You are currently involved in planning for the audit of Spot Light Ltd (SLL), a national company producing curtains and blinds. The curtain and the blind market is highly competitive, and SLL has been experiencing declining sales over the past three years. Cost-cutting has proven very difficult, as the cost of materials used in the companys production lines has increased each year. SLLs bank has continued to provide SLL with loan facilities; however, it has indicated that it expects to see improved results in the next financial report and has placed a number of quite restrictive covenants in SLLs lending agreements. Recent articles appearing in the financial press concerning SLLs expected financial results have been very pessimistic about its likely performance.

Required:

Based on the information provided:

1. Discuss the overall impact on audit risk. Which specific component(s) of audit risk would be affected?