You are auditing Sturt Pty Ltd (Sturt) a cabinet maker. This is the fourth year you have audited this firm. Sturt has provided home builders with high quality cabinetry for more than 20 years; and, during this time, has developed a reputation as a reliable supplier to the national market. Most of Sturt’s customers are large home builders.

However, during the last three years, Sturt has faced increasing pressure from good quality low-cost imports. Competition in the market is now fierce. As well, a rise in interest rates has slowed the market for new homes, such that the overall demand for cabinetry has fallen.

When you discussed these issues with Sturt ‘s CFO, she stated that, because of the changing market conditions, it would be necessary for her to give more thought to the matter of impairment of plant and equipment this year. You agreed, and suggested also that she give more thought to the provision for warranty, which, you remind her, has been problematic in recent years.

The CFO also indicated that she would adopt a prudent approach and implement some hedging arrangements to ameliorate any problems that might occur with supply contracts that are denominated in foreign currencies.

 

REQUIRED: Identify three inherent risks that you should consider when auditing Sturt for the current period. In your answer ensure you do the following:

(i) State the facts from the case that indicate the risk. 

(ii) Classify the risk (for example, “Integrity of management”) .

(iii) Explain why the issue identified in (i) above is a risk.