Business risk & control risk assessment

eBays decision to offer goods for sale at fixed prices in addition to goods
offered through its Internet auctions may be related to any of these
possible business strategies:
Match Competition. Because other retailers offer products at fixed prices through
the Internet, eBays ability to offer products at fixed prices allows eBay to attract
customers interested in purchasing goods offered by other retailers. Customers less
interested in participating in online auctions may come to eBay to purchase items at
fixed prices instead of visiting other retailers Web sites. Thus, eBay may have
decided that it needed to also offer products at fixed prices to match their
competition and meet consumer expectations in the marketplace.
Target New Markets. Many consumers may not be willing to participate in online
auctions due to the inconvenience of refreshing their online bids during the auction
period. By offering products at fixed prices to consumers through its Web site, eBay
may be able to expand its market to consumers who do not choose to participate in
the online auction.
Describe business risks related to eBays operations (SCAP)
Customer satisfaction with product
Because eBay products are offered by independent third parties, eBay faces risks
related to product quality. If products acquired through eBay fail to meet consumer
expectation for quality, customer use of eBay auctions may deteriorate over time.
Insufficient capacity to handle
If demand for products through the eBay Web site exceeds expectations, internal
systems may not be able to handle the volume of auctions and the processing of
completed transactions in a timely fashion
Internet availability
eBays business model is dependent solely on access to auctions through the
Internet. During periods when the Internet is not available, eBay is unable to
conduct business. If Internet outages are lengthy or frequent, consumers may be
less interested in shopping on eBay.
Consumer Privacy
Given that online consumers will be providing confidential personal information,
including credit card date, eBays system must be designed to protect consumer
privacy during transmission and processing of orders. Breaches in consumer privacy
may affect future demand for online sales and may increase legal exposure to the
company.

Acquisition of Paypal & Skype by eBay

The decision by eBay to acquire the online payment service, PayPal, streamlines the
payment process between buyers and sellers on the eBay auctions. eBays business
risk may be affected if the payment process fails to work properly. PayPal enables
customers, whether an individual or business, with an email address to securely,
easily and quickly send and receive payments online. PayPal's service builds on the
existing financial infrastructure of bank accounts and has tens of millions of
registered accounts. Acquiring PayPal allows eBay to reduce business risk by
ensuring they control this important aspect of the payment process in online
commerce. eBays business model is totally dependent on buyer and seller easy
access to the Internet.
The decision to acquire the Internet communications company, Skype, may have
been based on the view that the acquisition would strengthen eBays access to the
fastest growing Internet communications company. That helps ensure the company
controls this important aspect of its business model.

Identify possible risks that can lead to material misstatements in eBays

financial statements based on its business model
Customer Satisfaction with Product
While the independent sellers who offer products on eBay auctions bear primary
responsibility for product quality, some customers may seek financial
reimbursement from eBay when products are not delivered or are in poor quality.
Thus, eBays financial statements may need to include reserves for product returns.
Insufficient Capacity to Handle Demand
If demand for products through the eBay Web site exceeds the companys ability to
process orders in a timely fashion, consumers may cancel earlier recorded orders or
request returns when delivery occurs well beyond the expected delivery date. The
accounting systems must be designed to accurately reflect cancellations and
returns in a timely fashion consistent with GAAP.
Additionally, if the processing of orders is significantly delayed, the accounting
systems must be adequately designed to ensure sales are not recorded prematurely
(e.g., not until delivery).
Internet Availability
The lack of Internet availability will may lead to penalties or fee payments to online
sellers who use eBay to auction goods and to online advertising wanting to place
advertisements on the eBay site. When the Internet is down, there may be fees
owed to sellers and advertisers.
Consumer Privacy
If consumer privacy is breached, existing sales may be cancelled or returns beyond
the normal period may be requested. Such activity would need to be properly
reflected in the financial statements. Additionally, legal exposures may increase,
which may require additional financial statement disclosures.

Potential Risks
Risk of theft

Risk of obsolete inventory

Inaccurate amounts

Risk of assigning costs to

raw materials, work-inprogress and finished goods
inventory

Comments
Recorded inventory not
existing on balance
sheet date
Perishable
Expiration dates

Large number of
products with wide
variations
Perpetual records on
hand
Manufacturing process

Controls
Inventory controls on
prevention of theft
Engage specialist to assist
in the inspection and
evaluation of inventory
Examine controls over the
movement of inventory
Perform analytical
procedures

Test inventory costing

systems to evaluate the
operating effectiveness of
internal controls

Audit Procedure
Analytical procedures
ToC test of controls
AR account receivables
STOT substantive test of transactions
STOB substantive test of balances

Audit Report

Issue
Material/pervasive
Comments
Opinion

Immaterial

unqualified

Material

qualified

Highly material

disclaimer or adverse
(lack of knowledge)

(knowledge that fs not

fairly stated)
Issue

scope limitation
failure to follow IFRS
lack of independence
substantial doubt about going concern unqualified opinion with an
explanatory paragraph

Intelligis Electronics is a manufacturer of advanced electrical components.

During the year, changes in the market resulted in a significant decrease in
the demand for their products, which are now being sold significantly below
cost. Management refuses to write-off the products or to increase the reserve
for obsolescence.

a. Scope of the audit restricted b. Highly Material c. Disclaimer

In the last 3 months of the current year, Oil Refining Company decided to
change direction and go significantly into the oil drilling business.
Management recognizes that this business is exceptionally risky and could
jeopardize the success of its existing refining business, but there are
significant potential rewards. During the short period of operation in drilling,
the company has had three dry wells and no successes. The facts are
adequately disclosed in footnotes.

a. None

b. None

Your client, Harrison Automotive, has changed from straight-line to sum-ofthe-years digits depreciation. The effect on this years income is material,
and the effect in future years is likely to be highly material. The facts are
adequately disclosed in footnotes.

a. None b. None

c. Unqualified

c. Unqualified

Toronto Technology Corporation has prepared financial statements but has

decided to exclude the statement of cash flows. Management explains to you
that the users of their financial statements find this statement confusing and
prefer not to have it included.

a. Failure to follow GAAP b. Material

c. Qualified

Marseilles Fragrance, Inc., is based in New York but has operations throughout
Europe. Because users of the audited financial statement are international,
your audit firm was engaged to conduct the audit in accordance with U.S.
auditing standards and International Standards on Auditing (ISAs).
a. None b. None
c. Qualified

The controller of Brentwood Industries, Inc., will not allow you to confirm the
receivable balance from two of its major customers. The amounts of the
receivables are material in relation to Brentwood Industries financial
statements. You are unable to satisfy yourself as to the receivable balances
by alternative procedures.

a. Scope of the audit restricted b. Highly material

c. Adverse

Approximately 20% of the audit of Lumberton Farms, Inc., was performed by

a different CPA firm, selected by you. You have reviewed their audit files and

believe they did an excellent job on their portion of the audit. Nevertheless,
you are unwilling to take complete responsibility for their work.
a. Another auditor included

b. Material

c. Unqualified

Professional conduct & ethics

Issues
Threat
Discuss
Safeguard

Issues

Financial interests
Family relationships
Business relationships
Loans
Fees
Undue independence
Gifts and hospitality
Second opinion
Provision of other services

Threats

Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat