Audit Case Study Walgreens

Abstract: 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.

Company Overview

Walgreen Co. (Walgreens) is engaged in retailing of pharmaceutical items and
Walgreens does not charge administrative fees on unused gift cards and the gift cards do not have an expiration date. The income from gift cards is recognized when the gift card is redeemed by the customer; or the likelihood of the gift card being redeemed by the customer is remote ("gift card breakage") and the company determines that we it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The company determines gift card breakage rate based upon historical redemption patterns. Gift card breakage income, which is included in selling, general and administrative expenses, was not significant in fiscal 2009, 2008 or 2007 (Company K10,