Analysis of audit (engagement) risk for the revenue cycle:
The audit risk for Glentel Inc. is low, thus the engagement risk must be high.
Business Strategy: Glentel’s main business strategy is selling mobile phones in retail Canada and U.S and providing
telecommunications services. Since, the technological trend is changing constantly, it is really hard for Glentel to
maintain their revenue stream from retail division as they will incur more inventory costs due to inventory obsolesce.
Due to this, the company may inflate sales amount to keep their stake in the market. Their keen focus is on acquiring
telecommunications companies outside of Canada to expand their relationships globally. So far, they have excelled in
the acquisition of Diamond Wireless and Mac Station Technologies. This poses greater concern to the auditor as these
transactions are non-routine transaction with most them dealing with non-arm’s length. The company also recently
purchased AMT group based inAustralia.
Key Competitors: Glentel is facing huge competition from its rivals. Its direct competitors have a huge
potential to retain market share which severely affects Glentel’s survival ship. The industry is facing huge
difficulty in attracting and retaining customers as new entrants are driving up the customers from premium
brands to lower price contracts. The Company’s Retail Canada and U.S. Divisions primarily offer services of
five Canadian wireless brands and one U.S. wireless brand, any competitor’s relationship with Glentel’s third
parties can limit their ability to promote its products, thus decreasing their revenues. Therefore, there is huge
potential for material misstatement in particular to the revenue account. During the year ended December 2011,
approximately 73% (2010 – 72%) of the Company’s revenue was provided by three national networks; each
providing at least 20%. There will be a huge slump in the revenue if one them leaves Glentel.
Industry trends (external Fraud risk Factor): The industry trend is constantly changing due to customers
preferring more technologically viable mode of using telecommunications such as smart phones and tablets.As
a result, companies likeApple, Rim, and Samsung are coming up with new trends instantaneously. This
severely affects Glentel as it depends on selling third party communication devices and networks. This affects
Glentel’s valuation of its inventories.As a result, Glentel may have to alter their contract plans for most of its
non-trend mobile devices to get rid of them from their warehouses to reduce inventory costs and to attract
customers.Altering contract plans bring in more complexity in recognizing the sales dollar. Since, the industry
trend is affecting their potential for revenue producing, the company may overstate sales amount to maintain
their rank in the industry. This pose a huge work load for the auditor as their main engagement is making sure
whether the sales transactions have occurred or not.
Key Business Processes: Glentel’s main business process is inventory management as their main revenue
source is from retail and they have been actively involved in opening up new stores recently. This poses greater
risk to the auditors because they have to make sure that the management is not hiding any expenses to inflate
revenues. Sales from contracts for communication system solution sales are recognized whe