Organic Farm Ltd (OFL) is a fresh yoghurt producer and has decided to change its arrangements with its supermarket customers. Under the previous arrangement, the supermarkets would purchase stock from OFL, with unsold sock being the responsibility of the supermarkets. As the fresh yoghurt has only a very short shelf life, the supermarkets have had a tendency to understock the products, as they do not want to be left with outdated product and so have often been out of stock.

OFLs management believe that this has resulted in significant loss of sales and so they decided to implement a consignment stock arrangement with the supermarkets to try to increase sales.

However, OFLs sales manager had advised you that the new consignment stock arrangement has not resulted in the increased sales they expected. Despite increased deliveries of stock to the supermarkets, sales have not increased and profits on supermarket sales have decreased. Under the new consignment arrangement, the supermarkets are responsible for disposing of any unsold stock and have been reporting large quantities of stock being destroyed each week.

REQUIRED:

1. Identify an inherent risk that arises as a result of the consignment stock arrangement with the supermarkets. (1 mark)

2. Explain the risk of material misstatement that arises from the inherent risk identified in (a) including the 3 key accounts affected. (4 marks)

3. Identify the key assertion at risk of material misstatement for each account identified in (b). Explain why it is at risk of misstatement. (3 marks)