Client business risk

Client business risk is the possibility that an event or condition prevents the company from achieving a business objective. The auditor then considers whether that business problem could cause a material misstatement in the financial statements. The connection is easiest to see by identifying the affected account and explaining how it could be wrong. mia.org.my

Client business risk	Possible financial statement misstatement	Relevant audit response
A major retailer is struggling to pay. The company may lose cash it expected to collect.	Trade receivables may be overstated if the allowance for doubtful debts is too low.	Review the aged receivables report, inspect payments received after year-end and assess management’s allowance.
A furniture design has gone out of fashion. The company may have to offer steep discounts.	Inventory and profit may be overstated if the company continues to carry the furniture at full cost.	Inspect the condition of the goods and compare their cost with recent selling prices, after allowing for selling costs.
The company is under pressure to meet a sales target. Managers may have an incentive to record sales early.	Revenue and receivables may be overstated if January deliveries are recorded as December sales.	Test deliveries around year-end against customer acceptance records, contract terms and sales entries.

Classroom application. During the factory tour, an auditor sees 40 damaged tables. Which assertion should the auditor investigate first?

Suggested answer: Valuation. The auditor has seen the tables, which provides evidence of existence. The damage raises a different question: can the company recover their recorded cost? The auditor should inspect the damage and compare the carrying amount with the expected selling price after repair and selling costs.