AMAZON COMPANY: RISK FACTORS
AMAZON COMPANY: RISK FACTORS
A. Analysis of Income statement
The income statement, sometimes referred to as the profit and loss statement,shows the profitability of a company during a given accounting period and revenue is one of the most important financial statement measures. In the income statement for Amazon, revenues as well as costs of operations are recognized. The risk factor from Amazon’s income statement may be related with potential earnings originating from its largest customers. For instance, in 2014 accounting period, the entity reported net sales amounting to $88,988 (Amazon, 2014) and 18,908 were recorded as services revenues. It is necessary to evaluate its substantialcustomers to ensure reliability in revenue reporting and use of appropriate accounting in recording sales and service amounts. Also, the translation of income outside the United States into US dollars mayinclude some material risks in the organization since during 2014, net sales from its international segment accounted for 38% of Amazon consolidated revenues. The risks from Amazon income statement in compliance with US GAAP are associated with the recognition of revenue. Amazon primary source of revenue is the sale of a wide range of products and services to customerswhich are straightforward transactions but they also offer other services such as AWS, fulfillment, publishing, digital content subscriptions, advertising, and cobranded credit cards which can be difficult and challenging to determine what part of revenue should be recognized.
B. Analysis of Balance Sheet
Amazon is a big company andit has some complex nonstandard transactions, in domestic and international markets. Size alone often infers complexity, particularly if it leads to complex corporate structures or multiple locations. In Amazon’s case, volume size transactions has been assessed as a risk factor.Another risk is associated with item classification. We need to verify that assets and liabilities are recognized and classified in the correct manner and in compliance with GAAP and IFRS.
C. Analysis if Internal Control
Being Amazon a retail online company, adequate internal control over IT infrastructure (operations and security systems) is very important involvement of the top management is crucial.Internal controls should identify, capture, process, and report appropriate information. These are policies and procedures that ensure that the management’s directives are carried out.
In the annual report, top management has ensured that its internal control supports the company transparent reporting according to US GAAP. External auditors have also indicated that Amazon internal control system is appropriate. However, there is a need to assess internal control procedures for cash, sales and account receivables accounts with credit approvals and adequate creation of sales receipts.
D. Explain the audit universe and how you identified it.
An audit universe relates to a range of activities, structures and functions of an auditable accounting entity. The audit universe comprises of a document on an entity’s audit and risk identification which is often updated periodically. Risk based form of audit includes the assessment of risk factors regarding the corporate profile, departmental performance and risk exposure of the entity. The audit priorities emphasizes on areas that has greatest needs from the company’s departmental perspective.
E. Sampling program for the audit universe.
The audit universe will cover operations, collectionand suppliers procedures and activities. We will evaluate Amazon’s three largest suppliers to verify the occurrence and completeness ofsales transactions. Top management from one Europe and one Asia location in the warehousing and collection activity. The audit universe wasdetermined by the risk, materiality, nature of activity and last audit date.
F. Choose the most preferable audit testing procedures that could be used in the field, based on the audit universe items sampled in this situation.
We will test sales cut off by identifying the last shipping advice for the year and examining five large sales for three days before and after year end. We will also analyze sales, account receivable for a sample of 60 transactions including the five biggest earnings records in the US market and 30 transaction in the international market to ensure revenue recognition was done properly and in compliance with accounting framework.
References:
1. Clarified Statements on Auditing Standards http://www.aicpa.org/Research/Standards/AuditAttest/Pages/clarifiedSAS.aspx
2. Amazon financial ratios http://www.gurufocus.com/term/pe/AMZN/P%252FE%2BRatio/Amazon.com%2BInc
3. Specialty Retail financial ratios http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=1307
4. Auditing and Assurance Services: An integrated Approach 15th Edition by Alvin A. Arens, Randal J. Elder, Mark S. Beasley Chapter 8 and 9
5. Revenue Recognition http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-revenue-recognition-global-guide-2014.pdf
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