ABC Ltd. ABC Ltd.’s principal business activity is the assembly of circuit boards. One of the key materials used is copper wiring, all of which is imported. As a cost cutting measure, a contract with a new overseas supplier was signed, and all of the company’s copper wiring is now supplied under this contract. Purchases are denominated in a foreign currency, but the company does not use forward exchange contracts in relation to its imports of copper wiring. The company has two production facilities, one of which produces goods for the export market, and the other produces goods for the domestic market. About half of its goods are exported, but the export market is suffering due to competition from cheaper producers overseas. Most domestic sales are made under contract with approximately 20 customers.

In October 2020, production was halted for a week at the production facility which supplies the domestic market. A number of customers had returned goods, claiming faults in the circuit boards supplied. On inspection, it was found that the copper used in the circuit boards was corroded and therefore unsuitable for use. The corrosion is difficult to spot as it cannot be identified by eye, and relies on electrical testing. All customers were contacted immediately and, where necessary, products recalled and replaced. The corroded copper remaining in inventory has been identified and separated from the rest of the copper. Several of ABC Ltd’s key management personnel left in October 2020, to set up a company specialising in the recycling of old electronic equipment. This new company is not considered to be in competition with ABC’s Ltd operations

Required:

A risk in using “risk-based auditing” is that if the auditor applies a wrong rating in assessing particular risks, sufficient audit evidence may not be obtained to provide reasonable assurance on those areas. Using the scenario outlined below:

1. Identify the business risks faced by ABC Ltd
2. What rating would you apply to each risk? Why?
3. How would this impact the audit work to be done?