Reference no: EM132565049

Question - You are currently planning the audit of Cheap Groceries Pty Ltd (Cheap Groceries), a large proprietary company that operates a small chain of supermarkets. You are in the process of gaining an understanding of Cheap Groceries' objectives and strategies and the related business risks.

Competition in this business sector is intense, with major supermarket chains aggressively purchasing smaller rivals and discounting goods below cost in order to increase market share. In order to compete, Cheap Groceries has had to offer value-added services, such as free home delivery and loyalty rewards.

While these strategies have helped to maintain its customer base, its gross margins have dropped by 10 per cent. In an effort to increase profits, Cheap Groceries has recently added higher margin products such as gourmet foods to its range. To date, these items have achieved only limited acceptance among its customers.

All of Cheap Groceries' premises are leased. Three of the leases are due to expire prior to the end of the current financial year. In two cases, the land on which the premises are situated has been rezoned as residential. Due to 'prior use' legislation, this does not prevent the premises from being used as a supermarket in the future. However, it does mean the land's value has increased and, on this basis, the lessor is demanding a 50 per cent increase in rent.

Cheap Groceries is also experiencing difficulties with one of its major suppliers, which has withdrawn their volume rebates and reduced payment terms from 30 days to 14 days. Cheap Groceries has recently initiated legal action against a major supermarket chain for anti-competitive behaviour and predatory pricing.

Required - Identify and explain five business risks for Cheap Groceries that may lead to the risk of material misstatement in the financial report.