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Canadian Tire Audit Report Essay

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Canadian Tire Corporation, Limited (CTC) is primarily a canadian retailer, focusing on automotive and general merchandise. Founded in 1922, the company has been around for almost a century, building strong brand recognition in Canada. Initially starting as a car parts retailer they have expanded rapidly into other areas, mainly general merchandise retail. They have other secondary divisions being; Partsource Automotive stores (strictly automotive parts), Financial Services, Mark’s Work Wearhouse (clothing retailer), FGL Sports Ltd. (various sporting good retail chains), and Canadian Tire Petroleum (gas stations and car washing). The main users of CTC’s financial statements have been identified as the debt holders and shareholders.

Industry

There are many external factors affecting Canadian Tire Corporation (CITE: EXHIBIT 1). As the largest business divisions, the major external forces impacting the Retail and Financial Services divisions are listed below.

Economic Forces
Canadian unemployment is a good indicator of consumers’ willingness to spend. Currently unemployment is trending upwards (CITE: EXHIBIT 3). This is poor for the retail industry as consumer spending will decrease as unemployment increases. It impacts all of CTC’s divisions.

Volatile Petroleum Costs
Crude oil prices have been extremely volatile lately (CITE FIGURE Z). This has an impact on the supply chain of retailers, as transportation costs will increase with increased fuel costs. This also heavily impacts the Petroleum division because the cost of acquiring crude oil is difficult to anticipate.

Competition
The retail space is extremely competitive in canada. Some major competitors have been identified and can be found in (CITE:exhibit 2). It is important to be aware of CTC’s strategy and its goals of staying competitive. There is a trend of US retailers moving into Canada, such as Target.

Seasonality
Both the Retail and Petroleum divisions are highly seasonal. Consumer demand in both industries fluctuate throughout the holiday seasons, and are significantly impacted by the weather.

Key Success Factors
As the dominant division, the key success factors we have identified for the retail industry are as follows: 1. Maintaining low costs
2. Managing inventory to successfully anticipate and meet consumer demand 3. Establishing brand loyalty
4. Quality products
Competitors must trade off these KSF’s to succeed, it is extremely difficult to employ all together (CITE: EXHIBIT 5). For example, in order to have superior customer service they need to hire more staff and this will increase costs. CTC needs to focus on a specific strategy, as it is extremely difficult to have all KSF maximized.

Business & Operations

Internal
CTC’s major sources of revenue comes from its retail and petroleum divisions (55.85% & 19.07% of 2011 revenue). They are dependent on this revenue and need to keep customers happy to maintain it. CTC is one of the largest retailers in Canada. This gives them bargaining power with suppliers. If current suppliers threaten to unfavourably change terms or stop supply, CTC can find replacement suppliers. CTC has a diverse product offering. They are not dependant on any one product for revenue.

Operational/reporting structure
Canadian Tire Corporation is responsible for the centralized accounting and financial planning functions. Wholly-owned subsidiaries manage their own operations and accounting, with the exception of the consolidated financial information. The Retail and Financial Services divisions have been classified as strategic business units, therefore both are reportable operating segments. Due to the inherent difference in the nature of their businesses, they are both separately managed. With regards to Retail and Financial Services, all financial information, including adjustments and eliminations, are presented clearly in consolidated financial statements. CTC applies a dealer-corporation business model to its Retail operations. Each store is franchised with the owner being a ‘dealer’. This system causes many inefficiencies, both financial and non-financial, for CTR in comparison to its competitors (EXHIBIT CIBC REPORT). However, the dealer-corporation model is as old as Canadian Tire itself and extremely unlikely to change. Essentially the dealer is responsible for everything in-store, and the corporation takes care of the rest. A list of segregated responsibilities can be seen in Exhibit Z.

Going Concern
Canadian Tire Corporation is in good financial standing and extremely unlikely to bankrupt in coming years. Currently CTC’s debt to equity ratio is 0.242 below the industry average of 1.557, with a current ratio 0.614 above the industry average of 1.061. Addressing the debt to equity shortfall, CTC has decreased its debt to equity from 1.897 to 1.739 between third quarters of 2012 and 2010. This is including the acquisition of FGL Sports Ltd. which spiked debt in 2011. (CITE ANALYTICAL PROCEDURES) There is no issue of going concern.

Technology
IT is centrally-managed for each of CTC’s specific divisions. Retail stores use software to keep track of inventory and prices regarding items in stores. The stores then transmit this information to make purchases from CTC. It is an integral part of their supply chain and retail operations. They are continuing to upgrade these internally developed systems, which could pose a risk for exceptions. These systems will require increased test of controls before we can assess their reliability. However, with Financial Services, a vast majority of the data is outsourced to Acxiom for warehousing and analysis, and to Total Related Parties for transaction processing.

Related parties
Ms. Martha G. Billes is a major shareholder, controlling 61% of common shares. Related-party relationships exist between members of the Board of Directors, the CEO and CFO, top five office...

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Keywords

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