Bunyip Warehousebusiness and audit risk

Bunyip Warehouse Pty Ltd operates a chain of 7 hardware stores along the North Coast of NSW. Competition in the hardware industry is intense with major hardware chains aggressively purchasing smaller rivals and discounting goods below cost in order to increase market share. Bunyip has recently initiated legal action against one major hardware chain for anti-competitive behaviour and predatory pricing.

In addition, Bunyip began offering value-added services such as free home delivery and a $10 credit for every $100 spent. While such strategies have helped to maintain its customer base, its gross margins have dropped by 10%. In an effort to increase profits, Bunyip has recently added additional higher-margin products to its range such as Milwaukee and DeWalt power tools but to date sales for these items have been slow.

All of Bunyip's stores are leased, with 3 due to expire at the end of the current year. In two of these cases, the land on which Bunyip's stores are situated has been rezoned as residential. This does not prevent continued use as a hardware store but the rezoning does mean that the land's value has increased and on this basis, the lessor is demanding a 55% increase in rent at these sites.

Bunyip is also experiencing difficulties with two of its major suppliers, who have withdrawn their volume rebates and reduced payment terms from 30 to 13 days.

As part of the planning process, HFH has prepared the following analytical information:

	Industry average		Bunyip
	2021	2020	2021	2020
Ratio
Current	3.5	3.7	2.0	2.5
Receivables turnover ratio	5.9	5.6	6.5	7.0
Inventory turnover ratio	3.2	2.8	4.0	4.5
Return on total assets	7.5%	5%	12%	10%
Net profit ratio	7.1%	6.2%	5.4%	4.0%
Gross margin	20.0%	26.3%	16.2%	18.0%

Required

With reference to relevant audit standards:

1. identify and justify five business risks and;
2. outline how those business risks might result in potential audit risks that would require further investigation