Assignment no 1 Final Term.

Audit panning and analytical procedures

Understanding the client business and assessing the business risk.

The Internet has dramatically increased global e-commerce activities. Both traditional

"brick and mortar" businesses and new dot-com businesses use the Internet to meet

business objectives. For example, eBay successfully offers online auctions as well as

goods for sale in a fixed price format.

Required.

1. Identify business strategies that explain eBay's decision to offer goods for sale at

fixed prices.

EBay’s decision to offer goods for sale at fixed prices based on these strategies.

To match the opposition. Because other retailer’s offer products at fixed prices through the

Internet, eBay’s facility to offer products at fixed prices allows eBay to invite customers who are

interested in purchasing products offered by other retailer’s. Customers less interested in

participating in online public sale may come to eBay to purchase products at fixed prices instead

of visiting other retailer’s Web sites. Thus, eBay may have decided that it is necessary to offer

products at fixed prices to match their opposition and meet consumer expectations in the

marketplace.

Enable to grow new target Markets by offering products at fixed price to its customer.

Many customers may not be passionate to contribute in online public sale due to the problem of

uplifting their bids online for the time in which auction is actuality done. By offering products at

fixed prices to customers through its Web site, eBay may be able to grow its market to customers

who do not select to contribute in the online auction.

2. Describe three business risks related to eBay's operations.

Customer’s Gratification with Product. Because eBay offered products by autonomous third

parties, eBay faces risks associated to product quality and features. If a customer purchased

products through eBay fail to meet customer expectation for quality, use of eBay auctions by

customer may devaluate over time.

Customer Secrecy. Due to buying products online customers will be providing secret personal

information, including credit card data, eBay’s system must be designed to protect customer

privacy during transmission and processing of orders. Breaches in customer privacy may affect

future demand for online sales and may increase legal exposure to the company.

Internet Accessibility. EBay’s business model is helpless without access to the Internet. During

the periods when Internet is not available, eBay is unable to conduct business. If Internet outages

are lengthy or frequent, consumers may be less interested in shopping on eBay.

3. Acquisitions by eBay in recent years include PayPal, an online payment service, and

Skype, an internet communications company. Discuss possible reasons why eBay

made these strategic acquisitions.

The basic purpose or aim of purchasing of PayPal an online payment service by eBay is to

modernize the payment process between buyers and sellers on the eBay auctions. PayPal allows

customers, both the individual and business to send and receive payments online with an email

address securely, easily and quickly. PayPal's service builds on the existing financial

infrastructure of bank accounts. Attaining PayPal allows eBay to decrease business risk by

ensuring they control this important aspect of the payment process in online business. The basic

decision to purchase the Skype an Internet communications company, is to make stronger eBay’s

access to the wildest growing Internet communications company. That helps eBay to ensure the

controls on this important aspect of its business model.

4. Four years after acquiring Skype, eBay sold most of its interest in the company.

Discuss how that impacts eBay's business risks.

EBay Inc. acquired Skype in 2005 for $2.6 billion but in 2007, eBay Inc. took a $1.4 billion

reduce in the book value of Skype, admitting that the procurement had not performed as

projected. Between 2005 and 2007, its stock price was cut in half and its market cap shrank by

$30 billion. In 2009 The Company’s board decided to divest Skype due to a lack of

collaborations with the company’s core businesses and its focus on commerce. EBay retained a

30% stake in Skype, safeguarding possible advantage to any future value formation. EBay

wanted to unload Skype after failing to integrate the company into its core operations, and was

now soliciting bids to cut its losses.

5. Identify possible risks that can lead to material misstatements in the eBay financial

statements if business risks related to its operations, including recent acquisitions

and divestitures, are not effectively managed.

Each of the possible business risks that can lead to material misstatements are:

1. Inadequate Ability to Grip Demand.

2. Customer Satisfaction with Product

3. Consumer Privacy

4. Internet Availability may lead to an increased risk of material misstatements in the

financial statements, if not effectively managed.

Inadequate Ability to Grip Demand. If demand for products through the eBay Web site

exceeds the company’s ability to process orders in a timely fashion, customers may cancel earlier

recorded orders or request returns when delivery take place well away from the expected

delivery date. The accounting systems must be planned to exactly reflect cancellations and

returns in a timely fashion in accordance with GAAP. Additionally, if the processing of orders is

significantly delayed, the accounting systems must be effectively planned to ensure sales are not

recorded in advance (e.g., not until delivery).

Customer’s Gratification with Product. While the autonomous sellers who offer products on

eBay auctions bear principal duty for product quality and feature, some customers may seek

financial reimbursement from eBay when products are not delivered or are in poor quality.

Thus, eBay’s financial statements may need to include reserves for product returns.

Consumer Secrecy. If consumer privacy is breached, existing sales may be lost or returns

beyond the normal period may be requested. Such activity would need to be properly reflected in

the financial statements. Additionally, legal exposures may increase, which may require

additional financial statement disclosures.

Internet Accessibility. The lack of Internet availability will may lead to penalties or fee

payments to online sellers who use eBay to sale goods and to those who wanting to place

advertisements on the eBay site. When the Internet is down, there may be fees owed to sellers

and advertisers.