Background:
Starbucks Corporation is a company incorporated in 1985 that purchases and roasts high-quality coffees which it sells along with other beverages. The company has its common stock trading in the NASDAQ symbolized as ‘SBUX’. The company, in addition to the operations above, licenses its trademarks through other channels like licensed groceries, and national foodservice stores. The objective of the company is to have a standing among the most respected and recognized brands in the world. In order to achieve this, the company has continually expanded into markets that promise to boost revenues for the whole enterprise.
The company has four reportable segments, which are Americas, EMEA (Europe, Middle East, and Africa), CAP (China/Asia Pacific), and Channel Development. In addition the company has non-reportable segments that comprises of other brands combined together and called ‘All Other Segments’. All these segments generated revenues at a percentage of total revenues of the company. Americas generated 73%, EMEA 8%, CAP 7%, Channel Development 9% and All Other Segments 3% (Starbucks Corporation 2).
For the Fiscal year ended 28th September, 2014 Starbucks generated total net revenues of $16.45 billion in sales. These was divided among three operational sectors where revenues from company-operated stores were reported at $12.98 billion, licensed stores at $1.59billion, and CPG, foodservice and other at $1.88 billion. The net income margin was reported at 12.57%. The company’s assets was reported at $10.75 billion at and its Net Worth quoted at approximately $5 billion. Starbuck’s Corporation had employed approximately 191,000 people worldwide as at 28th September, 2014(Starbucks Corporation 8).
Management/ Auditors Conclusion on Internal Controls
Both the management and the auditors conducted an evaluation of the effectiveness of the internal control of Starbucks Corporation. The evaluation was based on the framework and criteria established in Internal Control-Integrated framework(1992). The evaluation consisted of a review of documentation of controls, test of operation effectiveness of controls, evaluation of control design effectiveness, and a conclusion of the evaluation. The management concurred that the internal control over financial reporting was effective as at 28th September, 2014. The auditor, Deloitte & Touche LLP expressed an unqualified opinion on Starbuck’s financial statements stating that the company had maintained effective internal control based on set criteria.
Technology Concerns
Starbucks Corporation utilizes information technology systems in almost every aspect of its business. There are those utilized at the point of sale, web platforms, mobile payment systems, and those utilized for administration functions. Their systems contain very sensitive information about customers and company operations. The fact that Starbucks Corporation has many stores that it manages and a complex system to work with exposes the company to inherent risk. This is because the system needs to be changed or improved on in a consistent basis thereby if employees are not trained properly, then material misstatements can take place. Systems need to be altered and improved on a regular basis so as to avoid any instances of breakage and corruption from third parties. In addition control risk can arise especially if management does not take into account operating effectiveness of new systems.
Accounting policy and assertions to be evaluated
Starbucks Corporation is in the business of purchasing and roasting high-quality coffees that they later sell to customers. They have other products that are also sold in their franchise stores. Revenue for Starbucks is essentially recognized when a sale has been made to dealers where it is considered that ownership has been transferred. The primary assertion in the case is existence followed by accuracy, completeness, cut-off and occurrence. It should be established that in deed transactions took place and that all accounts related to them exist in their true form and are recorded on a timely basis.
Inherent risks
Inherent risks can be defined as the risk of a material misstatement that arises due to errors or an omission of critical information due to factors not related to failure of controls (Karen K. W. Li 3). Inherent risks are often considered to be high in institutions where there are high numbers of estimation or degrees of judgement. They can also be high in institutions where transactions are highly complex. Starbucks is an example of such an institution where due to the high number of subsidiaries it has in different regions of the world, its consolidated statements are highly complex and prone to inherent risk due to omissions and errors in recording.
Starbucks is vulnerable to an inherent risk involving initial vs. subsequent arrangement. Starbucks has been audited on several occasions by Deloitte & Touche. It is perceived that the auditor has gained substantial experience and knowledge on the engagement they have had with Starbucks. The auditor might have built some level of trust and confidence on the systems at Starbucks. Most times it happens that an auditor sets a high inherent risk when auditing a company for the first time and lowers it as more knowledge is obtained about the client. This should be checked on so as to avoid any errors that might arise due to perceived confidence on internal systems.
Starbucks is susceptible to inherent risk due to non-routine transactions that takes place in its financial year. Without proper structures in place to effectively record such transactions then the financial systems are prone to high inherent risk. If employees are not trained effectively to record these transaction then there might be an inherent risk involved. For instance there might be inherent risks when a franchise is burnt down and becomes nonoperational or even when operations are being moved to novice countries. There is an increase in labor costs too due to minimum wage levels and workers compensation reviews caused by litigation. Any change in accounting policy should be communicated effectively to staff to avoid any misstatements and omissions that might arise.
But of most concern to Starbucks is the inherent risk they are exposed to due to their international operations in various countries. Operating in several countries brings with it challenges that are beyond managerial control thus inherent risk. For instance foreign currency exchange rate fluctuations and the requirement to transact in country specific currencies can lead to material misstatements and errors in books. Countries often have specific political, social, and economic fluctuations that could affect the operations of the business. Their laws and regulations might require adherence to a certain accounting policy that the parent company is not utilizing. When consolidation takes place, errors could occur due to conflicting accounting standards. During tensions between the U.S and other nations, those nations could restrict actions of Starbucks by instituting protective measures like custom duties and tariffs that favor local businesses (Starbucks Corporation 13). If such changes are omitted in financial statements they could lead to recognition of revenues which are not necessarily present.
When setting up shop in new countries the company faces difficulty in staffing, developing, and managing supply chain logistics and operations. Factors beyond company control affect the quality of the product and hinder proper records where material misstatements are more prone to occur. These are cultural differences, language barriers, and challenges in recruiting and retaining high quality employees that are difficult to find in some developing countries. These inherent risks are mostly experienced in developing countries and pose a serious threat to the financial statements of Starbucks especially considering that these markets are quite significant to its long-term growth.
Substantive Analytics
The analysis consists of financial information for Starbucks Corporation from the period 2012-2014 extracted from the company’s respective annual reports. The following analytics are hereby carried out in order to ascertain whether there is a potential risk for misstatements in the company. Industry trends have to be monitored on a keen note to ascertain whether Starbucks is operating within reasonable standards that is expected. Starbucks Corporation conducts its business within the specialty eateries services industry. It is a recognized brand in this industry specifically in America where it is highly profitable. The expected growth in the industry as quoted by CSI Market is 17%(CSImarket 1).
The first ratio analyzed for Starbucks is revenue growth. In 2012, revenues were reported at $13.3 billion marking a 13.7% growth as compared to the revenue in 2011. In 2013 the revenue was $14.892 billion, a revenue growth of 11.98%. In 20114, the revenue shot up to $16.4 billion thus a revenue growth of 10.45%. The rate of revenue growth is within that set in the industry which is 17%. Gross profit margin has been fairly consistent within the three years where in 2012 it was at 19.47%, in 2013 it was 21.35%, and in 2014 it was 23.2% (Marketwatch Inc.). In fact the company is becoming more profitable in the industry within the expected standards.
The analytical procedures performed above to acknowledge that Starbuck’s actual revenue is in line with what is expected in the specialty eateries services industry. The company’s revenue growth is within the industry’s revenue growth. In fact the company should be able to achieve more revenue growth by implementing practical strategies to improve business in areas it operates in. The fact that actual revenues of the company is lower than expected revenues within the industry affirms that inherent risk in Starbuck’s might be quite low.
Substantive Procedures
These are procedures that can be taken in order to test management assertions and lower detection risk. The following substantive tests could be carried out.
| Assertion | Substantive Procedure |
| 1. Existence
2. Completeness
3. Accuracy |
1. There should be positive confirmation from dealers who attest to account balances with parent company.
2. Tracing of purchase orders to sales journals and invoice.
3. Recalculations of invoice amounts that should reconcile with the amounts in sales journals. |
In addition possible some procedures could be undertaken to avoid fraud in the company. This could include examination of key dealers’ information in an effort to note any anomaly. Daily transactions can be examined thoroughly to note control structures in place and where improvements can be made. To improve control, systems should be reviewed consistently and company agreements with dealers be analyzed regularly to close on loopholes that might be risky to the going concern of the business.
Conclusion
The actual substantive analytics performed above help mitigate audit risk involved with Starbucks Corporation especially as pertains to inherent risk. Additional analytics have been recommended to improve control in the organization and mitigate on any fraud that might take place. The corporation has low inherent risk as pertains to financial statements but this can be adversely affected if the inherent risks due to international operations are not mitigated.
Works Cited
CSImarket. Starbucks Corporation(SBUX). 2015. 14 March 2015.
Karen K.W. Li. Risk in Auditing – Inherent Risk. Hong Kong: Institute of Certified Public Accountants, 2013.
Marketwatch Inc. Annual Financials for Starbucks Corp. 2015. 14 March 2015.
Starbucks Corporation. Form 10-K Starbucks Corporation. Washington: United State Securities and Exchange Commision, 2014.