Question

Research restaurant industry. Which factors will have an impact on the financial information reported on restaurant company’s financial statements that would result in a material misstatement?

Answer 1

Material misstatement refers to the risk that the financial statements are materially misstated. Identifying and Assessing Risks of Material Misstatement, indicates that the auditor should assess the risks of material misstatement at two levels:

(1) At the financial statement level and

(2) At the assertion level

In this question we will discuss factors impact at financial statement level:

Factors which will have an impact on the financial information reported on restaurant company’s financial statements that would result in a material misstatement are depicted below:

Ineffective control environment

A lack of sufficient capital to continue operations

Declining conditions affecting the company's industry might create pressures or opportunities for management to manipulate the financial statements

Revenue reduction: The reduction in demand may likely to be linked to the increased awareness of the importance of healthy eating.

Expansion plans: Ambitious plans to dramatically increase the number of restaurants from say 100 to 200 within the next 12 months

Profit before tax has fallen: Despite an overall increase in revenue of say 11%, profits have fallen by say 13%. This may indicate poor cost control by the company, or it could be that some one-off expenses during this year have caused a distorting effect in the financial statements.

Reduction in cash.