- 12 Marks
Question
Mogya Bi Accounting Firm is the Auditors of Abronyeh Enterprise (Abronyeh), a retailer selling computers, phones, and other high-technology equipment. Abronyeh was set up just a year ago by its sole owner Adam Joseph. Adam Joseph has employed several bookkeepers to help him with accounting records and the preparation of financial statements, and the most recent one has just left. In order to start the business, Adam Joseph re-mortgaged his house and, in addition, took out a business loan. As part of the loan agreement, Adam Joseph is obliged to provide a copy of the annual financial statement.
Required:
Explain SIX (6) business risks that Mogya Bi Accounting Firm faces when conducting the audit of Abronyeh and explain why they could be identified as risks.
Answer
| Business Risk | Reasons why these factors were identified as risk |
|---|---|
| High-tech equipment like phones, computers | There is a risk of obsolete inventory which needs to be written down. If Abronyeh cannot keep up with trends, the business may not continue. |
| Startup business under a year | Any startup business is inherently risky as many fail in their first year. |
| Sole shareholder and director | There is a possibility of motivation to misstate figures due to personal stakes. |
| Turnover of bookkeepers | High turnover of bookkeepers indicates pressure, which could lead to misstating figures. |
| The most recent bookkeeper has left | This indicates a high risk of misstatement since there is currently no one to prepare financial statements. |
| Mortgage and bank loan | Adam Joseph has a personal motivation to misstate figures to avoid defaulting on the loan, which could lead to business takeover. |
- Tags: Audit Risk, Business Risks, Financial Statements, Misstatement, Technology Retailer
- Level: Level 2
- Topic: Audit and Assurance Risk Environment
- Series: NOV 2021
- Uploader: Theophilus