Page 233 - COSO Guidance Book

As an example of a change in the economic environment, consider a local tire store. If the economy
were to have a downturn, then this might have a behavioral impact on consumers. Consumers could
possibly retain their existing vehicles longer than planned. This in turn would increase the demand for
new tires and, hence, the economic downturn could be economically beneficial for the local tire store.

The changing physical environment (for example, weather patterns) can have a detrimental impact
on an entity that is located in a resort area that caters to the snow-skiing industry. If there is both a
slight amount of precipitation and the temperatures during the peak skiing season are unusually
warm, then local for-profit entities most likely would suffer adverse economic consequences due to a
lack of demand (low number of skiers, tourists, and so forth).

 Point of focus — Addresses changes in the business model

The organization considers the potential impacts of new business lines, dramatically altered
compositions of existing business lines, acquired or divested business operations on the system of
internal control, rapid growth, changing reliance on foreign operations, and new technologies.

The owner-manager of a second-hand clothing store that sells only high-end fashions grew faster
than anticipated partially due to the recession. The owner-manager’s marketing research found that
consumers who were used to acquiring haute couture clothing and who were also adversely affected
financially by the recession still wished to buy high-end fashions, but at a much lower price. The
owner-manager obtained the inventory of used luxury clothing from various sources (online
advertising and so on). Because of the dramatic growth of this niche market, the owner-manager
employed temporary staff during the winter busy season. The owner-manager was focused on
making sales and not internal control. Unfortunately, some of the temporary staff were in collusion
with several customers. Some of the temporary staff undercharged customers for merchandise in
return for a “tip.”

 Point of focus — Assesses changes in leadership

The organization considers changes in management and respective attitudes and philosophies on
the system of internal control.

For example, a new management team at a used-car dealership might be partially compensated
based on sales. This new team might use its influence over the credit department to approve vehicle
sales to customers classified as a high credit risk. If the dealership finances the sale, then there is a
higher risk of an increase in bad debts due to this weakness in internal control; management’s
compensation partially based on sales and management’s influence over the credit department both
provide a poor “tone at the top.”

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