ABC is a successful public company that manufactures and sells specialty auto products such as paint protection. By 2019, ABC's board of directors felt that the company needed to diversify. In November 2020, it acquired a patent for a new product—Synlube.
Management believes that Synlube will provide superior product performance. As it is more expensive to produce it has a higher selling price than its conventional competitors. ABC's main competitor is a successful multinational with excellent customer recognition and a large distribution network. ABC is creating a market niche for Synlube by targeting commercial businesses in western Canada.
ABC's existing facilities were not adequate to produce Synlube in commercial quantities, so in June 2021 ABC began construction of a new blending plant that became operational on December 1, 2021. The expansion was financed with a term bank loan. Management is considering a share issue later in 2021 to solve the company's cash flow problems.
ABC is a new audit client for your CPA firm (Lansdown, LLP) after the previous auditor resigned over a disagreement with the recognition of certain revenue amounts and the valuation of assets. Your firm has set audit risk at low.
Required:
Assess the overall financial statement risk at ABC, considering
1. Inherent risk factors, and
2. Fraud risk factors
Provide an overall conclusion on the RMM at the OFSL based on your analysis.
Discuss the impact of the risk assessment on detection risk. If inherent risk at the OFSL were assessed as low, discuss how that would impact audit risk and detection risk.
Note: There are no control risks in the case facts. For each risk factor, explain WHAT the risk is + WHY it is a risk.