Learning objective

As part of the planning process, the audit team needs to gain an understanding of Alpine Bags Ltd.'s structure and its business environment. By understanding the client's business, the audit team can identify potential risks that may have a significant effect on the financial statements. This will assist the team in planning and performing the audit, including making inherent risk assessments.

This assignment will help you learn to identify those potential risks of misstatement and evaluate which of those risks are classified as significant risks (CAS 315.27).

Required

Josh Thomas, Audit Senior, has asked you to research the retail and wholesale backpack industries and report back to the audit team. Your report will form part of the overall understanding of Alpine Bags' structure and its environment.

You should concentrate your research on providing findings from those areas that have a financial statement impact and are considered probable given Alpine Bags' operations. In conducting your research, you should consider the following key market forces, as they relate to Alpine Bags' operations.

For each area listed below, consider whether that factor could increase the risk of material misstatement in Alpine Bags' financial statements.

List your potential risks in the table provided.

General and industry-specific economic trends and conditions

• What is the current condition of the economy?
• Is the business affected by developments in other countries, foreign currency fluctuations, or other global forces?
• If the industry is labour-intensive, are there unusual or unique labour relations issues?
• How does the company's growth and overall financial performance compare with the industry, and what are the reasons for any significant differences?
• What is the volume and type of transactions in the business?
• Are the client's operations centralized or decentralized?
• Is the client's business cyclical or influenced by seasonal fluctuations in the market?
• What is the susceptibility to fraud and theft? (Is the product something that can easily be stolen and has an active market?)

Competitive environment

• What products does the client sell, and have there been significant changes with respect to:
  • -major products or brands?
  • -selling strategies?
  • -sales/gross margin by product?
• Who are the client's major competitors, and what share of the market does each hold?
• Is there significant differentiation between the client's and competitors' merchandise?
• What is the effect on the client of potential new entrants into the market? Are there any significant barriers to entering the market?

Product information

• Is there a specific life cycle for the product?
• Is the product dependent on trends or styles?

Customer information

• Are there specific customers on whom the client is highly dependent?
• What is the overall profile of the client's customers? Have there been significant fluctuations in the client's customer base?

Supplier information

• Who are the key suppliers?
• Are the materials subject to significant price movements or influenced by external market forces?

Technological advances and the effect of the Internet

• How does the industry use technology?
• What technological trends are affecting the industry?

Laws and regulatory requirements

• Are the client's operations affected significantly by local or foreign legislation?
• What new laws and regulations recently enacted (or pending) may have significant effects on the company?

List your potential significant risks in the following table. Also name the account that would potentially be misstated.

		W/P ref:	A1-1
		Prepared by:	_____
		Date prepared:	_____
Alpine Bags Ltd.
December 31, 2023
Identification of Significant Risks

Potential riskdescription	Account(s)	Assertion(s) (assignment 3)	Level of inherent risk (assignment 3)

Discuss your responses with your supervisor (or teacher). Can you clearly distinguish between a risk faced by the business and a significant risk?