ReCharge Ltd is a UK company specialising in the manufacture of batteries for electric vehicles (EV batteries). The company is new to the market and was started by two engineers with experience in the development and production of EV batteries. The EV battery market is challenging for new companies due to the dominance of large corporations with big budgets for research and development.

ReCharge Ltd’s niche is that it is a fresh face to the market with a strong focus on being environmentally-friendly in its production processes and in its desire to promote green motoring. Whilst it is expected that the market for EV batteries will continue to grow as the demand for EVs increases, market research has shown that customers are reluctant to purchase an EV. Potential customers’ top three concerns are the range between battery re-charge, the cost of EVs and the small number of charging stations in the UK. The directors of ReCharge are keen to address these issues and this year they have already invested large sums of money in research and development projects to produce smaller, lower cost batteries with a greater range. Whilst increasing range should reduce concerns about the lack of charging stations the directors are in talks with a larger competitor about the feasibility of working together to build more charging stations.

ReCharge Ltd is based in the South of England and in recent months two cities in close proximity to ReCharge Ltd’s headquarters have announced plans to ban diesel and petrol cars from their city centres within the next 5 years.

Funds have so far come from a loan from a local bank and capital invested by the existing directors/shareholders. However, given the scale of the project to develop lower cost, higher range batteries, ReCharge is now looking for alternative sources of investment. They have approached funding bodies in the UK and Europe with their plans. In order to support these applications they require audited accounts. The directors consider this funding to be essential to their future plans due to the increasing threat of overseas companies entering the market.

Required:

1. Detail at least six potential audit risks associated with the audit of ReCharge Ltd. Having detailed the risks, make an assessment of whether your audit firm should accept or reject this audit appointment. Give an explanation of your decision.

In accordance with the International Standards on Auditing, auditors take a risk-based approach to their audit work. What do you understand by the term ‘risk-based’ and what are the potential disadvantages of such an approach?