Question 2

Face Paint Ltd sells cosmetics and markets itself on the basis that its products have not been tested on animals, it has ethical policies towards its staff and suppliers, and that it takes corporate responsibility very seriously. The company is associated with an organisation that represents a collective of suppliers and staff, EcoProducts, which holds one ordinary B share in Face Paint (under Face Paint's constitution, this gives EcoProducts significant powers, including a controlling vote on all matters of strategy).

In the financial year to 30 June 2020, Face Paint floated on the Australian Securities Exchange. As part of this float, there was also a restructuring of the shares. In the restructure, 50 000 ordinary A shares were bought back by the company and exchanged for 25 000 ordinary shares. A further 1 200 000 ordinary shares were sold on the securities exchange for $5 per share. The new issue was fully subscribed.

Face Paint's results show an increase on the previous year. Revenue is $26 040 196 (2019: $21 143 992) and profit before tax is $1 713 936 (2019: $819 293). The cash raised by the float enabled the company to pay off some long-term debts and improve its short-term liquidity position.

Face Paint has two main product divisions: makeup and gifts. Makeup includes everything that would be expected in a cosmetics line. Gifts include handmade soaps and shampoos, a range of handmade products from developing countries and products made from recycled materials.

The company markets its products in four ways: mail-order catalogue, company website, retail stores and personal selling. In recent years, the mail order and personal selling revenues have been falling significantly, but at the same time sales via the company's website have increased substantially.

As part of its commitment to its suppliers, many of whom depend exclusively on Face Paint, the company sometimes pays high prices for its purchases, even when other cheaper but less eco-friendly alternatives exist.

Also, as part of this commitment, Face Paint sometimes pays suppliers in advance of receiving goods or, in some cases, even before placing an order. Given that the business is expanding, there has been an increase in the range of products sold and therefore an increase in the number of suppliers from all over the world, resulting in a large increase in the level of advance payments.

At 30 June 2020 the amount paid in advance was $1 932 071 (2019: $614 221). Required:

a)Who is responsible for minimising the business risk of an organisation.

b)Describe the auditor's responsibility with regard to business risk.

c)Consider the situation above and highlight the business risks.

Consider the extent to which those risks could have an impact on the financial statements