MAA303 Audit and Assurance - Chapter 3: Risk assessment I

3.32 Understanding the client and its risks — risk assessment

Ivy Brown is preparing a report for the engagement partner of an existing client, Scooter Ltd, an importer of scooters and other low-powered motorcycles. Ivy has been investigating certain aspects of Scooter Ltd’s business given the change in economic conditions over the past 12 months. She has found that Scooter Ltd’s business, which experienced rapid growth over its first five years in operation, has slowed significantly during the last year. Initially, sales of scooters were boosted by good economic conditions and solid employment growth, coupled with rising petrol prices. Consumers needed transport to get to work and the high petrol prices made the relatively cheap running costs of scooters seem very attractive. In addition, the low purchase price of a small motorcycle or scooter, at between $3000 and $8000, meant that almost anyone who had a job could obtain a loan to buy one.

However, Ivy has discovered that this year, the sales of small motorcycles and scooters have slowed significantly and all importers of these products, not just Scooter Ltd, are being adversely affected. Sales are down because the economic recession has caused many people to lose their jobs. Petrol prices have fallen this year, reducing the demand for more economical vehicles, and changes in banking laws have meant it is harder to get loans for vehicles which cost less than $10 000.

Required
Identify the issues that potentially impact on the audit of Scooter Ltd.
Explain how each issue affects the audit plan, by identifying the risks and the financial report accounts that require closer examination.