Reference no: EM133474138

Case: TeaTea (TT) is an Australian private company that was started by Camilla Bowles. The startup funding came from Camilla's personal wealth, and TT is still repaying those loans. Its two main product lines are loose-leaf teas and bubble teas. TT is best known for its unique flavours of loose-leaf tea. TT opened ten years ago and has experienced significant growth since then of about 10% per year. The additional of bubble tea four years ago has been pivotal for the company's growth. TT has several retail stores in the capital cities of the eastern seaboard of Australia, with its head office and a new, large central warehouse and distribution centre in Melbourne.

Tea is the most popular beverage in the world. There are three traditional tea markets: teabags, bottled drinks, and specialty loose teas. As the teabag markets are dominated by global brands, TT focuses on the loose tea market, where high-quality teas are appreciated, and large companies are not able to participate due to fluctuations in crops, pricing and sourcing. Loose-leaf tea is experiencing a growing demand, much like craft coffee and alcoholic beverages, with a wide range of patrons enjoying stylish packaging, unique flavours, and clever marketing. Younger and multicultural tea drinkers are more excited about varieties of flavours and non-traditional combinations, which is why Camilla has expanded into bubble tea.

TT competes in three markets: specialty drinks, online loose-leaf tea sales, and bubble tea. There are many large competitors that sell tea online and distribute to supermarkets. Camilla is hopeful that with the large new distribution centre, TT will be able to compete in supplying large grocery stores and supermarkets. Already, TT has contracts with a few specialty gourmet grocery stores. Their main competitor in the bubble tea market is the national franchise chain, Chatime. TT's ability to maintain an affordable, high-quality product is largely attributable to Camilla's many long-term relationships with tea growers across the globe. TT has incurred significant costs in getting Fair Trade certification for its products; another aspect of its appeal to the youth market. During 2022, TT's growth has attracted one of its largest competitors, who wants to invest in it. Camilla is thinking ahead to her retirement, and this seems an excellent opportunity for her to exit the business while keeping it on its growth trajectory. In anticipation of this, TT has changed from Reduced Disclosure requirements to full compliance with International Financial Reporting Standards (IFRS) during 2022.

Camilla is the CEO of the company. Sarah is the financial controller, but as a trusted employee who has been with the company from the start, she is also responsible for management of shipping and receiving, sales and payroll. She is assisted by a recently graduated accountant. A small team handles receiving and shipping in the Melbourne centre, and there is an online sales manager.

TT leases its head office space and retail stores on three-year terms. The new warehouse and distribution centre is on a five-year lease. TT incurred significant leasehold improvement costs during 2022 in retro-fitting the centre to suit their business processes. Sarah expenses the lease payments monthly, at the time of payment.

For a working bubble tea machine, multiple component parts are needed. Purchasing the equipment for bubble tea production at each of the retail locations was a considerable expense. However, Camilla believed the investment to be worthwhile, as its introduction boosted profits by 5-10% at all locations. The machines originally had an estimated useful life of eight years, but recently have become difficult to use and require significant repairs, slowing service times. TT is now evaluating whether to replace the machines. New machines are higher quality and will have double the cost of the original machines.

Required:

Question: Identify and explain THREE business risks that are facing TT. In general, and why do auditors need to assess the business risks facing their clients?