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Xian Shen

on 6 May 2017

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Transcript of WalMart

Auditing Industry Risk Analysis
Retail Industry: Wal-Mart

Part I: Industry Report
Industry Trends

General Background

Business Strategy
Major Risks

General Economic Risks

Regulatory Risk

Increased Competition

Financial Structure
Special Audit Testing Procedures

Audit of Cash

Audit of Inventory

Audit of Cost of goods sold
Part II: Company report
Overview- General Background

Preliminary analytical review

Risk Assessment


Industry Trends
Business Strategy
The retailer industry in the United States is one of the most industries in the residents’ daily lives. There are thousands of retailer stores in the US mainland, like Kroger, Wal-Green, CVS, and the largest retailer, Wal-Mart. The retailers make more than 8 billion dollars revenue every year, and they also provide more than 3.1 million job occupations to the citizens. Wal-Mart is the head of the retailer industry. It has the most market share, makes the largest amount of revenue, and provides the biggest number of employees.
Advertising Strategies

1. Customer Profile.

2. Advertising

3. Best ways to advertise
Merchandising Strategies

1. Pricing strategy

2. Managing your inventory

3. Sales per square foot

4. Space allocation
General Economic
Audit Risk
Retail Industry Audit Risks
General Economic Risk
Low consumer market growth
Volatility in the real estate market
Failing to anticipate consumer behavior
Higher interest rates and energy costs
Unemployment and unavailability of consumer credit
Primary Audit Risk: Completeness and existence of
Liabilities and assets, checking for inflated profits
Primary Audit Risk: Reporting and disclosures
of the possible affect on the business
- Large and small retailers
Primary Audit Risk: Understatement of
liabilities affecting the cost of goods sold
Financial Structure
Supply Chain
Primary Audit Risk: Reporting and disclosure
listing possible adverse risks to the company
Special Audit Testing Procedures
Audit of Cash
Audit of Inventory
1. Perform tests of the cost accounting system

2. Evaluate financial statement presentation of cost of goods sold, including the adequacy of disclosure.
1.Compare a sample of cash receipts to the cash receipts journal, accounts receivable postings, and authenticated deposit slips

2.Segregation of duties.

3.Confirm cash balances with financial institutions.
1.Use appropriate procedures for taking the physical inventory.

2.Inspect the inventory to determine its existence and evaluate its condition to make sure inventories are properly stated at cost.
Audit of Cost of goods sold
Business Strategy
Corporate Strategy:

Strong distribution, inventory management system

Differentiated pricing

Cost advantage strategy

IT advantage
Major Competitors
From Finance Yahoo
Horizontal analysis
Vertical Analysis
Ratio Analysis
Risk from acquired stores in emerging market
In Wal-Mart’s 5,651 stores operated in 26 countries, nearly 60% of them are by emerging.
Number of emerging stores: Mexico (1,600 stores), China (364 Stores), Brazil (429 Stores), Costa Rica (200 Stores), Chile (314 Stores), Guatemala (198 Stores) and South Africa (219 Stores)
High risk
Risk from emerging and acquired stores
6 billion fraud of a Chinese local retail chain—SEASTAR Supermarket, which used to be Wal-Mart’s negotiating acquisition target
Formal CEO
Acquired stores number reaches 10% of Wal-Mart’s total stores.
In the latest 10-K, goodwill composed 10.7% of its total asset.
In overseas, Wal-Mart usually not have a dominating position and face intense competitions from local players and other international players.
Risk from acquired stores--goodwill
Goodwill Impairment Test becomes essential and crucial for the auditor
Risk from Sales and Account Receivable
From latest 10K, Wal-Mart’s average account receivable is only 1.2% of fiscal year sales.
The A/R auditing risk is lower than other industry auditing targets.
Potential risks may come from sales return and allowances, rebates, discounts, loyalty points, gift cards
Wal-Mart China inflated 700 million gift card sales fraud in 2011
Wal-Mart China has not turned to profit since it comes into China market in 1996.
Based on Chinese news report, Wal-Mart China changed CFO and COO in 2011 mainly due to the inflated gift card sales in China.
Wal-Mart China recognized all the gift card sales including those have not be consumed by customer.
They first listed some low or even zero gross profit margin merchandises to dealer and then encouraged them to buy via gift card with additional discount. They got significant sales of gift card through this method. Both the sales of gift card and the total sales number were increased.
Risk from COGS and expenses
Retailing companies are usually judged by operating margin for their operating efficiency by investors.
the incentive to manipulate or deflate expenses and cost.
Wal-Mart currently faces bribery charges in Mexico which the bribery was accounted as company expenses.
Risk from legal charges
Violation of Foreign Corrupt Practices Act (FCPA) in Mexcico.
Gender and sexual orientation.
Many disputes with labor unions.
California State Teachers’ Retirement System filed charge against Wal-Mart
http://www.reuters.com/article/2012/05/22/us-walmart-calstrs-idUSBRE84L0VO20120522, http://www.nytimes.com/2012/06/05/business/wal-mart-vote-reflects-rise-in-shareholder-unhappiness.html
We believe the current economic condition is relatively in favor of retail industry and Wal-Mart is in good financial and business condition.
As the biggest company by annual sales globally, Wal-Mart’s complicated situation need auditor’s specific attention and in-depth review.
A 100 stores Chinese local retail chain SEASTAR Supermarket, which was a negotiating acquisition target for Wal-Mart but finally sold to an Australian retail chain, found inventory fraud in 2009 after the acquisition deal close.

The auditors from Deloitte China which executed the acquisition due diligence.

The managements of the company moved inventories from other stores to the sampled stores and faked the logistic documents to pass the due diligence.

The fraud was detected when a POS machine did not work, the technician found original data of sales had been changed.
Full transcript