Reference no: EM132617481

Question - Speedy Ltd is a publicly listed company that manufactures and assembles automobile parts. This is the second year for your firm to audit Speedy's financial statements. Below are some extracts from your working papers so far:

(a) Sales and profits appear to have dropped by more than 1/5 in comparison with last year; it is partially due to the increased competition and decreased demand as two of the close competitors merged in one and expanded the business to cover some areas originally only covered by Speedy Ltd.

(b) Speedy Ltd hired a new CFO in this financial year. Within three months since the new CFO was hired, the profits has increased significantly; partially due to the development of a new partnership with a Korea-based company Flyhigh Ltd where the CFO used to work for when he lived there five years ago; Flyhigh Ltd purchased large amount of automobile parts from Speedy Ltd every month in the last three months before the financial year end.

Required - Specify how the above two factors may increase business risk for Speedy Ltd. Discuss whether the business risk specified may or may not increase the likelihood of misstatement in the financial statements.