Question

You are currently planning the audit of Food Plus Pty Ltd (FPPL), a large proprietary company that operates a small chain of convenience stores. You are in the process of developing an understanding of its objectives and strategies and the related business risks.

Competition in this sector is intense, with major supermarket chains aggressively purchasing smaller rivals and discounting products below cost in order to increase market share. In order to compete, FPPL has been forced to offer value-added services such as complimentary coffees based on a loyalty scheme.
While these strategies have helped to maintain its customer base, its gross margins have dropped by 10%. In an effort to increase profits, FPPL has recently focused on expanding the products available in each store. However, these items have achieved only limited acceptance to date among FPPL’s customers and stock obsolescence is high.
All of FPPL’s premises are leased. Two of the leases are due to expire prior to the end of the current financial year. In both cases, the land on which the premises are situated has been re-zoned as residential. Due to “prior use” legislation, this does not prevent the premises from being used as a supermarket in the future. However, it does mean the land’s value has increased and, on this basis, the lessor is demanding a 50% increase in rent.
FPPL is also experiencing difficulties with two of its major suppliers, who have withdrawn their volume rebates and reduced payment terms from 30 to 14 days. In addition, FPPL has recently initiated legal action against a major supermarket chain for anti-competitive behaviour and predatory pricing.

REQUIRED:

1. (a) Identify three (3) business risks, which may lead to the risk of material misstatement at the

   financial statement level for FPPL.

2. (b) For each business risk you identified in (a) above, identify the financial statement account at

   risk of misstatement.

3. (c) For each business risk you identified in (a) above, describe how it may lead to the risk of

   material misstatement at the financial statement level.

You may wish to present your answer to (a), (b) and (c) using the following table:

(a) Business risk (b) Account at risk of (c) How it might lead to risk material misstatement of material misstatement

Answer 1

A. Business Risk	B. Account at Risk	C. How it would lead to Risk of Material Misstatement
Financial Risk i.e.: Risk of maintainig gross margin	Sales Purchases Cost of goods sold Stock	It is clearly evident that there is a lot of competetion and company's gross profit margin has dropped by 10%. So if there is any kind of pressure on management to maintain a certain % of profit then it can inflate sales and deflate purchases in oeder to increase its profit. Further to maintain the same, company has increased its stock which has limited acceptance and high obsolecense.
Strategic Risk i.e; Two leases rezoned into residential	Lessor Account Lease Rentals	Lease payments have increased i.e. by 50% and such land is of strategic value as now it has been declared as Residential. However, company's margin has reduced by 10% leading to alteration in accounts of lessor and lease rentals.
Operation Risk i.e. risk of defaulting in payment to suppliers	suppliers account Rebate/Discount account	As the suppliers have reduced payment cycle to 14 days and that too major suppliers, the accounts may be altered in order to show a better presentation of timely payment.