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Chapter 10, Practice Examination 2, Question 3

1. Identify five (5) business factors and provide an explanation of each factor’s impact on risk of material misstatement. Also identify the account most affected
| |Business factor |Explanation of impact |Account |
|(a) |Debt covenants |Possibility of accounts (current |Current asset |
| | |assets and current liability) | |
| | |manipulation to meet the convenant | |
| | |and overstate of profit | |
|(b) |Tariffs caused lower sales figure of locally |Lower sales figure than expected, and|Profit, inventory |
| |produced product. |possibility of inventory overstated | |
|(c) |Changing the shape and design of skis |Additional costs and misstatement |Profit, inventory |
| | |within products valuation. | |
|(d) |Budget are produced and reviewed by sales |Possibility of fraud when setting a |Direct labour |
| |manager. |budget by sales manager and may set | |
| | |lover budgeting target to earn | |
| | |incentive.

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