Name
Professor
Course
Date
Case Study: International Auditing Considerations at Carrefour S.A.
Question 1: Carrefour’s Spain Component
Carrefour’s implication in many scandals because of illegal business practices is concerning. In the past decade, for example, the company mislabeled fish products to maintain profit margins and high revenues. These are only a few of the many possible fraudulent activities that Carrefour has engaged in in recent times. In this light, the company may have misstated its value in the data presented for audit. The company is at risk for litigation concerning the numerous malpractices that it has instigated. The paper indicates that the company is cheating the people in Spain by selling them cheap fish at the prices of more expensive species. Such a report is dangerous for a company because it may tarnish its public image. Sales are at risk of declining if the public realizes that the company is taking advantage of them.
An audit risk assessment will involve taking into account multiple factors at play in this situation. The chances of the company misstating its value are high because the company is already engaged in fraudulent activities. Sales are likely to decline as a result of the high rate of youth unemployment in Spain. Almost half of the youth population is unemployed, and this is bound to reduce the purchasing power of the people in general, trickling down to lower sales posted by Carrefour. The company’s stock prices are dropping, and the company might be inclined to overstate to save its image. For this reason, the audit risk assessment will find that the company is at high audit risk.
Chances of the financial statements being free of misstatement are low for this company. The misstatement is going to have a considerable impact on the audit process and the eventual allocation of materiality for the Spain component of the group. The discrepancies that an auditor identifies will be many because the amounts involved in this case are large. The sales throughout Spain are in billions of Euros, and the mislabeled fish must account for a significant fraction.
Question 2: Mislabelling of Fish Products
The mislabeling of fish has been employed by the company to increase profit margins. In the European market, there exist strict rules for the labeling of products for sale. There is also a paper trail from the producer to the consumer. It details all modifications and transactions that have occurred in between. However, the producers and retailers are not required to do a genetic analysis of products to determine authenticity. The lack of such regulation is a loophole that can be exploited by the retailers to pass off cheaper commodities for more expensive ones without regulatory authorities or consumers intervening. Auditors are also not required to utilize such tests either. Because auditors cannot confirm the authenticity of products sold, companies involved in such fraudulent activities have the liberty to misstate the value of their goods, and consequently, their financial statements. The auditor cannot prove that there is a misstatement, and the company is immune to such claims.
Fish mislabeling contributes to the misstatement of assets because the fish are actually of lower value than what the company is claiming. Carrefour spends much less to obtain the fish from suppliers while at the same time earning so much from the sale of the same commodity under the label of another more expensive fish type. The company owns the fish until the point at which a consumer makes a purchase. The mislabeled fish with an overstated value is, therefore, an asset for the company. The company is thus able to inflate its value illegally. Some of the assertions that might suffer from an audit include accuracy, completeness, and occurrence. These assertions will be affected because there is a high chance of statement doctoring to hide the mislabeling.
Question 3: Audit Risk
An audit risk refers to the possibility of the auditor failing to detect misstatement as a result of fraud or fraud. Such a failure results in the issuance of a defective or unqualified audit report. There are some crucial differences between IAS 36 and ASC 360-10-35 that might increase such a risk. Impairment losses are defined differently under the two policies. In the IAS 36 policy, recognition of an impairment loss occurs any time the recoverable amount of the asset falls below the carrying amount. Even when it is possible to decrease the impairment loss, the IAS 36 still recognizes the impairment loss. In the ASC 360-10-35, this is not the case. It does not accept the impairment loss if there is a possibility of reduction.
In the assessment of audit risk, it is vital to factor in impairment loss. The audit risk may be increased by the IAS 36 because of the variability of situations where impairment loss may be significant. An auditor is likely to make a faulty assessment of the value of assets because a company’s ability to decrease its impairment losses may be considerably affected by other prevailing factors. It also makes the detection of fraudulent activities such as those exhibited by Carrefour much more difficult. Non-sampling errors come into play in this situation resulting from the mislabeling of the fish products and the consequent value misrepresentations.
The auditor is likely to exclude the misrepresentation of data from inventory items. Such likelihoods are because the IAS 36 does not include assets classified as inventory. When the auditor is considering the impairment losses incurred on assets, they will have to exclude inventory items. In the case of Carrefour, for instance, the auditor’s report is subject to suffering errors as a result of the misstated values of the fish whose stated values are above their actual value. Such asset exclusions cause the audit risk to increase.
Question 4: Audit Procedure
One of the audit procedures that I would propose would be an inspection procedure. It would enable the auditor to verify documents to ensure that there are no discrepancies in the statements. An inquiry could make it possible to examine invoices to check whether they are consistent with the orders that were received. In the case of Carrefour, for example, an inspection of invoices from fish suppliers might reveal a disconnect between the sale price for the fish and the acquisition price for the same commodity by the company. An inspection can, therefore, shed light on the fraudulent mislabeling of the fish products to unfairly increase profit margins, and motivate for relevant authorities to investigate further. Furthermore, it can allow a better audit risk assessment and improve the estimation and declaration of impairment losses.
Another type of audit procedure that I would recommend is recalculation. This procedure would check the accuracy of the client’s audit to make sure that the auditor minimizes or eliminates misstatements and misrepresentations. In this procedure, the auditor would have to recalculate the transactions in the client’s domain and compare them to my own. In this way, the auditor can point out where errors exist and require the client to correct them or explain any inconsistencies. A recalculation is a way of providing quality assurance by confirming accuracy.