An auditor is required to assess the inherent risk in order to asses the risk of material misstatements associated with Harrisons Limited. Inherent risk is regarded as the level of susceptibility in relation to material misstatements that might exist in case there are no effective controls. The major factors that can raise inherent risk are listed below –
Decline in Residential building – It has been forecasted by ACIF (Australian Construction Industry Forum) that there will be a fall in residential building and construction activity. This will drag down the growth of economy and its development. The hardships in the market has made the builders to withdraw themselves from the development of several new projects. In the current year, it is expected that there will be a fall of 8.4% that might result in the decline of value of work done to approximately $96 billion.
Contraction of infrastructure construction activity – The value of work done has been contracted by 5.5% to $62 billion with regard to infrastructure construction. This indicates the completion of several large projects and delays in shifting to various new projects that belong to distinct sectors and geographies.
Industry Outlook – Total construction and building work declined by 8.2% previous year to $233 billion. Moreover, an additional fall of 1.7% is also expected for the current year. This indicates that the revenue generation will be low and therefore profitability level will also remain low.
Pollution levels – Current lobbying activities done by environmental groups with regard to pollution levels. It has indicated that this might influence their strong relationship with the stakeholders of the Harrisons Limited and also the social license to carry out operations in the specific region.
Fall in inventory turnover – There has been a fall in the inventory turnover in the year 2019 because of the rise in the level of competition in the domestic market. This decline might result in the decline in revenue and fall in the level of profitability.
Research and developmental activities – The directors and CEO of Harrisons Limited were engaged with counterparts of the industry and attended conferences in UK. It has been recognised that there is a requirement of innovation in fire retardant building materials. With regard to this, the Board of Directors has given approval for implementing research centre that may cost around $20 million. If this innovation does not take place then the company might experience high level of inherent risk.
Availability of financing – Another major factor is concerned with the rates of interest and the availability of adequate amount of finance for carrying out research and development activities. The company acquired a loan of $12 million from a local bank to buy a property in Brisbane to build a Research Centre. This contract of debt requires the interest coverage ratio to be above 3 and debt to assets ratio to be below the level of 50%. On this loan, Harrisons Limited is required to pay out interest amount at regular intervals of time and repay the principal amount on maturity irrespective of the profit or loss earned by the corporation. This creates inherent risk. Moreover, the remaining amount will be obtained by issuing equity shares in the market. These shares will be applied by the investors if the financial results will be presented in the best way. This creates the inherent risk of material misstatements.
Conclusion line- It can be concluded that there is medium level of inherent risk for Harrisons Limited at the financial statement level.
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