Reference no: EM132991384

Question - Tan Beng Motors sells car accessories such as seat covers, leadlight protectors and LCD monitors. The industry has been in a favourable trend for the past few years but not in the current year. The Company operates with seven retail outlets located across Penang, Klang Valley and Johor. The net profit before tax of the company for the year ended 31 December 2008 amounted to RM3 million, declined by 30% from previous year end.

During the year, the company has undertaken major changes in the management structure. The newly appointed managing director, Mr Beng runs the company in an autocratic manner because he believes his management style will make the company sustain longer in business and stay competitive. However, his way of management has resulted in an inefficient management of the company's assets and lack of integrity among the employees of the company. Furthermore, certain internal control procedures were overruled by the employees.

During the audit, the auditor discovered that the allowance for obsolete stocks was understated by RM500,000. The auditor has informed Mr. Beng about the matter and Mr. Beng suggested that the allowance for obsolete stock to be adjusted by only RM100,000 instead of RM500,000.

Required - Identify four (4) risks that Tan Beng Motors is facing and how these risks would affect the auditor's judgment and assessment on the acceptable level of audit risk and materiality.