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.
"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
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.
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.
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 system is critical. 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.
Hidding R., Weekend Courier - InMyCommunity. Stabbing at Rockingham shop. (2010) http://www.inmycommunity.com.au/news-and-views/local-news/Stabbing-at-Rockingham-shop-/7564307/
Perth 'thief' stabs Reject Shop worker in throat in Rockingham. News.com.au. (2010) AAP http://www.news.com.au/breaking-news/perth-thief-stabs-reject-shop-worker-in-throat-in-rockingham/story-e6frfku0-1225901005212
Event 4: April 27th, 2010. SAP disdained in Australia. Incorporation of CIBER.
Reject's plan to institute SAP as a replacement to QQQ CRMS system was a decision due to the need to address the company's very aggressive growth plans. The plans include a growth strategy intended to grow the number of stores at a rate of 20 per year. (Heath, 2010) The aggregate number of stores, expected to be around 400, an increase from its current level of 190. (Heath, 2010)
Impact on Audit
Auditor is now exposed to the internal control system of the Reject Shop and can see that the decision to change systems is due to the aggressive projected growth of the new stores. The auditor now is positioned to determine the intention of management in administering systems to track operational goals. Growth and sales appears to be the overarching theme with the Reject Shop. (Heath, 2010)
The challenge for the auditor is to decrease the costs, improve on productivity, and increase the level of customer service by centralizing communication systems, provide more effective staff and inventory management and streamline the back office operations. (IBM, 2005)
Heath. SAP Rejected in Australia. IT Wire. (2010) http://www.itwire.com/business-it-news/technology/38600-sap-rejected-in-australia
IBM Australia. New Web Portal Boosts Efficiency at The Reject Shop. Synergy (2005) http://www-07.ibm.com/businesscenter/au/industry/retailsolresource/pdf/Reject_Shop_Case_Study.pdf
Event 5: Date of Publication March 26th, 2009. Sour economic climate reduced profit and profit forecast.
The Reject Shop, expected to experience the same retail performance as other retails in an ill-performing macro-economic environment. The recession has particularly hit Australia given its remote distance from other nations and its inability to facilitate easy trade with other nations. The Reject Shop must look into liquidating assets to pay for working capital assets needed to continue its short-term operations. (Thomson, 2009)
With low working capital assets available, a macro-economic slowdown creates downward pressure from management onto sales staff to increase the rate of sales transactions. With wealthy individuals cutting back on purchases and even liquidating their assets as well, management at the Reject Shop decided to go on a discounting spree and reduce the sales price of their goods.
Impact on Audit
The auditor must determine whether raising cash in this environment or buying distressed assets is the better option for the Reject Shop. There are these two choices, which involve the selling of assets to pay for current liabilities that are coming due, or to buy distressed assets at a bargain value. The current ratio (acid-test) ratio (accountingformanagement, 2011) must be evaluated to determine whether the company can indeed afford to go on a bargain buying spree and whether such a decision is in the best interest of the stakeholder/shareholder.
As the Australian market has fallen in 40% in the past 12 months (Thomson, 2009), the question of whether there will be enough sales going forward to meet the working capital requirements. The auditor needs to establish the underlying financial performance of the company given inflation and rising rates and determine whether the company is acting in the best interest of the stakeholder.
Additionally, the auditor should uncover why there is a working capital issue considering the rising sales and strong growth forecast of the company. For instance, if there is a working capital issue, there stands to reason there is a lack of retained earnings and revenue growth necessary to create a fund to ensure payment of working capital expenses. The auditor should determine why the company's profits are not strong enough to facilitate a higher working capital ratio.