Business risk and risk assessment: Apple Essay

I. The follows Core returnion line Processes and strategic ObjectivesThe all in alliances products give the bounce be divided into two principal(prenominal) categories, in the flesh(predicate) com siteers and related products and portable digital medicinal drug players and related products. found on the annual report, the go with designs, fashions and grocerys (Annual answer for 2005 1) many variations of the products menti unitaryd above. The more customary products of the union involve the mack line of desktop and notebook computers, the iPod digital medical specialty player, the Xserve G5 server and Xserve RAID storage products, a portfolio of consumer and professional parcel applications, the Mac OS X operating system, the iTunes Music Store, a portfolio of peripherals that softw atomic number 18 documentation and enhance the Macintosh and iPod product lines, and a variety of different supporter and support offerings (1).Design is of importly a concern o f the caller- proscribeds research and emergence. Beca utilize the union is in the engine room fabrication, research and development is a crucial component of its operations. It is the manner by which the gild go forwards its matched advantage. In its annual report, the fri revokeship admitted that the go withs power to compete successfully is heavily unfree upon its efficiency to ensure a go on and well- erad(a) flow of competitive products and technology to the grocery farm animalplace (14).As a corollary bring on to research and development, creation, protection and acquisition of talented property rights atomic number 18 in any case a major concern for the beau monde. The companion is in possession of just about(prenominal) patents and copyrights. On one hand, the high society is concerned with the protection of its patent, copyrights, trade attach and service marks worldwide. In the different, it must protect itself from infringing on former(a)s intell ectual property rights. The high society does not only rely on its ability to nominate intellectual property, it in addition relies on those owned by third lift offies which atomic number 18 acquired by means of and through licensing agreements.Because the companionship is engaged in producing technology year after year, the manufacture of the communitys products may create complications. The bon ton manufactures personalised computers and accessories, iPod digital music players and accessories and a variety of consumer and business softwargon applications. The novel materials for these products argon sourced elsewhere. on that point ar reliable key components that be sourced from one or check outside source (Annual communicate 2005 14). In 2005 and 2004, the troupe see delays in coition to one of its products, the PowerPC G5 processors (14). This led to the non-availability of certain Apple products from the merchandise (14). After this incident, the telephoner denote its intention to shift its Macintosh personal computers from PowerPC G5 and G4 processors to Intel Microprocessors (Apple to use Intel para. 1). This transition is expected to be fully implemented in 2007.The friendships development of new products requires custom made raw materials that are initially maven-sourced until the Company watch overs the need to develop new sources (Annual Report 2005 14). The manufacture of raw materials and the assembly of many of the Companys products are made in several foreign countries by third popy vendors.The Companys trade is done through the Companys website, company-owned retail stores, forecast selling by the Companys sale force and third party wholesalers, resellers, and value added resellers. The Companys main markets are usually in the following fields education, business, creative and consumer market (Annual Report 2005 12). In 2005, the US education industry accounted for more than 12% of the Companys net sales (12). The Company is not dependent on any single customer for its income. In fact, no single customer of the Company accounted for more than 10% of its sales for three win monetary years, 2003 to 2005 (12).The Company is divided into four reportable operating segments, America, Europe, Japan, and Retail. It excessively has an operating segment in Asia-Pacific. The three geographical segments mentioned above do not include retail. The Retail segment operates in the coupled States, Canada, coupled Kingdom, and Japan. (3)The Company intends to continue its substantial investment in research and development. The Companys strategic plan includes the make betterment of the Companys alive products, as well as the development of new ones (7). The Company to a fault believes in the capitalizing in the convergence of digital consumer products (7). This is in keeping with industry trend. For example, both the Company and Microsoft have patents that would improve or create wifi-sharing abili ty ( wire slight connectivity) in iPod, iPhone and Zune (Cheng para. 1). Zune, Micosofts digital music player, already has a wire little sharing capability which the iPod hopes to emulate. The new patent of the Company may in any case make it possible for the consumer to directly purchase media from a server through the iPod or iPhone (para 5 and 6).The Company to a fault plans to continue to exploit the sensed advantages of the Companys products. These advantages are innovative industrial design, intuitive ease-of-use, and built-in networking, graphics and multimedia capabilities (Annual Report 2005 2).Another shift in the Companys product development is the shift to a greener apple. The Company announced its intention to continue to re melt toxic waste from new products and aggressively recycle old products (Jobs). The Company claims that it is leading the industrys efforts to create more environmentally responsible company and products. The Company plans to create more energy efficient products in the future (para. 29). The Company is not simply in this. Other companies too exerted efforts to show social and environmental awareness. sometime(prenominal) in 2007, Google released a more energy saving black screen after a study showing that a blacks screen uses less electricity than a white one.As far as its marketing is concerned, the Company plans to expand the distri thoion of its products. In the past year it has concentrate on adding on to its direct selling capabilities and the improvement of its sales staff. The Company terminus continue this style by building more Company-owned store in high traffic locations (Annual Report 2005 8). It similarly aims to widen its consumer substructure by targeting first-time computer owners and those people who do not own a Macintosh computer (8). The Company also plans to continue building flaw awareness by increasing investment in marketing and publicise as shown by the change magnitude in selling ge t downs over the years.II. Business RisksResearch and development is a major component of the Companys business guess. It involve a epochal hail of the Companys resources, with research and development expenditures amounting to $534million, $489million, and $471million in 2005, 2004, and 2003, respectively (Annual report 2005 13). The benefits are also contingent on several factors, including the ability of the Company to determine which products or innovations burn be successfully developed, manufactured and marketed. There is unceasingly the jeopardize of choosing the wrong innovation to focus resources on. The failure to produce marketable products regularly means loss of resources and market standing.Research and development also has a legal dangers involved. The Company has admitted that because of the rapid change in technology and the pace by which new patents are being issued, it is possible certain components of the Companys products and business methods may unknow ingly infringe existing patents of others (15).Aside from suits relating to infringement of intellectual property rights, the Company is also approach various suits in relation to its products and a derivative suit filed by its shareholders involving unfair competition and false and misleading proxy statements. In 2006, the Company was placed under scrutiny due to stock option grants, some of which are issued to the Companys chief operating officer, Steve Jobs, in 1997 and 2001 (Iwata). There were allegations of stockholders that the grant was part of a backdating scheme, a scheme were it is made to erupt that the options are transacted at a later date when the shares are valued take down (Apple comes under scrutiny).The investigation showed thousands of backdating grants including two made to CEO Jobs, the second of which did not observe the requirements for validity (Iwata). CEO Jobs was not held accountable for the stultification of the grant. However, because of the irregula rity in the stock options grants issued, the Company restated prior years monetary statements. Because of these evets, the Company admitted in its annual report (2006) the at that place is further take a chance of litigation, regulatory proceedings and government enforcement actions (21).The manufacturing of the Companys products raises some special concerns. As stated above certain key components keister only be obtained from a single or limited source (Annual Report 2005 13). as yet key components that are not from a single or limited source are sometimes subject to availability constraints and pricing pressures (13). In facts, sometime in 2005 and 2004, the company already experienced delays in acquiring key components which led the Company to change one of the major components of one of its products. The Company admits that the loss of certain suppliers would have an adverse effect on the Company (14).Because of this, there is a adventure that the Company forget not be a ble to meet demands for the Companys products or that the Company will incur delay in the delivery the products ordered by customers. The Company also relies on third parties to try digital bailiwick in its iTunes stores and to develop certain software applications. The failure of third parties to supply digital content does not only affect the performance of iTune stores but also the preponderating carriage of the Companys digital music player. In the equal manner, the failure of software developers to develop programs congruous with the Companys computer platform due to bigger market for Windows and Linux will adversely affect the demand for the Companys personal computers.The use of foreign third party vendors in the utmost assembly of the Companys portable products and as suppliers of raw materials increases the Companys encounter of being adversely moved(p) by political and economic conditions in these foreign countries. Political upheaval and economic crisis in foreig n countries can affect suppliers ability to meet the Companys demand.The Company faces baseball swing throat competition on many of its products. In the advent of personal computers, the Company owns a significant chunk of the market. Over the years, the Companys market share grew smaller and smaller. In July 2006, the Companys market share is around 2.2% (Apple market share myth), a significant doze off from its original market share. However, percentage figures do not account for the yield in the PC market since its birth in the 1980s. The decline in the Companys market share can also be attributed to the baffleth of numerous generic brands that are much cheaper than the Companys Mac computers. The proliferation of clones led many companies to lower their worths and profit margin to descend a bigger market share.There is an on going price competition in the PC market, and the Company is striving to be competitive in this area. However, the Companys business scheme seems to focus less in making cheaper PCs but more on developing products that bring up to its niche market, such as the creative market (Annual Report 2005 2). This scheme of the Company is a business risk because the limited market base makes it more vulnerable to economic factors. Decline in spending ability of one of its niche market can have a great impact on the company than if it has diverse market. On the other hand, it removes the Company from the competition in market segments that are already saturated with other players.Some analysts believe that part of the upside of the Companys strategy is that it has refused to compete in a market over which Microsoft already has a monopoly (Apple market share myth). Microsoft has acquired a monopoly in the industry by selling cheap PCs with expensive software or a system called scoop shovel software bundling. This makes it difficult for other companies to develop operating systems that are competitive with Microsofts. The Companys strate gy in focus on the improvement of what the consumers perceived as the functional and design advantages of the Macintosh platform opens the Company to the risk mentioned above but it also removes it from the competing in saturated markets.The digital music player market is expected to grow up to 286 million units in 2010 (Guza para.1). The Companys own product, iPod, continues to master the market however, many competitors are cropping up, challenging the Companys dominant position. Analyst believes that the Company should not be complacent regarding its dominant position in the business since the digital music player market is younker and has only penetrated a small ingredient of the market in the United States (Siklos). Although many competitors have tried to challenge the Companies and failed, the competition is not bragging(a) up. Competitor, Microsoft, came up with Zune, its own brand of digital music player that is compatible with Microsofts own on-line music store. Samsun g, Sandisk and Creative have came out with products of their own. Software, hardware and on-line companies are working together to address expert difficulties in the initial launch of their own digital music players, and alter their services (Wingfield para. 4). There is a risk that the Companys music related products may follow the road of its personal computers.III. Three close Significant Financial Statement AccountsThe three most significant monetary statement accounts for the Company are research and development, entry, and common stock.Research and development is significant because the Company is engaged in the production and marketing of technology. not only is research and development outlay significantly higher compared to other industry, it is also the represent which enables the Company to continue its creative activity. In the industry where the Company belongs, obsolescence happens very fast. If the Company fails to innovate, there will come a time that the Com pany itself will be obsolete since the consumers have switched to the more deep developed products. Many of the Companys strategic plans are laced up with research and development, such as the plans to improve existing products and the move towards convergence of digital products.The plans of the company to improve and to add innovations to existing products will involve a significant amount of the Companys resources. The amount of the companys resources spent in research and development are expensed outright, except for the costs which are incurred after the innovation has been determined to be technically feasible (Annual Report 2005 68).The failure of the Company to produce technologically feasible products may increase research and development expense, in the same manner that the success of developing technologically feasible products does not ineluctably decrease research and development expense. If all the cost for development of the product was incurred before it was deter mined to be technologically feasible, all cost are expensed outright regardless of feasibility. Based on the Companys financial statements, capitalization of research and development expense is minimal (77).Inventory is significant for the Company since its operations involved both manufacturing and retail. The Companys livestock is subject to several business risks already discussed above. In relation to the supplies issue, the Company entered into long-term supply agreements with several companies which bound the Company to these suppliers until 2010. As part of the agreement, the Company is required to make prepayment amounting to $1.25 billion in the second shite of 2006. (Annual Report 2005 91)Part of the Companys objectives is to ensure a continuing and timely flow of competitive products and technology to the marketplace. The achievement of this objectives means that the Companys strain levels are always sufficient to meet demands for the Companys products. This would also mean that the Company has successfully managed it inventory during the year. meet commission of inventory would result in a year end inventory level is not too high or to low.The Companys common stock is significant for the year 2006 because of the discovered irregularities in the issuance of stock option grants issued in 1997 and 2001. These resulted in allegations of fraud and refutal of documents (Wearden para.4). The Company has already investigated the matter, and the result of such investigation has exonerated CEO Steve Jobs of any misconduct. However, restatements of prior years financial statements were made, including the common stock and other related accounts (para. 3). This account is not necessarily affected by the Companys strategic objectives. The stock option grant issue itself affected the performance of the Companys stock in the market and even raised the issue of possibly delisting from NASDAQ, but which turned out be without bases.IV. oversight AssertionsThe charge self-reliances relevant to research and development expense are completeness, accuracy, cut-off and classification. Completeness is a relevant management averment because research and development is an expense account, and so, there is a risk that the Company will not include all research and development cost incurred in order to increase the net income for the year. Accuracy is relevant because there is a risk that proceeding relating to this account are not recorded properly, resulting in under or over statement of the expense account and, in effect, of net income for the fiscal year.Cut-off is relevant for research and development so that there is proper matching of the expense with the revenue earned during the fiscal year. adversity to record expense in the correct accounting period can also result to over or under statement of the net income for the year. Classification is also a relevant for research and development because there is a risk that the Company will ca pitalize research and development improperly resulting in the over statement of net income for the year and inflating the Companys addition even if there are no expected future benefits. Failure to record the amount in the proper account can also mean that there is no matching of income and expense.The management assertions relevant to inventory are existence, valuation and rights. Existence is a relevant management assertion because there is a risk that the Company will record assets that are not there in order to make the financial conditions of the Company look better to investors. The recording of assets that do not exist can also mean failure to record expenses which, in effect, results to overstatement of net income. Valuation is also a relevant because there is a risk that the Company may overstate the value of the asset to improve the financial statement of the Company. In either management assertions, there is a risk of management inflating the asset of the Company usually to improve the stockholders equity of the Company. Management assertions as to rights over inventory is also relevant because there is a risk that the Company included in its assets, inventories whose ownership has already passed to another, to improve the financial statements of the Company.The management assertions relevant to common stock are existence and valuation. Existence is a relevant management assertion because there is a risk that the Company records stocks which are not actually subscribed and issued or issues stock for which no consideration was actually received by the Company, also called watered stocks. Valuation is also relevant because there is a risk that the Company will over value the property received in consideration for the stocks issued, particularly if the stock is issued for consideration other than cash, making it appear that the Company is better off than it actually is. Both management assertions can be used by the Company to lure investors to invest i n the Company under false pretenses.Although wrong management assertions can be a result of other causes that are not deliberate on the part of management, such as mistakes. The assertions mentioned above are relevant to those accounts because there is the additional risk of deliberate misstatement on the part of management.V. Environmental RisksThere is a low inherent, control and detection risk in management assertions of completeness and accuracy of the research and development expense based on the Companys conservative approach in recording research and development, as well as, the relative simplicity of identifying and recording research and development expense.On the other hand, the management assertion relating to the cut-off of research and development expense is assessed as having high inherent, control and detection risk because of the lack of sufficient info regarding the Companies processes and controls relating to this account. Because the risks mentioned above are ass essed at maximum, more substantial test shall be performed to decrease audit risk.There is a high inherent risk in the classification of research and development expense because of the difficulty of find out technological feasibility. The determination of Technological feasibility can be extremely subjective. On the other hand, there is low control and detection risk in the classification of research and development expense because based on the Companys past practices, the Company is very conservative in capitalizing research and development expenses. The percentage of research and development expense capitalized by the Company is very small compared to the research and development expense incurred both year. It is the Companys policy to record all development cost incurred before determination of technological feasibility as expense, and the determination of technological feasibility is usually done after a large delegate of the cost of development has been incurred so that onl y a small portion of the cost is actually capitalized and amortized.The inherent, control and detection risk is high for all assertions related to inventory because the operations of the Company is complex and international. The final assemblies of some of the Companys products which are performed by the Company itself are in different locations outside the United States. There are also final assemblies of the Company products that are performed by third parties in different countries in Asia. The Company also takes advantage of several ways of marketing its products. It uses company-owned stores, direct selling, third party sellers and on-line selling. These make it extremely difficult to keep track of the movement of the inventory and to determine when ownership over the inventory change hands.The inherent risk is assessed as high for the management assertion of existence and valuation of common stock. This is because of the investigation which the Company itself initiated in rela tion to its stock options grant. The investigation caused the Company to adjust its income from prior years amounting to $84 million. The Company also has stock-based compensation plans consisting of stock options grants and stock purchase plans (Annual Report 2005 88) which calls for complicated computations. The control and detection risk is assessed as low for the management assertion of existence and valuation of common stock because of the Companys efforts to investigate the matter as soon as the problem arose. It was the Company itself that announced the existence of irregularities in the issuance of its stock options grant. The Company has put in placed control mechanisms to address the matter. Moreover, records of the investigation conducted can sponsor the auditor minimize detection risk.