Answers to December 2010 Exam
Answers
Professional Level – Options Module, Paper P7 (INT) Advanced Audit and Assurance (International) 1 (a) Briefing notes Subject: Business risks facing Jolie Co Introduction
December 2010 Answers
These briefing notes evaluate the business risks facing our firm’s new audit client, Jolie Co, which operates in the retail industry, and has a year ended 30 November 2010. Ability to produce fashion items The company is reliant on staff with the skill to produce high fashion clothes ranges, and also with the ability to respond quickly to changes in fashion. If Jolie Co fails to attract and retain skilled designers then the clothing ranges may not be desirable enough to attract customers in the competitive retail market. The high staff turnover in the design team indicates that Jolie Co struggles to maintain consistency in the design team. This could result in deterioration of the brand name and, ultimately, reduced sales. There would be a high cost associated with frequently recruiting – this would have an impact on operating margins. Inventory obsolescence and margins There is a high operational risk that product lines will go out of fashion quickly, because new ranges are introduced so quickly to the stores (every eight weeks), leading to potentially large volumes of obsolete inventory. These product lines may be marked down to sell at a reduced margin. The draft results show that operating margins have already reduced from 17·9% in 2009 to 16·8% in 2010. Any significant mark down of product lines will cause further reductions in margins. Wide geographical spread of business operations Jolie Co operates a large number of stores, many distribution centres, and has an outsourced function which is located overseas. This type of business model could be hard to control, increasing the likelihood of inefficiencies, systems deficiencies, and theft of inventories or cash. E-commerce – volume of sales On-line sales now account for $255 million ($250 per order x
Professional Level – Options Module, Paper P7 (INT) Advanced Audit and Assurance (International) 1 (a) Briefing notes Subject: Business risks facing Jolie Co Introduction
December 2010 Answers
These briefing notes evaluate the business risks facing our firm’s new audit client, Jolie Co, which operates in the retail industry, and has a year ended 30 November 2010. Ability to produce fashion items The company is reliant on staff with the skill to produce high fashion clothes ranges, and also with the ability to respond quickly to changes in fashion. If Jolie Co fails to attract and retain skilled designers then the clothing ranges may not be desirable enough to attract customers in the competitive retail market. The high staff turnover in the design team indicates that Jolie Co struggles to maintain consistency in the design team. This could result in deterioration of the brand name and, ultimately, reduced sales. There would be a high cost associated with frequently recruiting – this would have an impact on operating margins. Inventory obsolescence and margins There is a high operational risk that product lines will go out of fashion quickly, because new ranges are introduced so quickly to the stores (every eight weeks), leading to potentially large volumes of obsolete inventory. These product lines may be marked down to sell at a reduced margin. The draft results show that operating margins have already reduced from 17·9% in 2009 to 16·8% in 2010. Any significant mark down of product lines will cause further reductions in margins. Wide geographical spread of business operations Jolie Co operates a large number of stores, many distribution centres, and has an outsourced function which is located overseas. This type of business model could be hard to control, increasing the likelihood of inefficiencies, systems deficiencies, and theft of inventories or cash. E-commerce – volume of sales On-line sales now account for $255 million ($250 per order x