Reject Shop -- Recent Events (January 1st, 2010 -- March 31st, 2011) EVENT 1: Publication Date: February 16th 2011 -- Impact of floods on sales

The Reject Shop issued a statement declaring uncertainty regarding the aggregate cost of the floods and whether 100% of costs are reimbursable by insurance coverage and indemnity. The company's operations in Victoria and in Queensland Australia have been adversely effected. With working capital at a premium, according to the Reject Shop, the impact of the floods on sales will increase pressure on the available working capital. (Asia Post, 2011)

Impact on the Audit

The auditing staff will be assessing whether the Reject Shop can improve performance in response to the flooding catastrophe, determine whether company is accurately representing their financial performance as a function of the affected region, and whether they are following the IFRS reporting standards.

The auditors will need to focus on the impact of the floods on the financial performance of the company. Assessment of damages relating from the storm requires a field visit to identify the structural damages from the flooding event and the physical inventory at the affected locations. Auditors can determine the physical inventory level and estimate the variance in sales from the flood, and forecast the affect the flood will have on future sales, within a given variance.

The auditors must also investigate whether the Reject Shop (ASX:TRS) indeed were able to hedge against potential weather disasters against profits such as rises in interest rates, or unseasonably cool weather hampering summer clothing sales. (Asia Pulse, 2010) By investigating the financial management of the company's activities, the auditors can determine whether the Reject Shop is managing the company's operations in the best interest of the stakeholder.

References

"The Reject Shop Uncertain about Effects of Queensland Floods," 2011, Asia Pulse,, pp. n/a.

"Aust Retailer Reject Shop Cuts Full Year Profit Guidance," 2010, Asia Pulse,, pp. n/a.

EVENT 2: Publishing Date: December 9th, 2010 -- Interest Rate Hike Affects the Reject Shop

Discussion

The raising of interest is a significant event for the Reject Shop due to the company's inability to prepare for the ramifications of an expected increase of interest rates. The result of the increase in the Australian interest rate, was a decrease in total profit. Company net profit forecasts were lowered by approximately $5 to $6 million due to the inability to hedge against rising rates. (The West Australian, 2010)

Impact on the Audit

The emphasis on the auditor analysis in this case will focus on the financial management controls of the director and the relationship the finance department has with the accounting department. The internal control specific to the controller responsibility is the internal management system concerning diligence regarding the decisions rendered by the investment manager.

The level of risk exposure the financial management of the Reject Shop created an agency/principle problem and ostensibly will go undetected unless the auditor specifically investigates this issue. A recommendation for an internal control system should be rendered with emphasis on supervision and monitoring, computerized management system controls, and internal communication management system. (Understanding Internal Controls)

The auditor must identify the constraints within the internal control system specific to the risk management and the investment management areas. The inability to manage against macroeconomic risk is clearly a problem affecting the stakeholder and reducing the value of the company at therefore reducing the value of each sale.

References

The Reject Shop hit by interest rate hikes. AAP. (2010) The West Australian. http://au.news.yahoo.com/thewest/business/a/-/national/8478821/the-reject-shop-hit-by-interest-rate-hikes/

Understanding Internal Controls. A Reference Guide for Managing University Business Practices. http://www.ucop.edu/ctlacct/under-ic.pdf

Event 3: August 24th 2010 -- Reject Shop worker has throat sliced by Perth thief in Rockingham. Security issues as it affects productivity, worker output, and the internal security of financial information and personal data.

Discussion

Reject's attempted apprehension of a supposed shoplifter has caused an internal investigation regarding the security of its employees and the inventory management and internal controls to track goods within the store. The shoplifter who pulled a knife and slashed the throat of the 55-year-old employee walked into the store with the weapon, unchecked. A robbery could easily have taken place, adversely affecting profits. (News.com.au, 2010)

Impact on the Audit

Auditor must identify internal control system specific to tracking of outside inventory which refers to the items on display for sale. Additionally, internal control systems necessary to identify the difference between organized fraud and robbery/theft. The attack could be seen as an attempt to extort money or goods from the store and the internal control system must address this difference. (news.com.au, 2010)

The cash cow performance of the Reject Shop makes it a target for armed robbery and shoplifting. (Hidding, 2010) As a target for this activity, the repeating importance of increasing the internal control...

Ideally, tag and invoicing of items is in need however, given the margins per item sold, the cost of internal control systems can be cost prohibitive.
Auditor investigation into the current internal control system also will define the risk to the stakeholder. Inherent risk subject to the internal control measures to reduce accounting variance is necessary to ensure there is not an agency/principle problem. Additionally, the lack of internal controls becomes a noticeable issue to armed robbers and a signal to continue crime sprees at these Reject Shop locations.