Risk Factors and Compliance Issues on Income Statement
The income statement provides an overview of a firm’s performance. The statement provides investors with the knowledge they need to support their decision-making process. In evaluating Amazon’s income statement for 2017, a financial professional must understand three parameters. The parameters include the structure of Amazon’s financial statement, the economic characteristic, and its marketing strategies for brand differentiation. In this context, Amazon’s income statement showed significant improvement in 2017. The corporation recorded 177.87 billion dollars in net sales, 65.93 billion dollars in gross profit, and 4.11 billion dollars in operating income.
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Consequently, the firm’s non-operating income was 300 million dollars, while its net income was 3.00 billion dollars. Based on this analysis, the firm’s net sales increased in 2017, while the operating income decreased in the same year. The income statement can be assessed for risk factors or compliance challenges.
The GAAP standards require organizations to record cash inflow based on its accrual (Axelsen, Green, & Ridley, 2017). This reporting procedure would mitigate potential risk factors and compliance issues. Many organizations have neglected to identify the best technique for reporting income from different obligations. The IFRS 15 standard was enacted to address this challenge. As a result, the GAAP regulations mandate that organizations must report their financial statements according to international standards of reporting. This guideline aids investors in making informed decisions and administrative changes.
Risk factors and Compliance Issues on the Balance Sheet
Amazon identifies investment risks entailed by business deals and collection cycles. The firm’s investment begins with client orders submitted online. Customers pay for Amazon’s products using credit cards with the authorization of a third-party merchant. As a result, the orders are delivered through the firm’s logistics, which relies on precision, time, and quality.
Based on these facts, the risk indicators and challenges under GAAP can be evaluated using the control risk matrix. The firm’s products are priced automatically, while the cashier verifies and reviews each transaction. Amazon’s risk factors include the choice of depreciation method and the reliability of data collected. The option of depreciation method is one area where firms will record different estimations of devaluation depending on the strategy for depreciation. Therefore, an effective depreciation method would avoid risk factors in the balance sheet. Consequently, the firm’s information report influences the aggregate value of profits announced. Under accounting standards, Amazon’s total assets must be reported using international accounting principles. Thus, Amazon’s assets, liabilities, and cash inflow must be recorded in the year of occurrence.
Internal Control of Cash and Revenue
Amazon records and controls its large sales volume daily. As a result, the company is liable to different risk factors that might affect its cash and revenue. Cash fraud and theft are risk factors related to the firm’s sales volume. Although the company puts a limit on cash at hand, its accountants and auditors could still embezzle from the company. After conducting illegal deals, the accountants could report different figures on their financial statements.
As a result, the stolen money would be misrepresented as balanced in separate account ledgers to mislead investors and shareholders. The company can avoid such challenges by enforcing daily cash limits. Cash theft is another risk associated with daily transactions. Due to a weak internal control framework, employees could steal cash from daily sales (Ruhnke & Schmidt, 2014). However, daily cash reconciliation would prevent cash theft.
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The Risk that should be Documented
Based on the GAAP standards, compliance risk, procedural risk, and system risk should be documented. Auditors might avoid the GAAP standards or best practices for personal gain. Compliance risk regulates such actions and enforces strict adherence to accounting guidelines.
Procedural risk occurs because of management’s inability to follow regulatory guidelines and procedures. Due to weak internal control systems, employees could circumvent the methods of accounting and financial reporting to satisfy personal interests. Weak internal control also creates system risk. Employees could leak confidential information to investors, competitors, or the public. Such actions could cause management crises and affect its investor base.
Amazon’s Past Performance
Amazon generated 177.87 billion dollars in the 2017 fiscal year. The company recorded high sales in the last quarter of 2017 because of a rise in online transactions. As a result, Amazon’s profit rose by 31% as compared to its net revenue in 2016. Based on its financial statement for 2017, one can deduce that Amazon complies with the GAAP standards.
An audit universe is a list of areas that affect a firm’s performance. Amazon’s audit universe can be identified based on its market segment volatility, transactions, risk assessment, and geographical reach.
Sampling Program for Audit Universe
The non-statistical audit plan is most useful for this purpose. The program plan for the audit universe could cover its objectives, sampling areas, sample attributes, exceptions, target population, expectations, and size. As a result, the test audit must cover account receivables and their attributes. Thus, sales transactions should be classified based on standard accounting principles.
Preferred Audit Testing Procedure
A test of controls is a tool used to assess the impact of the audit strategy. The test of controls includes performance, observation, and inspection (Cannon & Bedard, 2017). Inspection is the most effective audit procedure for Amazon. Auditors could examine the firm’s financial statement, daily transactions, record sheets, and stamps.
Axelsen, M., Green, P., & Ridley, G. (2017). Explaining the information systems auditor role in the public sector financial audit. International Journal of Accounting Information Systems, 24, 15-31. Web.
Cannon, N., & Bedard, J. (2017). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114. Web.
Ruhnke, K., & Schmidt, M. (2014). Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments. A Journal of Practice & Theory, 33(4), 247-269. Web.