Which of the six risks described above should be considered a significant risk? Explain why they represent a significant risk.

Listed below are various risks identified during audit planning that you have been asked to evaluate to assess whether they are significant risks.
1. Fernandez Wholesalers sells energy drinks to various distributors. As they have expanded sales to additional customers, there has been some increase in the age of accounts receivable, which could require an increase in the allowance for doubtful accounts.
2. Sansone Construction builds light commercial real estate properties. This year they
started a new project that is three times larger than previous projects completed by
the company, and is the first one that will take more than one year to complete. The
company has limited experience with percentage of completion contract accounting,
and the project is running significantly behind schedule.
3. Horton Sports produces high-end sporting gear. Sales and receivables have increased significantly in the fourth quarter over the previous year, and the company has
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Chapter 9 / ASSESSING THE RISK OF MATERIAL MISSTATEMENT 299
pressured customers in the past to purchase more product than they need, resulting
in significant returns.
4. Alset Motors is a start-up focused on self-driving vehicles. Their technology has
shown significant promise in selected test markets, but there are several competitors
also in the market, including major auto manufacturers and technology firms.
5. Orion Computer has a significant amount of goodwill on its balance sheet resulting
from its acquisition of another enterprise software company in the prior year. The
company has seen a significant decline in sales and its stock price due to increased
cloud computing.
6. Lumony manufactures yoga pants and other activewear. Due to changes in consumer tastes, it has experienced a significant build-up in inventory of two of its products
that may require a write-down.
a. Describe what is meant by a significant risk. How is it different than an inherent risk
or a business risk?
b. Which of the six risks described above should be considered a significant risk?
Explain why they represent a significant risk.
c. For each risk that you identified as a significant risk, describe how you might ad-
dress the risk to give it special audit consideration. For example, a valuation risk
might be addressed by engaging a valuation specialist

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