CPA Exam — AUDAssessing Risk and Developing a Planned ResponseMedium
A client operates a chain of retail stores. During the understanding of the entity and its environment, the auditor learns that the client recently implemented a new 'click-and-collect' system, allowing customers to order online and pick up in store. The system is fully integrated with existing inventory management but introduces new points of sale and customer interaction. What is the most significant inherent risk introduced by this new system?
- ADifficulty in attracting new customers to use the service.
- BIncreased risk of employee turnover due to new job responsibilities.
- CPotential for revenue recognition issues and inventory discrepancies.
- DHigher likelihood of stockouts in physical stores.
Show answer & explanationAnswer & explanation
Correct answer: C. Potential for revenue recognition issues and inventory discrepancies.
The new 'click-and-collect' system alters the sales process and inventory flow. This introduces inherent risks related to ensuring revenue is recognized in the correct period (e.g., when control transfers) and that inventory records accurately reflect goods ordered, picked, and collected, leading to potential discrepancies.
Why the other options are wrong
- A. Customer attraction is a marketing/business strategy risk, not a direct inherent risk to financial reporting.
- B. Employee turnover is a general business risk, not directly an inherent risk of the financial reporting process for the new system.
- D. Stockouts are an operational risk, which could indirectly affect sales, but not a direct inherent risk to financial statement assertions in the same way as revenue recognition or inventory accuracy.
Inherent Risk - New Systems
New or significantly changed information systems and processes can introduce inherent risks to financial reporting due to lack of established controls, unfamiliarity, or complexity, particularly affecting revenue, inventory, and related accounts.
- Increases susceptibility to misstatement.
- Often impacts revenue recognition and inventory.
- Requires careful assessment during planning.
Memory trick: New sales methods mean new ways for numbers to go wrong.