.0/msohtmlclip1/01/clip_image002.gif”>
Introduction
Target Corporation is one of the leaders of its industry, and has a strong financial position. Even though there are many risk factors surrounding the retailer industry, those factors are not related to Target alone. Those risk factors are common in the retailer industry, and as a result they dont affect our recommendation of accepting Target as long as we decided to accept providing an independent audit to this particular industry.
Target holds a great mount share of discount and variety when it comes to the industry of USA and Canada. This giant Corporation has 1763 stores all over the continent, which are representative of the story of retail stores. Its history started in 1902 in Minneapolis, Minnesota and here is where the headquartered is also currently located. It was known as Dayton Dry Goods Company until it opened its first Target store in 1962. It is the second largest discount retailer in the United States, just falling behind Walmart. The company is currently ranked at 33 in the Fortune 500as of 2010. It is also worth mentioning that Targetannounced its expansion plan of opening 100 to 150 stores in Canada by 2013. Supermarket stores and online stores with higher value work, leaded Target to gain net profits of $ 2,929 million for the fiscal year of 2012.
Target offers a wide assortment of general merchandise such ashouse ware, children toys,beauty products, crockery, and cleaning supplies as well as food assortment. Another special feature about Targets products is its talented designers, who offer exclusive lines of products at notably discounted prices, which contribute to Targets success. But it is not only the discounted prices and special designs, but also higher quality of products, which help Target to gain its share of the retailer industry in the USA and Canada. The highly competitive industry helps Target stay at the top of its game to meet the standards of other competitors, such as Walmart, Kmart and Canadan Zellers, Inc.
Approximately, a number of 36,5000 team members and a great workforce that enables Target management compete in a highly competitive industry. Top management of Target is represented byGregg Steinhafel the president, CEO and Chairman of the Board. Also,Douglas Scovanner the CFO.
Risks
The following are list of Targets risks:
I- Risks Related to Target:
1- The additional need of working capital at the end of the year (Financial reporting misstatement-pressure).
2- The exposure to different kinds of competitions (Financial reporting and assets misstatement-pressure).
3- The continues changes in consumers preferences (financial reporting-pressure and rationalization).
4- The majority of Targets stores are based in U.S (Financial reporting misstatement-pressure)
5- Labor wages manipulation.
6- High dependency on vendors (Financial reporting misstatement-opportunity).
7- The great necessity of gaining loans for its growth (Financial reporting misstatement-pressure).
8- The Risk of entering new markets.
II- Risk Factors Related to the Retailer Industry:
1- High amount of cash handled by employees (Financial reporting and assets misstatement-opportunity).
2- Inventory theft (Financial reporting and assets misstatement-opportunity).
3- The repetitive nature of transactions.
4- Corruption between employees (Financial reporting and assets misstatement- opportunity).
5- Internal control issues (Financial reporting and assets misstatement-opportunity).
III- Risks related accounts:
1- Inventory Account.
2- Cash Account.
3- Accounts payable.
4- Current maturity of the long-term debt.
5- Stock price.
I- Risks Related to Target:
1- The additional need of working capital at the end of the year (Financial reporting misstatement-pressure):
Target, particularly needs working capital in the years last quarter to meet its increasing volume of sales Target endeavors to meet this need through the cash generated from its operations as well as from short-term loans. As a result, this considers being a financial-reporting misstatements risk factor because the company could manipulate its financial results to earn the short-term loans. In this area we should focus our attention on the liquidity and profitability ratios, and related account such as cash, accounts receivables, and inventory. This because there are profitability and liquidity restrictions and conditions set by the providers of these loans, and Target will fight to meet those conditions.
2- The exposure to different kinds of competitions (Financial reporting and assets misstatement-pressure):
Target, as a retailer of various products and services, is exposed to many different competitions such as competition in the pharmacy division, grocery division, and apparel division. This places a difficult task on Target, and in order to survive and succeed, it needs to compete and be as efficient as possible regarding its product and service costs. The great amount of competition is a pressure on the company, and therefore it could push the company to do any falsification to survive and reserve its market-share. We would suggest that competition is a financial-reporting misstatements risk factor that is not related to a specific set of accounts, but is a risk that is related the company financial profile as a whole.
3- The continues changes in consumers preferences (financial reporting-pressure and rationalization):
The nature of consumers needs and preferences in choosing products is changing, and not meeting those preferences and needs would affect the companys financial results negatively. Target faces this problem and the related risk to this problem is the chance of inaccurate inventory records. Target in this situation would falsify its inventory account by including the unsold amount of its inventory in order to avoid any losses from this obsolescent inventory. Making this fraud could be justified by the company that the continues changes in customers preference is out of its control, and as a result this would be its rationalization. We would suggest increasing the surprise visits to Targets warehouses to count the inventory and ensure the proper recording of inventory in its records not to include obsolescent inventory.
4- The majority of Targets stores are based in U.S (Financial reporting misstatement-pressure):
One of the risk factors that Target is exposed to is that a large amount of its stores are only in The U.S. Consequently, any undesirable macroeconomic events will affect the companys financial results negatively. Unfortunately, the economy is not as it was, and many people have lost their jobs, as well as buying ability and freedoms. This would affect Targets sales, and therefore it considers as a pressure on the company as well as one of the hot spots that we should bring our attention to. We would suggest comparing the companys sales ratios with previous years to know whether or not the U.S economy conditions has impacted Target by pushing it to falsify its sales, and to discover any irrational patterns in sales ratios.
5- Labor wages manipulation:
A labor cost considers being one of Targets largest operating costs. Target employs Over 365,000 workers. Target has many responsibilities toward these workers such as health care and attractive wages, so failure to meet those responsibilities would result in additional expenses and consequently decrease its profitability.We would suggest increasing our tests in this area of operating expenses by inspecting the payroll function records, which show the hourly rate as well as the work hours for each employee. Meeting employees to ask them about the real amount of wages as well as work hours worked by them, and compare what stated by employees with the records to ensure whether it reflected the actual wages.
6- High dependency on vendors (Financial reporting misstatement-opportunity):
Targets business as a retailer is dependent significantly on its product vendors. Delays in shipping products or increasing products costs will affect its sales and results from operations negatively. Also, the financial-reporting misstatement risk is a high opportunity to build relationships between Targets purchase department and those vendors. We would suggest Targets management to have a rotation of the purchase departments manger and employees. Another vital risk factor is that large portions of Targets merchandises are from China and this exposes Target to risks that are out of its control. Any kind of global problems such as political problems in China, labor strikes, and changes in shipping rates will affect its financial performance, and will decrease its sales and profits. This risk in our opinion is difficult to deal with, and forecasting those factors is not usually effective under continued shifts in markets and political conditions.
7- The great necessity of gaining loans for its growth (Financial reporting misstatement-pressure):
Targets ability to obtain the required loans in order to opening new stores and financing working capital needs is dependent on many factors. The strong debt rating, its operations results, and capital market condition are the most crucial factors. This is considered as a pressure and could lead the company to misstate its financial reports. To illustrate, the risk associated here is that Target will try to keep its credit rating as high as possible in order to get the needed finance for its growth. We would suggest here to pay significant attention on its solvency ratios, and send confirmations to its creditors to obtain the real amounts of loans. Moreover, we suggest performing tests to identify any related-party transactions that are designed to hide its debts.
8- The Risk of entering new markets:
Targets expansion in Canada is a risk factor that could deteriorate its financial results. The expansion would need a large amount of efforts to study the market, determine the products vendors, and choose the suitable locations for its stores. Those efforts need a huge amount of capital and expenditures, and in the case of failure, Target will suffer a loss in its operations. Again, any factors that cause a loss are risk factors, and are considered pressures on the company to falsify its financial results in order to not only to obtain the required finance, but also to window dress its financial statements and increase its stock price.
II- Risk Factors Related to the Retailer Industry:
1- High amount of cash handled by employees (Financial reporting and assets misstatement-opportunity):
Cash handling in retailer stores is considered one of the most crucial risk factors in the industry. Large amounts of cash can tempt employees to steal cash with the idea that nobody will notice. The opportunity to steal which is one of the fraud conditions is obvious here, and managing this risk would require Target to place effective controls to prevent and detect any cash theft. We would suggest effective test controls placed by Target in this area and ensure that they are designed and operated properly. Examples of controls that could be placed in this area are cameras to oversight cashiers, surprise counts of cash, and rotation of employees.
2- Inventory theft (Financial reporting and assets misstatement-opportunity):
Retailers have a risk of inventory theft because the inventory is easy reachable both in Targets stores and warehouses. Consequently, the theft could happen not only by customers but also by employees. This will place a difficult task on Target to prevent inventory thefts. Suggested controls are placing cameras in stores and warehouses to observe both employees and customers, and rotating stores managers and employees in order to prevent them from building strong relationships, and consequently cooperating with each other to steal and cover it up.
3. The repetitive nature of transactions:
The repetition of performing the same transactions daily increases the probability of mistakes. Those mistakes have an adverse impact on retailer companies because it costs those companies a large amount of time, effort, and money to correct them. The strong training of employees as well as continuous supervision by managers will decrease those mistakes, and the risk of falsified financial results associated with it.
4- Corruption between employees (Financial reporting and assets misstatement- opportunity):
Each retailer store is dependent, and decentralized from the company. This places a risk of cooperation between employees and managers to achieve personal needs and taking advantage of the company. This risk factor would require us ensuring that rotation of stores managers and employees is applied, and the probability of cooperation between them in taking illegal advantages from the company is decreased.
5- Internal control issues (Financial reporting and assets misstatement-opportunity):
Monitoring the internal control function task becomes very hard in the retailer stores. Not only does the decentralization cause this problem, but also the degree of employee turnover does. In the retail industry the degree of employee turnover is very high, and this will have an adverse impact on the companys internal control.Hiring new employees causes high risk of ineffective internal control. New employees take time to adopt the companys policies and systems, and therefore those employees will not effectively operate the controls in this period of time, and this also provides a high opportunity to some employees to misstate assets accounts and financial reports without being caught. This will place a heavy burden on us regarding testing the companys internal control function, and will require increase the number of effective tests not only at the end of the year, but also during the interim period.
III- Risks related accounts:
1- Inventory Account:
Regarding its management of the inventory account, Target has stable inventory ratios. Both the inventory turnover and days sales in inventory ratios have been stable. However, the stable inventory ratio doesnt mean that the inventory theft doesn’t exist, and we are still responsible to test and inspect warehouses as well as all inventory controls placed by Target in order to uncover the theft. Another important point regarding inventory is that the increase in inventory was consistent with the increase in account payable account, and that is a natural correlation between both accounts.
2- Cash Account:
Looking at Targets current ratio, there was a decline since 2010 even though the inventory and receivable ratios were stable. Consequently, the problem appears to be in managing its cash, and that could be proved by the decline in its cash ratio. The cash account has declined in fiscal 2013 by around %30 comparing to fiscal 2009 As mentioned earlier, the possibility of the cash theft is high in the retailer industry, and we should test this account and the related controls carefully.
3- Accounts payable:
As a rule of thump, the increase of both inventory account and accounts payable should be consistent. Nonetheless, the increase in this account was around %3 comparing to 2009 and the increase in inventory account was by .
4- Short-term loans:
The increase in this account was by %21comparing to 2009, and this could justify the stability of accounts payable. Instead of delaying the payments to its vendors, Target may better of borrowing short-term loans to pay its vendors obligations. We would suggest inspect the documents of the short-term notes, and insure whether it was used to pay the vendors. Also, we could send confirmations to lenders in hope to know the reason was provided by Target for the use of those loans.
5- Current maturity of the long-term debt:
The current maturity of the long-term debt has increased sharply even though its long-term was stable. Possible justification is that creditors require larger annual amount in the latest years.
6- Stock price:
Targets profitability ratios were stable and all kinds of returns were in the same range over the previous four years. The only concern is that the decline on its price/earning ratio, and that is justified by the decline of Target stock price. The price has declined from $86 in 2010 to $61 in 2012.
Conclusion
Target is one of the leaders of its industry, and has a strong financial position. Even though there are many risk factors surrounding the retailer industry, those factors are not related to Target alone. Those risk factors are common in the retailer industry, and as a result they dont affect our decision in the acceptance of Target as long as we decided to accept providing an independent audit to this particular industry. In terms of Targets financial position, it appears to be strong and reliable. Based on our analytical procedures, the majority of its ratios and accounts are stable and consistent over the years. Targets liquidity is healthy, and the additional suggested procedures dont mean any discredit to the companys liquidity, but they would provide us any contrast to our finding. Regarding Targets solvency, it appears to us that it has a balanced amount of debts, and the suggested procedures would prove any fabrications. Targets profitability ratios were dependable, and as with the liquidity and the solvency positions, any falsification would be uncovered by our additional procedures. Consequently, we agree to accept Target as our audit client, and the risk factors related to Target would not affect our independence or our reputation.