Walmart Inc. Audit Plan

Background Information

Wal-Mart is a multinational retail giant that is based in the USA. It operates thousands of
hypermarkets, grocery stores, and discount department stores. Starting as a small store in 1962,
the company has grown to become the world’s largest company by several employees and
revenue (Wal-Mart, 2019). Its headquarters are in Bentonville in the state of Arkansas, USA. As
of 2018, Wal-Mart ranks first on the Fortune 500 list of companies (Fortune 500, 2019). It is
traded on the New York Stock Exchange (NYSE), and its ticker symbol is WMT.
The paper will create an audit plan for Walmart’s financial statements presented in the balance
sheet, income statement, statement of cash flow, and stockbroker’s equity. As a publicly-traded
company, an audit of the company’s financial statements is essential for both creditors and
investors. Such an audit allows creditors and investors to gauge conditions for the profitability
and safety of their investments. In particular, a look at its liabilities and contingencies allows
investors and creditors to gauge its ability to remain stable in the face of economic downturns
and other financial hits that the company may face both in the short and long term.
Walmart Inc. is a successful company in the retail industry, and I am grateful for the
opportunity to assist in the audit process and planning for the company. In preparation for the
audit of Walmart Inc’s financial statements, a plan is provided to ensure success in this task by
providing information including initial risk assessment, analytical procedures, materiality and
risk, and audit tests.

Analytical Procedures

An analytical procedure is when the auditor evaluates the financial information by
analyzing plausible relationships among financial and non-financial data. The debt ratio provides
an overview of how Walmart finances the various assets purchase and the potential to make
payments of the existing debt. Comparing Walmart’s debt to equity ratio, I have found that they
have healthy figures that have remained remarkably steady for decades. Target is one of
Walmart’s most significant competitors. They have shown a higher debt to equity ratio for the
recent year showing that its debt load has overtaken the value of its equity. Measuring the debt to
equity ratio will measure whether Walmart is more leveraged and reliance on debt to finance
asset purchases. Return on equity is a percentage of shareholders’ equity and indicates how
efficient its management team performs. Walmart has a strong return on equity, which shows
that the management team can parlay its equity into sturdy earrings. Target also shows a strong
return on equity with a slightly higher percentage. By comparing the current liabilities and assets,
I will be able to get the ration that will show me the potential Walmart has in paying the current
debts. Walmart’s current ratio comes in a little lower than the preferred value, but Target comes
in below Walmart. Both Walmart and Target have a current ratio around one, but the differences
are insignificant. Walmart could use a higher ratio, but other financial ratios offer confidence that
paying debts shows not to be a problem. From the debt to equity, return on equity, and the
current ratio, I can decide that the company is in a position to make payments for the debts, and
the management team is stable. Target is one of Walmart’s most significant competitors, and
comparing the financial information shows that both companies have strong management teams
and the ability to pay the debt.
As of 2018, the company’s total liabilities were $116,909 million. The liabilities include
current liabilities amounting to $78,521 million, long term debt amounting to $30,045 million,
and deferred income taxes of $8,343 million (Wal-Mart, 2019). The total liabilities represent an

WALMART INC. AUDIT PLAN 3
increase from the $112, 282 million liabilities recorded in the previous year. The overall increase
in Walmart’s total liabilities is from the increasing liabilities from $66,928 million to $78,521
million (Wal-Mart, 2019). The increase is from the inventory of Walmart.
As the new auditor, the main challenge will be on revenue recognition. The audit presented may
be weak or too vague, and there will be a need to carry out the substantive test for completeness.
All the documents, such as those for sales, will be verified to improve the authenticity of the
information. There will be an ad generation of enough evidence that will be supported by various
proofs (Minjung and Young-Tae, 2019). Also, a detailed test will increase the confidence level
that will support all the assertions. Fraud is the other worrying challenge. As the auditor, I will
take full responsibility if there is any blatant fraud that has been ignored unless stated otherwise.
The problem will come from the issue of management override within internal control. Removal
of all the assumptions set in the first audit is the best mitigation strategy to put in place and apply
professional skepticism while conducting the audit. The appropriateness of the journal entries
will be essential in ensuring that the chances of cooperation are minimal. Segregation of duties
will be crucial, and any activity which does not appear to be appropriate will be flagged.

Materiality and Risk

In the audit process, the premises is that the auditor will behave in their best interest and
not be under any pressure to make irrational decisions (“Financial Accounting Standards Board,”
2010). To understand the expectations of the audit, there are key terms pertaining to materiality
and risk that require an understanding by all parties. To ensure that all parties have the same
understanding, below is a list defining the key terms relating to materiality and risk.
 Materiality
What may seem important to one person could seem immaterial to another. The greatest
determining factor I think for an item to be material is when the information makes it a game-
changer for the person making decisions.
 Misstatement
In the framework of accounting a misstatement is the difference in how the item is classified or
presented or disclosed that misleads fair representation.
 Audit Risk
These are an inherent risk, control risk and detection risk. Even when everything is reported
correctly, there is still the chance that the auditor may not detect an error.
 Audit Risk Model
This allows them to manage risk in the planning stage that material information is gathered to
perform the audit. This can be changed through the process as information proves necessary.
 Inherent Risk
There needs to be checks and balances in place and system to monitor events. These could be
simple as a complex transaction that has a simple mistake or not disclosing important
information.
 Relationship of Risk to Audit Evidence
The more material evidence that the auditor has the lower the risk. The goal is to be cost and
time-efficient for the audit. Too much information drives up the time spent in the audit.

Audit Tests

Risk Assessment

WALMART INC. AUDIT PLAN 4

For the company, Walmart Inc., one of the necessary audit tests to perform is risk
assessment procedures. The audit firm must understand Walmart’s business, clients, and internal
control to assess the risks accurately. Walmart Inc.’s annual report 10-K encompasses a
statement of cautionary that focuses on the various transactions. In the statement, Walmart Inc.
provides an estimate of the future list and actions that will drive them towards their vision. The
annual report also discloses the risk factors and uncertainties that could affect their business.
These uncertainties include economic factors such as business conditions, trends, currency
exchange, unemployment levels, transportation costs, commodity prices, trends in consumer
shopping habits, insurance reimbursement programs, and competitors entering the market. There
are also operating factors that contribute to risks such as net sales and operating expenses, cash
flows, customer traffic at stores and on eCommerce, variety of merchandise, availability of
goods and services from suppliers, effective implementation of strategies, customer acceptance
of new products, gross profit margins, selling prices of fuel, disruption of seasonal buying, the
expense for Foreign Corrupt Practices Act, disruption in the supply chain, cybersecurity
disruptions, labor costs, accident-related costs, turnover rates, and availability of personnel.
Another area of possible concern is regulatory and other factors such as changes in taxes or labor
laws, creation of new governmental policies, impositions of new taxes on imports and tariffs,
changes in currency control laws, changes in levels of public assistance payments, the timing of
federal income tax refunds, public health emergencies, natural disasters, terrorist attacks, and any
changes to generally accepted account principles in the United States. The auditor must consider
the risk exposure that Walmart faces. Depending on certain exposure levels, those areas must be
tested, and the auditor should talk with management and use their professional judgment to
conclude which areas create the most risk. As an auditor of the company, I recommend several
contingency plans that the company can use as their mitigation strategies.
The company can use several contingencies that are likely to reduce its profitability.
These contingencies are mainly due to various litigations that have been brought against the
company by various individuals and institutions in the countries that it operates in. They include
a case against the ASDA store for equal value claims by its current and former female
employees. The store is a UK-based wholly-owned subsidiary of the company; thus, any
financial statement from the case is going to be handled by Wal-Mart. Another one is the FCPA
(Foreign Corrupt Practices Act) investigation by the Department of Justice. Several cases have
been brought against by various counties and municipalities over the company’s involvement in
the distribution of prescribed opium (Wal-Mart, 2019). If successful, Wal-Mart may be forced to
pay significant amounts of money to the individuals and institutions involved.
Even though Wal-Mart faces these contingencies, no money has been set aside for them
under the liabilities section. That could mean that Wal-Mart does not think that these
contingencies will happen in the 2018 financial year. It could also mean that its current
contingencies do not have significant material effects on its profitability. As stated in the notes,
the contingencies that the company has a reasonably accurate assessment of their occurrence and
cost involved have been included in its expenses.
Tests of Controls
The auditor would benefit by performing tests of controls. Walmart employees can
purchase stock in the company, so internal controls must be reviewed to ensure that management
is reporting accurate numbers. If management chooses to purchase stock, then they have a

WALMART INC. AUDIT PLAN 5
vested interest in the company’s performance. Management’s interest could create a conflict of
interest in financial reporting.
Since Walmart states in its annual report that sales are highest in the last quarter of their
fiscal year, a concentration on this period must be thorough. This test will help the auditors
evaluate whether controls over transactions in the cycle are sufficiently adequate to support the
reduced assessment of control risk, which allows for less substantive testing. In the test control,
there is a plan to investigate the income taxes of the company equally. A test on the income
statement will provide an overview of the company’s level of compliance with the tax regulations
of the country in operation.
The income taxes for Walmart will be disclosed in the auditing plan after the income
from the continuing operations. Table 1 shows the income tax for the company within the last
five years.
Consolidated Statements of
Income – USD ($)

12 Months Ended

shares in Millions, $ in Millions Jan. 31,
2019

Jan. 31,
2018

Jan. 31,
2017

Jan. 31,
2016

Jan. 31,
2015
Y from continuing Activities 11,460 15,123 20,497 21,638 24,799
Provision for income taxes 4,281 4,600 6,204 6,558 7,985
Y from continuing Activities
after taxation

7,179 10,523 14,293 15,080 16,814

Income from discontinued
operations, net of income
taxes

0 0 0 0 285

Net Income Consolidation 7,179 10,523 14,293 15,080 17,099
Income Tax Percentage 37.36% 30.42% 30.27% 30.31% 33.35%
The information shows that the income tax percentage is fluctuating each year. The
highest proportion of income paid as income tax was in 2019, while the lowest income tax was in

2017. In 2015, other than the income from the proceeding activities, the organization can
      equally pay the discounted activities income taxation of $285 million (Wal-Mart, 2019).
      In Walmart Inc.’s Balance Sheet, the item ‘Deferred Income Taxes’ features promptly in all the
      financial years. Table 2 shows the amount of deferred income taxes in each of the years.

WALMART INC. AUDIT PLAN 6

20192018201720162015

0
2,000
4,000
6,000
8,000
10,000
12,000
14,000

Deferred Income Taxses

Deferred income taxes arise because of taxes that a company has identified as payable but
are not yet due for payment. This difference arises because of different approaches of
calculations of taxes by the company and the local tax authorities, where the tax bodies differ
taxes that the company views as owing in the current financial period due to accruals accounting
concept.
From an auditing perspective, Walmart should consider separating its income tax from
operations as U.S. and Non-U.S. taxes. It should also break down the tax figures to current and
deferred International, U.S. Federal, and U.S. State and local taxes. Effective Jan. 1 2018, the
U.S. Tax Act changed the statutory tax rate to 21.0 percent from 35.0 percent (Wal-Mart, 2019).
In response to this, Walmart, Inc. can re-evaluate its deferred taxes to reduce the amount paid
when these taxes become due in the future.

Tests of Detail Balances
Walmart’s vision is to provide everyday low prices (EDLP). Keeping this goal in mind,
the audit firm should perform tests of detail balances. To maintain EDLP, the company strives to
maintain control of expenses to pass the savings on to their customers. As an auditor, the main
concern will be on the receivable accounts, payable accounts, and inventory. The testing of the
balances will aim at the ending period of the general ledger balance for the balances in the
income statement and the various accounts in the balance sheet. Performing the testing of
detailed balances traces the transactions back to the sub-ledgers. Auditors can look at the details
and decide on how much evidence is needed, which is part of the substantive tests of transactions
process. An overview of the transactions is part of the analytical test, which tests for
reasonableness of the transactions in the journals and the general ledger.
The gains and losses related to pension plan assets in Walmart represent the difference
between the returns on investment and the expected returns. For Walmart, there is again in the
pension tax advantage. Thus, the employees are entitled to immediate tax deductions, which are
remitted to the pension funds. From the disclosure of SEC 10-K of Walmart company

WALMART INC. AUDIT PLAN 7
concerning pension and post-retirement benefits, there is a huge benefit that can cover all the
U.S. employees. From the financial statement, the premium and post-retirement benefits funded
for the 2007 fiscal year are $17,288 and $23,386. For the year 2008, the pension and post-
retirement benefits are valued at $3,994 and $27,356 million, respectively. Thus, the company
has assets and liabilities which are corresponding to the post-retirement benefits. There will be a
decrease in the value of equity in the book, and a contingency plan will be required to make
payments of the employee’s pensions and the retirement gains.
That is an indication that the obligation of the gain would consider both of the values that
the employees will earn and have not yet received their payments. Thus, for all the employees to
collect their interest as an auditor, I suggest that Walmart set aside some funds for the move.
Equally, from the accounting disclosure, Walmart needs to put funds in a support payment
system for other forms of post-retirement benefits (Barth and Landsman, 2010). The
stockholder’s equity at $228 million in 2019, a decline in the company’s post-retirement
obligations, may result in a rise in the long-term liabilities. The pension plan’s assets surpass the
expected gains of the obligation, and the difference between the two will be the cause of an
increase in the company’s long-term assets.
Conclusion
I think the various tests to be carried out as per the plan need to be carried out step-by-
step as the test is interconnected, and the outcomes of one test largely depend on the outcome of
another. As the auditor, I must decide how to continue to realize credibility in the audit reports.
Some tests will require additional testing and information, which for Walmart Inc would be risk
assessment, tests of controls, and details of balances. Based on their assurance, the auditor can
form an opinion if it is fairly stated by following generally accepted accounting principles
(GAAP). The auditing procedure will start by evaluating some of the financial documents to the
income taxes that indicate the company’s tax compliance level. The audit procedure will aim to
identify the fundamental errors made in the financial documents, make corrections, and provide a
necessary recommendation on how to mitigate the issues. Fraud and revenue recognition are
some of the main challenges that will be encountered as the new auditor. Some of the risks that
the company is facing include economic uncertainties and foreign policy. The fact that the
company is operating oversees makes the auditing procedures to be followed differently, such
include the adherence to the tax regulations and policy compliance of the country in operations.

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References

Barth, M. E., & Landsman, W. R. (2010). How did Financial Reporting Contribute to the
Financial Crisis? European Accounting Review, 19(3), 399-423.
Financial Accounting Standards Board (2010). Chapter 1, The objective of general-purpose
financial reporting, and Chapter 3, Qualitative characteristics of useful financial
information. (Statement of Financial Accounting Concepts No. 8). Norwalk, CT: FASB.
Retrieved from https://www.fasb. org/jsp/FASB/Page/SectionPage&c
id=1176156316498#2010
Fortune 500 (2019). Results. 2019, Retrieved from
https://googleweblight.com/i?u=https://fortune.com/fortune500/search/&hl=en-KE
Minjung, K. & Young-Tae, Y. (2019). Investor perception of fair value evaluation: focusing on
financial instruments. Investment Management and Financial Innovations, 16(1), 203-
214.
Wal-Mart (2019). 2018 SEC 10k Report. 2019, Retrieved from
https://www.sec.gov/Archives/edgar/data/104169/000010416918000028/wmtform10-