You have recently been appointed manager of the newly created internal audit department at Canadian Wood Toys

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Question:

You have recently been appointed manager of the newly created internal audit department at Canadian Wood Toys Inc. (CWTI). You have found out that the company does not have an established risk management process in place and have discussed this with the company's chief executive officer. In your discussion, you mentioned a number of risk frameworks that were developed by various groups over the past decade or so.

The CEO has asked you to begin by identifying the significant risks faced by the company and the methods that you would expect the company to use to reduce each of these risks to an acceptable level. You have done some initial fact-gathering about the company's activities. CWTI is a medium-sized company. Its common shares are actively traded on the national stock exchange. CWTI has acquired some timber licenses that allow it to harvest trees, subject to a requirement to clear and replant the areas from which the trees have been extracted. Trees are trucked from the forests to the company's sawmill, where the bark is removed and the trees are turned into uniform pieces of lumber (12 foot long 4"×4"s). These are then trucked to the company's manufacturing plant, where they are made into a variety of finished products. Most of the finished products are sold to large domestic chain stores such as Toys 'R' Us, with the remainder shipped to overseas markets. Domestic sales are priced in Canadian dollars and sold on 60-day terms. Foreign sales are priced in U.S. dollars and sold on 90-day terms. Approximately 60% of the company's sales are for the pre-Christmas market. The company has decided that it is more cost-effective to produce at approximately the same volume throughout the year, building up inventories prior to major shipment of products to the overseas markets in September and to the domestic chains in October.

CWTI has invested in a fleet of logging trucks and plant equipment necessary to manufacture its products. Funding was from a long-term U.S. dollar loan, repayable in five years, with interest at 1% above the U.S. prime rate.

Required

Identifying five risks faced by CWTI, and suggest methods using the approach and describe how the company could use to mitigate each risk.