Blarney Focus Inc., a manufacturer of coloured sunglasses, has had steadily increasing losses since its inception of 2002. Management feels that they will be able to improve profits by retooling to handle coloured contact lenses, which are all the rage.

The owners of the company have exhausted all of their personal financial resources, having placed loans upon their personal assets, such as their homes, and liquidating their investments. They are hoping to obtain a large bank loan to cover the purchase of new equipment to manufacture coloured contact lenses, about $300,000.

Blarney's banker is anxiously awaiting the audited financial statements to see if the results of the current year end are any better than the previous two years' results.

Required:

Identify your thoughts with respect to your assessment of audit risk and inherent risk for the overall business. How would this assessment affect the extent of audit testing and the audit process?