BACKGROUND Cellphone Importers is a privately owned and managed company that imports cell phone accessories such as batteries, cellphone covers, headphones and chargers. The company supplies to a number of large retail chains (supermarkets, furniture and clothing stores), specialist electronic shops and small independent cellphone shops, most of which are situated in shopping malls throughout South Africa. The year-end of Cellphone Importers is 31 December and the company is registered for Value Added Tax (VAT). The reporting framework applied by Cellphone Importers is International Financial Reporting Standards (IFRS).

Most of Cellphone Importers products are generic (no brand name) versions of manufacturers original equipment which gives the company a significant price advantage. However, the disadvantage of dealing with lesser-known manufacturers is that there are no guarantees and any defective goods cannot be returned to the manufacturers for credit or a refund. The insurance policy of Cellphone Importers does not cover defected items imported. Cellphone Importers holds large amounts of inventory (imported goods) at their warehouse in Midrand, Johannesburg. Inventory is measured at the lower of cost and net realizable value. As the company imports all its inventory goods, IAS 21 The Effect of Changes in Foreign Exchange Rates is used to account for purchase transactions applicable to inventory. Cellphone Importers does not take out forward exchange on imports.

Cellphone Importers was profitable for many years, but has recently experienced difficult trading conditions arising from increased competition in the sector, rising costs due to the weakening rand, problems caused by continuing technological changes as well as the impact of COVID-19 on the import of goods. These factors have also affected many of the companys customers, especially the independent cellphone shops. As such, the company is using the 31 December 2021 year-end audited financial statements to apply for a loan to improve its cash flow because most of the independent cellphone shop trade receivables are not paying their outstanding debt.

The accounting department of the company has a high staff turnover and is mostly ascribed to the Financial Director, Thandi Mosekas autocratic management style. Employee resignation interviews indicate that Thandi often requested employees to override controls to make sales look better in order to secure management performance bonuses. Most staff members within the accounting department do not have in-depth expertise regarding the application of IFRS.

Use the information under the heading BACKGROUND to discuss the risks of material misstatement applicable to inventory using the format below:

Risk

Assertion