This area was the target for substantial cost

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Unformatted text preview: t process risk. Receipt of inventory from hundreds of suppliers needs to be managed daily at warehouses and at retail stores. Loblaw faces a variety of choices about how to receive that inventory—direct delivery to the retail store, delivery to one of Loblaw’s distribution centers for traditional inventory, or delivery to a distribution center on a cross docking or a flow-through basis. For the latter three categories, Loblaw faces additional decisions about delivery to the retail stores: via its own fleet or through commercial contractors. This area was the target for substantial cost reduction and rationalization requiring the adoption of many new operating practices. Process complexity and current changes to reduce costs increase inherent process risk. Loblaw’s inventory largely consists of fast-turnover food and related items. Accordingly, Loblaw has not established routine procedures to identify obsolete inventory. During last year’s audit, KPMG carried out a number of procedures to obtain assurance about inventory obsolescence. The end result was a number of minor adjusting entries that were accepted by Loblaw’s management. While inventory obsolescence is not a primary concern when the auditor considers logistics and distribution, insufficient management attention would raise concern about inherent process risk. Based on the high degree of managerial judgment and process complexity, the audit team concludes that there is a moderate level of inherent risk in logistics and distribution. 3. Control Environment of Logistics and Distribution The team believes that there may be risk associated with the client’s information systems and, in particular, with changes being made to those information systems. As noted in the 1997 Annual Report, a number of critical operating systems were converted or modified to ensure year 2000 compliance. Industry analysts perceive some inadequacies in Loblaw’s current information systems. The current set of ad hoc systems has been attributed to the growth via acquisition that characterized the company’s early years. Both the nature of ad hoc information systems and the large-scale systems conversion project lead the audit team to conclude that process-level controls may be potentially weak, which indicates a moderate level of control risk. Completing the Audit of Logistics and Distribution Mary Lou assigns Mark responsibility for completing the audit of logistics and distribution. She reminds Mark that a key reason for auditing logistics and distribution is to aid in evaluating management’s assertions about inventory and cost of goods sold as reported on the financial statements. Mary Lou concludes her instructions by stating, “To the extent that Loblaw has any significant residual business risks related to logistics and distribution, we need to assess their impact on the financial statements. I would like you to document conclusions about residual risks and propose any additional testing we may need related to inventory and cost of goods sold.” As an aid, Mark reviews those portio...
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This note was uploaded on 01/27/2014 for the course ACCY 405 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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