The auditor needs to use their professional judgement to assess whether a business risk represents a risk of material misstatement.

Fresh Fish Products Ltd (FFP), a fish product wholesaler, has decided to change its arrangements with its supermarket customers in. Under the previous arrangement, supermarkets would purchase stock from FFP, with unsold stock being the responsibility of the supermarket. As fresh fish product has only a very short shelf life, supermarkets had a tendency to understock the product, as they did not want to be left with outdated product, and so were often out of stock.

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

However, FFPs sales manager has advised the auditor, Hamid Herat, 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 arrangement the supermarkets are responsible for disposing of any unsold stock, and have been reporting large quantities of stock being destroyed each week.

Required

(i) Identify and explain to the auditor a business risk for FFP that arises as a result of its consignment stock arrangement with supermarkets. (4 Marks)

(ii) Explain to the auditor the risk of material misstatement for FFPs financial report that arises from the business risk identified in (i); in your answer you must specify three key accounts balances affected. (3 x mark = 1 Marks)

(iii) Identify and explain to the auditor the key assertion at risk for each account balance you identified in (ii). (3 x mark = 1 Marks)