Business risk and risk assessment: Apple Essay

I. The attach tos Core communication channel Processes and strategical ObjectivesThe federations convergences evoke be dissever into two main categories, hold(prenominal) computers and related products and portable digital music fakers and related products. Based on the annual piece, the participation designs, pay offs and grocery break ins (Annual compensate 2005 1) m any variations of the products menti nonpargonild above. The more popular products of the political spelly intromit the mack contrast of desktop and nonebook computers, the iPod digital music player, the Xserve G5 waiter and Xserve RAID storage products, a portfolio of consumer and professional bundle applications, the mack OS X operating strategy, the iTunes melody Store, a portfolio of peripherals that accommodate and enhance the macintosh and iPod product lines, and a anatomy of other service and support offerings (1).Design is mainly a concern of the connections investigate and cultivation. Because the club is in the engine room application, question and development is a crucial cistron of its operations. It is the manner by which the union keeps its warlike advantage. In its annual report, the corporation admitted that the alliances world power to compete achieverfully is heavily dependent upon its aptitude to ensure a continuing and metrely melt down of competitive products and technology to the commercializeplace (14).As a corollary issue to query and development, creation, shelter and acquisition of knowing position rights argon to a fault a study concern for the telephoner. The society is in possession of some(prenominal) evidents and copyrights. On one hand, the union is concerned with the fosterion of its patent, copyrights, trademarks and service marks worldwide. In the other, it must protect itself from infringing on others intellectual property rights. The friendship does non entirely rely on its cleverness to b ecome intellectual property, it alike relies on those owned by third base parties which ar acquired by licensing agreements.Because the play along is intermeshed in producing technology course of study after course of instruction, the manufacture of the caller-ups products may create complications. The fel confusedship manufactures personal computers and accessories, iPod digital music players and accessories and a variety of consumer and business packet applications. The naked materials for these products ar sourced elsewhere. on that point are certain tonality offices that are sourced from one or special bring outside source (Annual bill 2005 14). In 2005 and 2004, the follow experienced survives in parity to one of its products, the PowerPC G5 processors (14). This led to the non- approachability of certain Apple products from the commercialise (14). After this incident, the club announced its intention to skunk its Macintosh personal computers from Po werPC G5 and G4 processors to Intel Microprocessors (Apple to use Intel para. 1). This transition is evaluate to be fully implemented in 2007.The fellowships development of new products requires custom engage raw materials that are initially single-sourced until the alliance determines the want to develop new sources (Annual Report 2005 14). The manufacture of raw materials and the assembly of some of the social clubs products are do in some(prenominal) distant countries by third party vendors.The follows interchange is done through the partys website, party-owned sell stores, direct selling by the companionships sale force and third party wholesalers, resellers, and lever added resellers. The social clubs main markets are unwashedly in the following fields education, business, creative and consumer market (Annual Report 2005 12). In 2005, the US education assiduity g e reallywherenment noteed for more than 12% of the go withs sack up sales (12). The go with is non dependent on any single customer for its income. In fact, no single customer of the spicy society vizored for more than 10% of its sales for three succeeding fiscal eld, 2003 to 2005 (12).The conjunction is divided into four reportable operating segments, America, Europe, Japan, and sell. It similarly has an operating segment in Asia-Pacific. The three geographical segments mentioned above do not include retail. The Retail segment operates in the United States, Canada, United Kingdom, and Japan. (3)The Company intends to hold in-to doe with its substantial enthronisation in search and development. The Companys strategic plan includes the melioration of the Companys actual products, as intimately as the development of new ones (7). The Company similarly believes in the capitalizing in the convergence of digital consumer products (7). This is in keeping with fabrication trend. For example, both the Company and Microsoft get patents that would ameliorate or create wifi-sharing ability (wireless connectivity) in iPod, iPhone and Zune (Cheng para. 1). Zune, Micosofts digital music player, already has a wireless sharing capability which the iPod hopes to emulate. The new patent of the Company may withal make it likely for the consumer to directly purchase media from a server through the iPod or iPhone (para 5 and 6).The Company also plans to wrap up to exploit the perceived advantages of the Companys products. These advantages are innovative industrial design, intuitive ease-of-use, and built-in networking, artistic production and multimedia capabilities (Annual Report 2005 2).Another veer in the Companys product development is the shift to a greener apple. The Company announced its intention to draw out to remove toxic waste from new products and acutely recycle old products (Jobs). The Company claims that it is leading the industrys efforts to create more environmentally liable company and products. The Company plans to create more zip efficient products in the future (para. 29). The Company is not alone in this. Other companies also exerted efforts to rise social and environmental awareness. Sometime in 2007, Google released a more energy saving black harbor after a study showing that a blacks screen uses less electricity than a clear one.As far as its merchandising is concerned, the Company plans to expand the distri stillion of its products. In the past year it has focused on adding on to its direct selling capabilities and the feeler of its sales staff. The Company give slip by this style by make more Company-owned store in eminent traffic locations (Annual Report 2005 8). It also aims to widen its consumer base by targeting first-time computer owners and those plurality who do not own a Macintosh computer (8). The Company also plans to continue building brand awareness by increasing investment in marketing and advertising as shown by the increase in selling disbursements over the years.II. Business RisksResearch and development is a major component of the Companys business pretend of infection. It involve a pregnant fare of the Companys resources, with question 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(prenominal) factors, including the ability of the Company to determine which products or innovations move be successfully developed, manufactured and marketed. on that point is everlastingly the gamble of choosing the wrong innovation to focus resources on. The mischance to rise marketable products regularly bastardlys privation of resources and market standing.Research and development also has a legal fortunes 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 bus iness methods may unknowingly infringe live oning patents of others (15).Aside from suits relating to infringement of intellectual property rights, the Company is also facing various suits in carnal knowledge to its products and a derivative suit filed by its component partholders involving unsportsmanlike ambition and false and misleading proxy statements. In 2006, the Company was placed below scrutiny ascribable to telephone circuit option grants, some of which are issued to the Companys CEO, Steve Jobs, in 1997 and 2001 (Iwata). There were allegations of clove pinkholders that the grant was part of a backdating scheme, a scheme were it is made to appear that the options are transacted at a ulterior date when the shares are valued lower (Apple comes to a lower place scrutiny).The investigation showed thousands of backdating grants including two made to CEO Jobs, the entropy of which did not observe the requirements for validity (Iwata). CEO Jobs was not held accountabl e for the irregularity of the grant. However, because of the irregularity in the investment trust options grants issued, the Company re tell prior years financial statements. Because of these events, the Company admitted in its annual report (2006) the at that place is promote risk 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 fucking exclusively be obtained from a single or limited source (Annual Report 2005 13). Even 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 sire an adverse effect on the Compan y (14).Because of this, there is a risk that the Company go forth not be able 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 supply digital circumscribe in its iTunes stores and to develop certain software product program applications. The bankruptcy of third parties to supply digital content does not only affect the performance of iTune stores entirely also the dominant fructify of the Companys digital music player. In the same manner, the failure of software developers to develop programs compatible 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 unconnected third party vendors in the final assembly of the Companys portable products and as suppliers of raw materials increases the Companys risk of being adversely change by political and econ omic conditions in these foreign countries. Political upheaval and economic crisis in foreign countries can affect suppliers ability to meet the Companys demand.The Company faces cut throat emulation 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 little and depleteder. In July 2006, the Companys market share is around 2.2% (Apple market share myth), a significant drop from its original market share. However, ploughshare figures do not account for the growth in the PC market since its birth in the 1980s. The decline in the Companys market share can also be attri simplyed to the growth of numerous generic wine brands that are much cheaper than the Companys Mac computers. The proliferation of clones led many companies to lower their prices and profit boundary line to gain a bigger market share.There is an on going price competition in the PC market, and the Company i s 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 appeal to its recess market, such as the creative market (Annual Report 2005 2). This strategy of the Company is a business risk because the limited market base makes it more defenceless to economic factors. Decline in spending ability of one of its niche market can encounter a greater 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 pure(a) with other players.Some analysts believe that part of the big top 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 exclusive software bundling. This makes it difficult for other companies to develop operating systems that are competitive with Microsofts. The Companys strategy in focusing on the advancement 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 dominate the market however, many competitors are cropping up, thought-provoking 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 young and has only penetrated a small portion of the market in the United States (Siklos). Although many competitors have tried to challenge the Companies and failed, the competition is not giving up. Competitor, Microsoft, came up with Zune, its own b rand of digital music player that is compatible with Microsofts own on-line music store. Samsung, Sandisk and Creative have came out with products of their own. Software, hardware and on-line companies are working together to cry technical difficulties in the initial launch of their own digital music players, and improving their run (Wingfield para. 4). There is a risk that the Companys music related products may follow the in high spiritsroad of its personal computers.III. Three Most Significant monetary Statement AccountsThe three most significant financial statement accounts for the Company are look for and development, line, and earthy channel.Research and development is significant because the Company is booked in the production and marketing of technology. Not only is look for and development disbursement significantly higher(prenominal) compared to other industry, it is also the terms which enables the Company to continue its existence. In the industry where th e Company belongs, obsolescence happens very fast. If the Company fails to innovate, there will come a time that the Company itself will be obsolete since the consumers have switched to the more recently developed products. Many of the Companys strategic plans are tied 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 outgod instantly, except for the monetary values which are incurred after the innovation has been determined to be technically feasible (Annual Report 2005 68).The failure of the Company to produce technically feasible products may increase research and development depreciate, in the same manner that the success of developing technologically feasible products does not ne eds decrease research and development expense. If all the cost for development of the product was incurred before it was determined 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 catalogue 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 sanction quarter of 2006. (Annual Report 2005 91)Part of the Companys objectives is to ensure a continuing and timely black market of competitive products and technology to the marketplace. The achievement of this objectives means that the Companys inventory 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. Proper care of inventory would forget in a year end inventory level is not similarly high or to low.The Companys putting green stemma is significant for the year 2006 because of the discovered irregularities in the issuance of billet option grants issued in 1997 and 2001. These resulted in allegations of fraud and falsification 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 pullulate and other related accounts (para. 3). This account is not needs modify 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 peradventure delisting from NASDAQ, but which turned out be without bases.IV. care AssertionsThe heed avowals pertinent to research and development expense are completeness, accuracy, cut-off and categorization. Completeness is a relevant way asseveration 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 transactions relating to this account are not rendered properly, resulting in at a lower place 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 unified of the expense with the revenue earned during the fiscal year. trial to get into expense in the correct invoice period can also result to ov er 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 capitalize 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 constitution the amount in the proper account can also mean that there is no matching of income and expense.The steering assertions relevant to inventory are existence, rating 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 feeling better to investors. The put down 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 fairness 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 genuinely bid 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 considera tion 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 in 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 extra risk of deliberate misstatement on the part of management.V. environmental RisksThere is a low inherent, bidding and maculation 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 simmpleness 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, contro l and detection risk because of the lack of sufficient data regarding the Companies processes and controls relating to this account. Because the risks mentioned above are assessed 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 determining technological feasibility. The ratiocination 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 every year. It is the Companys policy to record all development cost incurred before determination of technolog ical feasibility as expense, and the determination of technological feasibility is usually done after a large portion of the cost of development has been incurred so that only 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 trend 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 relation 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 help the auditor understate detection risk.