Reference no: EM132596835

Question - You are auditing Delta Pty Ltd (Delta), a high technology manufacturer of pharmaceuticals. In recent years, Delta significantly increased its research and development capability, and has grown into the one of the country's largest, privately owned chemical companies. During this expansion phase, Delta purchased a number of patents and some state-of-the-art manufacturing equipment. To fund the expansion, Delta took out a loan from a major bank.

Delta has 4,200 active customers located across Australia. All sales are on credit, with outstanding accounts due within 30 days. In recent months, the Australian Dollar has depreciated 35 % against the $US, which has made some of Delta's inputs more expensive. Furthermore, rising interest rates in the Australian economy are putting pressure on some of Delta's major customers. Consequently, the credit manager, who recently joined Delta after many years in the building industry, is closely monitoring receivables.

Required -

1. Identify one financial report level inherent risk and one assertion level inherent risk that may cause you concern when planning the audit of Delta. Ensure these risks are specific to Delta.

2. Explain why the risk factors in (1) above are potential problems for you as the auditor. That is, why could these factors increase the risk of misstatement in the financial statements of Delta?

3. For each risk factor identified in (1) above identify a significant Balance Sheet item that is at risk of material misstatement.