Prepare a memo for use by the audit team:

Identify and explain the inherent audit risks in the external audit of H.A.s financial statements. please apply the below case for an answer.

H.A. Background

H.A. makes boats for sport and leisure and sells these to rich individuals who like to sail, or be on board their own boat to entertain rich friends and celebrities. The business began ten years ago when its founder, James Lam, the managing director and majority shareholder, established the company to manufacture boats using his long list of rich friends as contacts and customers. The company was initially very successful with several lucrative orders in each of the first five years. James had to work very hard in terms of sourcing the right skills, suppliers and materials for making the boats. After this initial success the last few years have been harder. Revenue is falling and several complaints have been received from previous customers saying their boats are leaking and parts are falling off important safety equipment during sailing trips. James recently received a lawyers letter from a former friend and customer threatening to sue him if he did not return the full amount of the sales price of a boat to the customer due to it now being unusable.

Accounting

During the last year, James employed his best friend from school days, Betsy Mi, as his company accountant. Betsy is very rich and does accounting as a hobby to keep herself busy. She has tried to pass her professional accounting exams, but has not been successful. Nevertheless, she feels she knows enough to do a good job of the accounts and financial statement preparation for James.