Reference no: EM132627772

TD Aluminum Ltd. (TDA) has been an audit client of Bryer LLP for eight years. Francis Garful has been assigned to TDA's audit and has been asked to perform the audit risk assessment. As part of the initial audit planning, Francis has already identified various risks faced by TDA.TDA manufactures and sells windows and eaves to various customers. TDA's revenue recognition process is fairly simple; however, there are complexities in the audit of inventory and cost of goods sold.TDA purchases a significant amount of aluminum, and, as such, it is affected by any small variation in the price of this commodity. A change in aluminum price can affect the value of inventory as well as profits.The work-in-process inventory also poses a challenge when it comes to valuation. The information system used by TDA is outdated and does NOT properly track inventory; the information system lacks the proper functions to track inventory as it moves through the various stages of production. TDA's management is NOT worried about this, because Ellen Fates, TDA's controller, has been working with TDA for 10 years, and she prepares all estimates. Ellen is very good at what she does, and management rarely intervenes in this process.

Risks identified by Francis:

• Accounting for work-in-process inventory is complex.
• Management rarely intervenes in the estimate and allocation process done by Ellen.
• The accounting information system used by TDA is out of date
• The cost of aluminum is volatile.

Required:

Question a) For each of the risks identified by Francis, classify the risk (inherent risk, control risk or detection risk).

Question b) Explain how each of the risks could result in a financial statement misstatement.