Advanced Audit and Assurance Essay

These briefing notes evaluate the business risks facing Grohl Co, and identify and explain four risks of material misstatement to be considered in planning the audit of the financial statements for the year ended 30 November 2012. In addition, two ethical issues are discussed and relevant actions recommended.(i) Business risksImported goods exchange straddle fluctuationsGrohl Co relies on a key component of its production process being imported from overseas. This exposes the company to exchange rate volatility and consequentially exchange flow fluctuations. The company chooses not to mitigate this risk by using forward exchange contracts, which may not be a wise outline for a business so reliant on imports. Exchange gains and losses can also cause volatility in profits, and as the company already has a loss for the year, any adverse movements in exchange rates may quickly increase this loss.Imported goods transportation issuesHeavy reliance on imports means that transportation costs will be high, and with fuel costs continuing to increase this will put squash on Grohl Cos margins. It is not just the cost that is an issue reliance on imports is risky as supply could be disrupted collect to aviation problems, such as the grounding of aircraft after volcanic eruptions or terrorist activities.Reliance on imported goods increases the likelihood of a stock out. Unless Grohl Co keeps a reasonable level of horseshit wiring as inventory, production would have to be halted if supply were interrupted, creating idle time and inefficiencies, and causing loss of customer goodwill.Reliance on single providerAll of Grohl Cos copper wiring is supplied by one overseas supplier. This level of reliance is extremely risky, as any disruption to the suppliers operations, for example, due to financial difficulties or political interference, could result in the curtailment of supply, leading to similar problems of stock outs and halted production as discussed above.Quality subdue issuesSince appointing the new supplier of copper wiring, Grohl Co has subsequently experienced quality control issues with circuit boards, which could result in losing customers (discussed further below). This may have been due to changing supplier as part of a cost-cutting exercise. Given that the new supplier is overseas, it may make resolving the quality control issues more difficult. supernumerary costs may have to be incurred to ensure the quality of goods received, for example, extra costs in relation to electrical testing of the copper wiring. The companys operating margins for 2012 are already low at only 4% (2011 72%), and additional costs will put further pressure on margins. High-technology and competitive industryGrohl Co sells into a high-technology industry, with computers and mobile phones being subject to rapid product development. It is likely that Grohl Co will need to suit quickly to changing demands in the marketplace, but it may not have the resources to do this.