You are the audit senior responsible for the audit of Advantage Movers Berhad (“AMB”). You are currently planning the audit for the year ending 31 July 2017. During your initial planning meeting with the financial controller, he told you of the following changes in the company’s operations:
(i) AMB’s new CEO, who previously worked for a property developer, is keen for the company to start a new business in property development. The company has no experience in the property development industry.
(ii) AMB has incurred operating losses for the past three years. As at 28 February 2017, the latest company’s unaudited accounts show current liabilities exceeding current assets. In addition, a major bank loan is due on 1 November 2017. The management of AMB is negotiating with its bankers to refinance the loan.
(iii) AMB has decided to stop importing its raw materials from China and instead will source all its raw materials from within Malaysia, as part of the company’s initiative to mitigate the impact of the Malaysian currency weakness against the US Dollars. All imports from China are denominated in US Dollars, and this has caused the company’s operating costs to increase by over forty percent over the past three years.
(iiii) The company increased its provision for warranty by fifty percent of the previous year’s balance.
(v) AMB’s major competitor has decided to cease its current aggressive discounting and marketing campaign that it started last year to try and increase its market share. AMB responded by giving massive discounts and increasing promotional activities, which caused the company to record RM5 million in losses.
Required:
Describe the effect, if any, on inherent risk for each of the issues mentioned in the Advantage Movers Berhad case. Explain your answer for each of the issues mentioned.