Cloud 9 Ltd. : An Audit Case Study, First Canadian Edition Class Notes

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2Assignment 1: Understand the businessGeneral and industry-specific economic trends and conditionsThe Canadian economy is expected to grow at an average of approximately 2 to 3 percenteach year to 2016.•After a period of spending and debt accumulation, Canadians are now focusing onreducing debt levels while interest rates are at historic lows. Today, the overalltrend is toward more prudent spending, resulting in modest growth. As the Bankof Canada signals interest rates will increase in the future, the timing of suchincreases are uncertain. Future interest rate increases may decrease the amountof disposable income available for expensive running shoes.•Greater movement of U.S. retail chains into Canada continues to put pressure on theretail sector. With increased competition, price wars are common, puttingpressures on profit margins. There is an adequate supply of workers and thereare no special or unique labour relations requirements.•However, sales of the product will depend on the target market. Who is most likelyto buy—Generation Y? Baby Boomers? Gen X? Mellennial’s? House prices andinterest rates don’t affectMellennial’s, Gen Yer’s, and the Baby Boomers asgreatly as Gen Xers, who are experiencing the prime years of home ownership.Therefore, the target market may not be significantly impacted by future interestrate increases.•Lower pricing levels and improved quality of Chinese imports have resulted in largevolume increases. Cloud 9 has responded well to this shift by obtaining themajority of its good from its China distribution plant.•The strength of the Canadian dollar against the U.S. dollar has improved the foreigncurrency exchange issues (dollar parity makes imports cheaper).•Seasonality is not a specific concern for running shoes.•Having a retail outlet/store increases the risk of theft (and has been proven) andneed for skilled or at least consistent labour.•Cloud 9’s growth expectations are in line with the industry.Competitive environment/Product information/Customer information/Supplier informationCompetition is high and increasing, with price and quality the deciding factors.•The ability to supply footwear retailers with products in a timely manner is animportant success factor against competitors. Footwear is subject to fashiontrends.•Image and functionality are two of the most important characteristics consumers useto differentiate footwear. An aggressive marketing campaign, often using sportsand fitness preferences, riskey to establishing brand recognition.•The industry is relatively capital intensive. The need for warehousing, transportation,and stock is high and may create barriers to entry.•While entry from new wholesalers can be difficult based on agreements betweenexisting wholesalers and retailers, the trend in the industry is for the customer to

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