E-Commerce Industry Flashcards
What are the industries transformed by E-commerce?
*computer software,
*securities trading,
*banking,
*travel services,
*books and magazines,
*recorded music,
*advertising,
*news media,
*biddings and auctions, and
*education.
*recently: retail, supply chain, human resource
What are the uses of E-Commerce? (5)
- provide only information about the entity and its activities, which can be accessed by third parties such as investors,customers, suppliers, finance providers, and employees,
2.facilitate transactions with established customers whereby transactions are entered via the Internet,
3.gain access to new markets and new customers by providing information and transaction processing via the Internet,
4.access Application Service Providers (ASPs), and
5.create an entirely new business model.
What are the Audit considerations of E-commerce? (4)
*Skills and Knowledge
*Risk Identification
*Internal Control Considerations
*The Effect of Electronic Records on Audit Evidence
What are the audit considerations regarding skills and knowledge?
*The level of skills and knowledge required to understand the effect of e-commerce on the audit will VARY WITH THE COMPLEXITY OF THE ENTITY’S E-COMMERCE ACTIVITIES
*The auditor considers whether the personnel assigned to the engagement HAVE APPROPRIATE IT AND INTERNET BUSINESS KNOWLEDGE TO PERFORM THE AUDIT
*When the work of an expert is used, the auditor obtains sufficient appropriate audit evidence that such work is adequate for the purposes of the audit, in accordance with PSA 620, “Using the Work of an Expert.”
The auditor’s required business knowledge:
*Understand, so far as they may affect the financial statements:
-The entity’s e-commerce strategy and activities,
-The technology used to facilitate the entity’s e-commerce activities and the IT skills and knowledge of entity personnel,
-The risks involved in the entity’s use of e-commerce and the entity’s approach to managing those risks, particularly the adequacy of the internal control system, including the security infrastructure and related controls, as it affects the financial reporting process,
*Determine the nature, timing and extent of audit procedures and evaluate audit evidence,
*Consider the effect of the entity’s dependence on e-commerce activities on its ability to continue as a going concern.
What are the matters that may be relevant to the auditor when considering the entity’s e-commerce strategy in the context of the auditor’s understanding of the control environment?
*involvement of those charged with governance–alignment of e-commerce activities with the entity’s overall business strategy,
*whether e-commerce supports a new activity for the entity, or whether it is intended to make existing activities more efficient or reach new markets for existing activities,
*sources of revenue for the entity and how these are changing (for example, whether the entity will be acting as a principal or agent for goods or services sold),
*management’s evaluation of how e-commerce affects the earnings of the entity and its financial requirements,
*management’s attitude to risk and how this may affect the risk profile of the entity,
*the extent to which management has identified e-commerce opportunities and risks in a documented strategy that is supported by appropriate controls, or whether e-commerce is subject to ad hoc development responding to opportunities and risks as they arise, and
*management’s commitment to relevant codes of best practice or web seal programs.
How should the auditor identify risks?
The auditor uses the knowledge of the business obtained to identify those events, transactions and practices related to business risks arising from the entity’s e-commerce activities that, in the auditor’s judgment, may result in a material misstatement of the financial statements or have a significant effect on the auditor’s procedures or the audit report.
Business Risks related to E-commerce
- loss of transaction integrity –the lack of an adequate audit trail in either paper or electronic form,
- pervasive e-commerce security risks (virus attacks and the potential for the entity to suffer fraud through unauthorized access or identity misrepresentation),
- system availability risks (the risk that the entity’s infrastructure is not capable of meeting disclosed system availability requirements, security practices, and applicable laws and regulations). Unavailability of system or service –> temporary loss of revenue, impaired cash flow, or diminished public image
- loss of information privacy –> loss in customer confidence in transacting business over the entity’s website. There is a risk that personal information collected by websites in the normal course of business is not adequately protected or is misused. Personal information is any information relating to an identified or identifiable individual.
- improper accounting policies related to, for example, capitalization of expenditures such as website development costs, misunderstanding of complex contractual arrangements, title transfer risks, translation of foreign currencies, allowances for warranties or returns, and revenue recognition issues.
- noncompliance with taxation and other legal and regulatory requirements
- failure to ensure that contracts evidenced only by electronic means are binding, and
- overreliance on e-commerce when placing significant business systems or other business transactions on the Internet.
It is any information relating to an identified or identifiable individual, which includes but is not limited to, the customer’s name, address, telephone number, social security/insurance or other government identification numbers, employer, credit card numbers, personal or family financial information, personal or family medical information, employment history, or history of purchases or other transactions, credit records, and similar information.
Personal information
What are the controls addressing business risks?
- ensure the integrity of transactions and business processes,
- ensure that information and information systems are available during the periods disclosed by the entity,
- obtain agreement on terms of trade, including agreement of delivery and credit terms and dispute resolution processes, which may address tracking of transactions and procedures to ensure a party to a transaction cannot later deny having agreed to specified terms (non-repudiation procedures),
- obtain payment from, or secure credit facilities for, customers, and
- establish privacy and information protection protocols.
What are the legal and regulatory issues? (5)
- adherence to national and international privacy requirements,
- adherence to national and international requirements for regulated industries,
- the enforceability of contracts,
*the legality of particular activities, for example, Internet gambling, - the risk of money laundering, and
- violation of intellectual property rights.
It refers to the way various IT systems are integrated with one another and thus operate, in effect, as one system.
Process Alignment
What are the effects of electronic records on audit evidence?
- The auditor considers whether the entity’s security of information policies, and security controls as implemented, are adequate to prevent unauthorized changes to the accounting system or records, or to systems that provide data to the accounting system.
- The auditor may test automated controls, such as record integrity checks, electronic date stamps, digital signatures, and version controls when considering the integrity of electronic evidence.
- Depending on the auditor’s assessment of these controls, the auditor may also consider the need to perform additional procedures such as confirming transaction details or account balances with third parties (refer to PSA 505, “External Confirmations”).
What are the general business models of e-commerce?
● Business-to-Consumer (B2C)
● Business-to-Business (B2B)
● Business-to-Government (B2G)
● Consumer-to-Consumer (C2C)
● Consumer-to-Business (C2B)
● Consumer-to-Business (C2B)
(Business Model)
●Companies sell directly to the product end-user.
●they perform transactions with the consumer that will ultimately use the goods.
●may be used to sell products or services and the most common business model
Business-to-Consumer (B2C)
(Business model)
●business can directly sell goods to a user–may be another company.
●often entail larger quantities, greater specifications, and longer lead times.
Business-to-Business (B2B)
(Business model)
●Some entities specialize as government contractors providing goods or services to agencies or administrations.
Business-to-Government (B2G)
