GROUP ASSIGNMENT:

Audit Case of
Dell Computer Corporation (Case 2.2)

By Group Accounting Class - Auditing:

Amellia Samantha / 008201500036
Jersey Purba / 008201500057
Samuel Alexander / 008201500028
Stephanie Angelica / 008201500095
Batch 2015
Auditing Seminar Subject
Lecturer: Gatot Imam Nugroho

President University
Jalan Ki Hajar Dewantara, Cikarang,
West Java - Indonesia
(021) 89109762

May 2017
 Case 2. 2 DELL COMPUTER CORPORATION
Evaluation of Client Business Risk

Summary
Dell Computer Corporation (Dell) is a worldwide provider of products and services that enable
customers to build information-technology and internet infrastructures. Dell offers a broad
range of product categories, including desktop PCs, servers and networking products, storage,
mobility products, software and peripherals, and services. The company’s business strategy
combines its direct customer approach with a highly efficient manufacturing and supply chain
management organization with an emphasis on the use of standards-based technologies. Dell’s
direct customer approach and highly efficient supply chain management and manufacturing
organization also allow it to more quickly introduce new technologies to customers.
Learning Objectives
1. Describe the implications of an audit client’s business risk on the audit engagement.

Business risks are factors which could stop the company achieving its stated
objectives, for example, launching a product for which there is limited demand. Most
business risks will eventually have financial consequences, and thus an effect on the
financial statements. This is why auditors perform a business risk assessment as part of
their planning procedures.

Throughout an audit engagement, audit firms are faced with analyzing the risk
of being associated with a client. Engagement risk is evaluated as being composed of
three components: client's business risk, audit risk, and auditor's business risk
(Johnstone, 2001). Each of these components must be reviewed during the initial
acceptance phase as well as during the audit engagement. Evaluation of each
component is an essential part of the audit firm's process of analyzing engagement risk
as the possible damage can range from financial loss (uncollected audit fees or potential
litigation), loss of prestige or image, to the ultimate demise of the audit firm. As
indicated, the potential consequences may be very serious.

2. Describe the types of information relevant to evaluate an audit client’s business risk.
As stated in ISA 310, auditors are required to obtain a reasonable understanding
of the clien’s business and industry. The nature of the client’s business and industry
affects client business risk and the risk of material misstatement in the financial
statements. Auditors use the knowledge of these risks to determine the appropriate
amount of audit evidence to gather. Auditors have been exposed to problems resulting
from the auditor’s failure to understand comprehensively the nature of transactions in
client’s industry. The auditor must also have an understanding of the client’s external
environment, including economic conditions, impact of competition, reporting
obligations, legal and regulatory requirements. The auditor should source this
information by reading industry trade publications, and regulatory requirements. The
auditor should identify factors such as major sources of income, key customers and
 suppliers, sources of finance, related parties and transactions with related parties
requiring disclosure that may be high-risk areas within the client. The auditor should
make inquiries of management and others within the entity in relation to the above.
Visiting the client’s premises is also useful in this regard because it gives an opportunity
to observe operations first-hand and to meet key employees. Transactions with related
parties are important to auditors because the International Accounting Standards require
that such transactions be disclosed in the financial statements if they are material. As
management are pivotal in establishing an entity’s strategies and business processes the
auditor should consider management’s philosophy and operating style and its ability to
identify and respond to risks as this significantly affects the risk of material
misstatement in the financial statements. In this regard, the auditor should read the
memorandum and articles of association, read minutes of board of directors and
shareholders, and inquire of management.
In addition, the auditor should understand the client‟s objectives related to
reliability of financial reporting; effectiveness and efficiency of operations; and
compliance with laws and regulations. Auditors need knowledge about operations to
assess client business risk and inherent risk in the financial statements. The auditor
should make inquiries of management; review prior year working papers; inspect legal
documents (such as share options and pension plans), minutes of meetings and
significant contracts. The auditor needs also to consider to client‟s performance
measurement system. Inherent risk may be increased if the client has set unreasonable
objectives or if the performance measurement systems encourage manipulation of
amounts in the financial statements. The auditor should read financial statements,
perform ratio analysis, and inquire of management about key performance indicators
that management uses to measure progress toward its objectives.
3. Identify and evaluate the factors important in assessing an audit client’s business risks
and risk of material financial misstatement.

The auditor should perform risk assessment procedures that are sufficient to
provide a reasonable basis for identifying and assessing the risks of material
misstatement, whether due to error or fraud, and designing further audit procedures.

Risks of material misstatement can arise from a variety of sources, including

external factors, such as conditions in the company's industry and environment, and
company-specific factors, such as the nature of the company, its activities, and internal
control over financial reporting. For example, external or company-specific factors can
affect the judgments involved in determining accounting estimates or create pressures
to manipulate the financial statements to achieve certain financial targets. Also, risks of
material misstatement may relate to, e.g., personnel who lack the necessary financial
reporting competencies, information systems that fail to accurately capture business
transactions, or financial reporting processes that are not adequately aligned with the
requirements in the applicable financial reporting framework. Thus, the audit
procedures that are necessary to identify and appropriately assess the risks of material
misstatement include consideration of both external factors and company-specific
factors.
Required
1. Go to Dell’s web site (http://www.dell.com) and click on the “About Dell” link. Review
background and investor information provided about Dell. Click on the “Investor” link
in the About Dell section and print and read the most recent SEC Form 10-K provided
for Dell.
2. Based on Information obtained from the web site, and your knowledge of the industry
prepare a memo discussing the following items:
A. DELL’s
1. Sales :
Net Sales Revenue 2nd Feb 2018 3rd Feb 2017
Products $ 58,801 $ 48,706
Services $ 19,859 $ 12,936
Total $ 78,660 $ 61,642

2. Net Income
2nd Feb 2018 3rd Feb 2017
Net Loss
$ (3,855) $ (1,718)

3. Cash Flow From Operating Activities

Change in cash from 2nd Feb 2018 3rd Feb 2017
operating activities $ 6,810 $ 2,309

4. Total Asset
2nd Feb 2018 3rd Feb 2017
Total Asset
$ 122,281 $ 118,206

5. Number of Employee
At the end of Fiscal 2018, Dell had approximately 145,000 total full-time employees,
approximately 22,000 of whom were employees of VMware, Inc. In comparison, at the
end of Fiscal 2017, Dell had approximately 138,000 total full-time employees,
approximately 20,000 of whom were employees of VMware, Inc. At the end of Fiscal
2018, approximately 39% of our full-time employees were located in the United States
and approximately 61% were located in other countries.
B. Dell’s Product
1. Client Solutions Group ("CSG") — Offerings by CSG include branded hardware,
such as personal computers ("PCs"), notebooks, and branded peripherals, such as
monitors and projectors, as well as third-party software and peripherals.

2. Infrastructure Solutions Group ("ISG") — EMC's Information Storage segment and

our existing Enterprise Solutions Group were combined in Fiscal 2017 to create the
Infrastructure Solutions Group.
 3. VMware, provides compute, cloud, mobility, networking and security infrastructure
software to businesses that provides a flexible digital foundation for the applications
that empower businesses to serve their customers globally.

4. RSA provides essential cybersecurity solutions engineered to enable organizations

to detect, investigate, and respond to advanced attacks, confirm and manage identities,
and, ultimately, help reduce IP theft, fraud, and cybercrime.
5. SecureWorks (NASDAQ: SCWX) is a leading global provider of intelligence-driven
information security solutions singularly focused on protecting its clients from cyber-
attacks.
6. Pivotal provides a leading cloud-native platform that makes software development
and IT operations a strategic advantage for customers.
7. Boomi specializes in cloud-based integration, connecting information between
existing on-premise and cloud-based applications to ensure business processes are
optimized, data is accurate, and workflow is reliable
C. Competitors:
As a large provider of computer products and services across both the business and
computer sectors, Dell Inc. competes most closely with Hewlett-Packard Company and
Lenovo. Dell also competes with IBM Corporation in the business hardware and
software arenas, as well as with Apple Inc and many other makers of consumer PCs. A
year after taking Dell private in 2013 with the help of a $2 billion loan from Microsoft
Corporation, company founder Michael Dell announced that Dell had made significant
investments over the previous year in business sector markets such as data analytics and
cloud services.
D. Customers:
Customers in Industrial Machinery and Components Industry
Customers in Conglomerates Industry
Customers in Diversified Industry
Customers in Food Processing Industry
Customers in Legacy Industry
Customers in Renewable Energy Services & Equipment Industry
Customers in Consumer Financial Services Industry
Customers in Accident & Health Insurance Industry
Customers in Life Insurance Industry
Customers in Property & Casualty Insurance Industry
Customers in Investment Services Industry
Customers in Miscellaneous Financial Services Industry
Customers in Money Center Banks Industry
Customers in Regional Banks Industry
Customers in S&Ls Savings Banks Industry
Customers in Commercial Banks Industry
Customers in Personal Services Industry
Customers in Professional Services Industry
 Customers in Communications Equipment Industry
Customers in Computer Hardware Industry
Customers in Computer processing and cloud services Industry
Customers in Semiconductors Industry
Customers in Software & Programming Industry
Customers in Internet, Mail Order & Online Shops Industry
Customers in Department & Discount Retail Industry
Customers in Specialty Retail Industry
Customers in Technology Retail Industry

By name, Dell’s top customer include Icahn, Jordan Engineering, Intel, JTG Daugherty,
Google, and Pixomondo.

E. Suppliers:
NO. LIST OF SUPPLIERS NAME
1. COMPAL
2. DellEMC
3. Foxconn
4. Inventec
5. Mitac
6. Micro-Star International
7. Pegatron
8. Wistron
9. Acbel
10. Amphenol
11. AU Optronices
12 BOE Global
13. Calestica

F. How Dell market and distribute its products:

1. DELL works on build to order business model and uses Just in time strategy to
distribute its products at optimal prices there by decreasing the inventory cost and
delivery time. Dell also has its own dedicated retail stores. But the major sale is driven
through modern retailers as well as Ecommerce.

2. Dell is one company where the direct orders to its home site are also fantastic. This
is because Dell offers you to build up your laptop with the specifications that you want,
thereby giving you a customised laptop.

3. DELL solution centres to provide support services 24/7 to its customers.

G. Dell’s basic business strategy:

In response to the change in market condition and customers’ buying behavior, Dell
combines together its cost leadership skills with differentiated product features and
related services to create value for its customers, thus means that Dell is using an
 integrated cost leadership/differentiation strategy as their business level strategy.
Integrated cost leadership/differentiation strategy is an action plan the firm develops to
produce goods or service, with strong emphasis on both differentiation and low cost.
With this strategy, the firm produces products that have some differentiated features
(but not as many as offered by firm using differentiation strategy) and that are produced
at a low cost (but not as low as those firm who use the cost leadership).
H. Dell’s Critical Business Process:
Dell’s business strategy of is achieved through its innovative supply-chain
management. Instead of ordering components in advance and carrying large amounts
of inventory, the manufacturing process is efficiently managed by only purchasing
materials to be directly used in production. Dell also maintains a close relationship with
its suppliers to capitalize on synergies and uphold a smooth, fast-running operation.
This core strategy has been expanded upon recently by adding new distribution
channels to reach even more customers. Furthermore, first-rate customer service is the
cornerstone at Dell, so this has always been a critical business process- ensuring good
communication between customers and Dell, Inc. and responding to customer’s current
and future needs.
I. What accounting information is associated with the critical business process and how does
Dell measure up on that information?
1. Supply chain management: inventory, cost of goods sold, revenues, accounts pay.
2. Customer support services: accounts receivables, selling & admin expenses,
advertising, research and development expenses (online feedback loops/ direct
customer focus
J. What Accounting methods does Dell use to report the accounting information associated
with critical business process and what is the risk of material misstatement?
 Sales Revenues recognized at date of ship.
 Value inventories with FIFO, lower cost or market.
 Research and Development- expenses when incurred.
 Accounts receivable- allowance method for uncollectible.
3.
[a] What is the auditor’s objective for understanding an entity’s business environment?
The auditor must obtain an understanding of the entity and its environment to assess the risk
of material misstatement and to design the nature, timing, and extent of further audit
procedures to perform.
[b] Why does an auditor not have responsibility to identify or assess all business risks?
Not all business risks give rise to risks of material misstatement. The auditor needs to consider
those business risks that could result in a material misstatement at either the financial
statement level or assertion level to classes of transactions, account balances, and disclosures.
[c] Provide some examples of business risks associated with an entity that an auditor
should consider when performing an audit.
 Operations in regions that are economically unstable, for example, countries with
significant currency devaluation or highly inflationary economies.
 High degree of complex regulation.
 Marginally achieving explicitly stated strategic objectives.
 Constraints on the availability of capital and credit.
 Changes in the industry in which the entity operates.
 Changes in the supply chain.
 Developing or offering new products or services, or moving into new lines of business.
 Expanding into new locations.