Business risk & control risk assessment

eBay’s 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, eBay’s 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 retailer’s 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 eBay’s 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

eBay’s 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, eBay’s 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. eBay’s 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. eBay’s 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 eBay’s 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 eBay’s 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, eBay’s 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 company’s 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 Comments ControlsRisk of theft Recorded inventory not

existing on balance sheet dateInventory controls on prevention of theft

Risk of obsolete inventory PerishableExpiration dates

Engage specialist to assist in the inspection and evaluation of inventoryExamine controls over the movement of inventory

Inaccurate amounts Large number of products with wide variationsPerpetual records on hand

Perform analytical procedures

Risk of assigning costs to raw materials, work-in-progress and finished goods inventory

Manufacturing process 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 c. Unqualified

Your client, Harrison Automotive, has changed from straight-line to sum-of-the-years’ digits depreciation. The effect on this year’s 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

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