Question

Assume you were just assigned as lead auditor for a new e-commerce client. This is your client’s first year in business. Identify general business strategies that might explain your client’s decision to enter the e-commerce space with the likes of giants such as Amazon. Considering these strategies, identify potential business risks that can lead to material misstatements in your client’s financial statements. Be sure to include new start-up and e-commerce risks. What are some other things your team will need to consider during the planning phase for this audit?

Answer 1

Following can be the general business strategies because of which client has entered the e-commerce space:-

1) Increase in online shopping by consumers.

2) Except warehouse, no other place required to conduct business so it can help in cost reduction.

3) Increase in demand of global goods by consumers.

4) Reach to global customers.

5) No need to open shops everywhere to sell things.

However, such business might trigger certain risks which may lead to material misstatements in financial statements. Such risks can be:-

1) Financial Risk

2) Security Risk

3) Position Risk

4) Risk of change in laws and regulations

5) Risk of technological changes

6) Internal control Risk

7) Going concern Risk

Because of the above risks, it is very important to be cautious while planning the audit for such company. Following are the points which are to be considered during the planning phase of audit:-

1) Understanding the client and his business, place of business etc.

2) Identifying related parties

3) Identifying fraud risk

4) Understanding IT controls

5) Understanding Internal controls

6) Going concern risk

7) Understanding Materiality risk

8) Understanding Corporate Governance Risk