The audit function creates several important relationships among the various parties. One of the most significant and potentially problematic relationships is between the audit firm and the audit client. The decision by the audit firm to accept or retain a client is crucial because of the potential risk of being associated with certain clients. Engagement risk is considered to be composed of three components: client's business risk, audit risk, and auditor's business risk.
Client's business is with the risk of the entity not being profitable and not continuing to survive. There could be going-concern issues, inflated profit goals, or operations in volatile industries that can impact an entity's risk (Colbert, 1996). Most business risks will eventually have financial consequences and, therefore, an effect on the financial statements. Financial trends commonly represent the most important part of client's business risk. Audit firms cannot control the amount of client's business risk. They can only assess it and decide whether or not to accept the risk.
Walgreen Co. (Walgreens) is engaged in retailing of pharmaceutical items and general merchandise. The company’s products include prescription drugs, nonprescription drugs, beauty care, personal care, candy, household items, greeting cards, convenience foods, seasonal items, photofinishing and other general merchandise. It is also engaged in providing various health related services. Walgreens sells its merchandise through company owned retail stores and website. It also enables prescriptions to be filled through drugstore counter, mail, telephone and Internet. It also has distribution centers and strip shopping malls (Global Market Direct, 2010)
Industry and external factors
In 2006 drug stores posted retail revenues of $189.3 billion, a 7.9% growth rate over 2005, according to the National Association of Chain Drug Stores (NACDS, 2006). Chain drug stores, which account for about 35% of the industry's 61,200 stores, took in $144.8 b, or 76% of the income. Total prescription sales in all types of stores in 2006 were $249.8 b, up 7.7% from $232 billion in 2005. The retail volume of prescription sales was 3.4 b prescriptions in 2006, an increase of 4.3% from 3.28 b in 2005 (Encyclopedia of American Industries, 2008).
The rapid growth in this industry prompted powerful supermarket and mass-merchandise chains to enter traditional drug store markets, forcing the independent drug store industry to compete with these larger companies. The drug store industry faced narrowing profit margins due to the general push to reduce health-care costs in the United States which resulted in that acquisitions and consolidation became prevalent. This combination of factors forced drug stores to concentrate on customer service, expand into niche markets, add products, form partnerships with suppliers and health-care providers, and automate operations for increased cost-efficiency.
Drug stores in the mid-2000s faced a future with potential for significant growth and unique challenges. The average age of the U.S. consumer is increasing rapidly. An aging population has increased health-care and prescription needs, thus providing a growing customer base for drug stores. Nevertheless, low profit margins on prescription drugs, challenges from grocers and discounters, shortage of pharmacists are of challenge (Encyclopedia of American Industries, 2008).
To compete with mass merchants and grocery chains, drug stores marketed themselves as uniquely equipped to service the "quick-trip" shoppers. According to Chain Drug Review, the average trip to a drug store takes ten minutes, or eight minutes if the customer is not picking up a prescription. Drug stores are also adding food items and other staples to bring in time-pressed women and older shoppers who buy for smaller households and may not need to stock up at the grocery store as often but may run low on basic...