Question :

BestSteel Ltd has been the biggest metal pressing machine manufacturer in Australia since 2005, when it introduced a machine with technologies few years more advanced than those provided by its competitors. From thereon, BestSteel has been driving out competitors out of the market by providing higher quality products at highly competitive prices. Thus, a new entrant to the industry has currently introduced its latest innovation.

Based on the competitor's advertisements, you are aware that the competitor's product is highly likely to be of enhanced quality than BestSteel's and due to their high end machinery, their production costs are expected to be significantly lower. BestSteel's management has predicted that to the competitor's product, their demand will drop by at least 40%.

2. You are currently appointed as the auditor for Sprinkles Ltd. The accountant of Sprinkles has been notorious for searching loopholes in the legislations in order to prepare its clients' financial statements look presentable as desired by the clients themselves. In the past few years, Sprinkles has always been required by the Australian Tax Office to give additional supporting information after the lodgement of its tax returns.

3. BPharm Ltd is a family-owned company operating chemist shops in Albany. Majority of the sales transactions are done in cash. BPharm is planning to expand to Walpole and Denmark. It is applying for a loan from the bank to get funding for the expansion. Before granting the loan, the bank needs BPharm to give them with the audited financial statement.

Required

(a) Identify and explain why the above situation represents a risk.

(b) By applying auditing knowledge, Classify the main account or group of accounts affected by this risk in the audit plan.

(c) Classify how the audit plan will be affected by the risks and recommend specific audit procedures to address these risks.