You have been the auditor for Bob Edward Thomas Ltd. (BET) for four years, including the audit for the current year ended December 31, 2022. BET is a private company. BET sells casino equipment across North America. It has two products, a highly electronic slot machine (Product X) and a blackjack table (Product A.) BET follows ASPE for reporting purposes. The following are facts about BET and financial information based on the preliminary analysis of the 2022 unaudited financial statements prepared by management.

• As the world recovers from the pandemic, sales for 2022 were still lower than in 2019 (before the pandemic) but more than in 2020 and 2021. The Company and its creditors are sure that the company will return to profitability that exceeds the level in 2019 in 2023.
• The Company has had some supply chain interruptions affecting importing product A. The Company was forced to use airlines to ship, more than doubling the freight cost for the last ten months of the year. However, due to the high demand for this product, the Company increased the selling price to recover about 70% of the increase in freight. The Company anticipated this would change the gross margin expected on the Product A from 40% to 33%. The VP of Sales indicated that less quantity of this product was held in inventory at the end of 2022 to save costs.
• Sales of product line X had fallen significantly during 2022 because of new technology. Still, the VP of Sales expected that he could eventually sell all of this product in 2023. The Company did not make any purchases of the product in 2022. The margin on this equipment had been 25% since 2019. Due to a lack of demand in 2022, all sales were made below the cost of the product. No provision for obsolescence has been made in the Company's financial records due to the anticipated sales in the future.
• To increase sales, the Company increased the commission on the sale of all product lines from 5% to 7%, effective January 1, 2022.
• During the year, the majority shareholder of BET provided a $1,250,000 non-interest bearing demand loan to improve cash flow. The shareholder demanded that the auditor classify the loan as equity to ensure that the debt to equity bank covenant requirements of a maximum of 2 to 1 at December 31, 2022 would be met. The shareholder wanted the equity classification, even though he expected payment in 2023, as the Company was in the process of negotiating a new long-term loan with the bank
• The majority shareholder had always been very cooperative, and the previous year's audits had discovered very few misstatements. However, the shareholder was concerned there may be problems this year because in order to save costs an inexperienced CFO had been hired, who the VP of Sales had complained was providing "bogus" information about inventory. Due to the need to get the additional financing from the bank quickly, the shareholder asked the auditors to prepare the 2022 financial statements.

Question

Based on the information given in the CASE,

a. Identify and describe 2 significant risks of material misstatement at either the overall financial statement level or the financial statement assertion level. DO NOT IDENTIFY AS JUST INHERENT OR CONTROL RISK (AT LEAST ONE RISK MUST BE AT THE FINANCIAL STATEMENT ASSERTION LEVEL).

b. Explain why it is a significant risk.

c. For each risk identified at the financial statement assertion level, identify the specific account being affected as well as the assertion (only one account and one assertion). For each risk identified at the overall pervasive financial statement level, explain how this overall risk affects the auditor's response.