Tag (SQ): Acquisition issues

YUM Supermarkets (YUM) has 200 stores throughout Ghana, with around a further 20 stores across Africa. YUM have been trying to compete with the large out of town supermarkets for the last five years but have recently taken the decision to move into the smaller stores in towns. Their aim is to be specialist in the type of value for money ‘quality’ products that cannot normally be obtained in local shops. YUM has also moved into sales via the internet. They receive orders through the internet and arrange for the closest local store to distribute the shopping to the customer.
You have been assigned to the audit of YUM this year. You have obtained the following information:
(1) The internet sales service has proved very successful with a 100% increase in revenue on last year. However, there have been complaints about the quality of deliveries and that customers are failing to receive all items ordered.
(2) There have been interruptions to the internet sales service caused by the higher than expected levels of revenue. There have also been concerns over the confidentiality and security of information accessed via the internet.
(3) Problems have arisen with two of the new sites selected by YUM for expansion.
In respect of Site A, there has been substantial local opposition accompanied by environmental concerns over potential contamination of the site.
In respect of Site B, planning permission has not yet been obtained and has been deferred due to an alternative application in the locality by a major competitor. This looks likely to delay planning decisions for a significant period of time.
(4) YUM acquired Ripe Supermarkets last year as part of their business strategy. Initially, the decision was taken to continue to operate Ripe separately and integrate the stores on a phased basis over a two year period. This would involve rebranding Ripe, investing and upgrading stores and ensuring the same quality of staff as YUM. Ripe managers were retained to continue managing stores and to ensure continuity. As the integration has commenced, a number of problems have now become apparent with Ripe operations. These include the following:

• Ripe employees have not been receiving the legal minimum wage.
• No records have been maintained of the number of hours worked by employees, although anecdotal evidence has been received that in some areas they have been regularly working 60 hour weeks.
• There are three ongoing complaints for unfair dismissal.
• Staff retention has been a major difficulty.
• Investigations are underway by the authorities over allegations of false labelling of sales items.
• An investigation is underway over the sale of meat products in one store that appear to have resulted in a local outbreak of food poisoning. The most likely cause for this outbreak is the poor refrigeration and maintenance of the products and sales beyond ‘sell by’ dates. Some local press comment has already arisen.
  Required
  Explain the risks facing YUM Supermarkets in respect of the above, the controls you would expect to operate in the scenario, the further work you would undertake and the potential impact on the financial statements and the audit.