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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 11
(BLOCK 3 LECTURE 5)
Objective: Business risk understanding and past papers
Understanding business risk from AAA perspective
Business risk

A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect
an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate
objectives and strategies (ISA 315)
Business objective (Critical success factors)

 Profitability
 Reputation
 Market share
 Competitive advantage
 Liquidity
 Stakeholder relationship (banks, suppliers, customers)
Something which adversely impact the business objectives

 Case study
 Internal or external to the business (weakness + threat)

For the purpose of the exam, these risks can usually be thought of in terms of conditions that may prevent a
business from meeting its objectives and might include risks to achieving future profits or cash flows or to
business survival. This is a simplified explanation, but will help you describe the implications of most risks you
come across in the exam. There will be some risks whose explanation is more involved and you can find
examples of these in past exams.

 Business risk- can be in present or in future

 Implication of business risk – profit / cash flow / business survival

In general, you are looking for risks in the information that the examiner has presented to you within the
scenario. You will be asked to evaluate those risks. At this level you will not be credited for defining business
risk, nor will you receive credit for describing what a client could do to mitigate those business risks.

 Never write – definition of business risk

 Never write – risk mitigation

As such, you need to consider how to frame the information which is provided as a business risk. As a general
rule, marks for business risks will be awarded along the following lines:

 For identifying only without meaningful explanation, ½ mark

 For a briefly explained business risk, 1 mark will be awarded, and
 Full marks will only be awarded where a well explained business risk is presented. (2 marks)

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Marks will not be awarded for points that are purely speculative – ie not based on specific information provided
in the question scenario – nor will marks be awarded for business risks that do not impact on the audit.

Examples:

In exam, in Q1 the part a will be to evaluate the business risk and the part b will be to evaluate audit risk or
RoMM. When you are reading the case you have at back of your mind, that you need to find 2 types of risk, one
being business and other being RoMM.

For example- when reading the case you might come across a situation which is equally a business risk as well
as RoMM.

 Inventory holding period has increased from 65 days to 100 days.

(a)Business risk

Inventory

Inventory holding period has increased a lot from last year, means the inventory has become slow moving. This
possibly indicate that demand for company’s product has gone down and that customer are not liking the
company’s product or that the company product has lost its competitive position. This can impact business
revenue which can scale down in months to come and can even adversely impact company market share.(2
marks)

(b) RoMM

Inventory

Inventory holding period has increased a lot from last year, means the inventory has become slow moving. The
slow moving inventory should be valued at lower of cost or NRV. There is a possibility, that inventory is
inappropriately valued, and thus inventory could be overstated. (2 marks)

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March/ June 21 – Q1
Business risk
(A) business risks (10 marks)
1. Approximately 30% of the timber is exported
Export
Pale company exports 30% of its timber, which exposes company to foreign exchange risk and volatility. Further
the export case exposes company to any international trade restriction which could adversely impact on future
exports sales. The volatility in exchange rate if any, could affect the company profitability.
2. the board has recently approved the acquisition of several large areas of tropical rainforest in Farland, a remote
developing country
Farland
This is the first time that the company has expanded to an international location which means that company
initially will have less knowledge of the new country, its laws and regulations etc. This exposes the company to
any risk of non-compliances with the laws and regulations relating to Farland which can increases company
exposure to fines and penalties which could adversely affect company reputation and bring into risk the gold
standard accreditation.
3. A share issue was the only option for funding the international expansion as the company is at the limit of its
bank borrowing agreement.
Bank borrowing
The company is at the limit of bank borrowing which means that the company is highly geared and any possibility
of securing further loan is dim. If no further loans is negotiated it can impact or worsen company liquidity
position as already the cash balance over the last year has gone down by 33.8 %. The worsening liquidity can
bring into doubt any possible repayment of the government grant if condition are not adhered.
4. grant of $20 million to assist Pale Co in its Farland expansion
5. adhere to a number of strict standards. (Gold standard)
Gold standard
The gold standard is very important for Pale to keep it competitive advantage in the timber business. If there is
any issues pertaining to non-compliances with strict standard required for gold accreditation, the company could
lose the gold standard status which could negatively impact pale future sales and profit and potentially results
in losing one of its main customer recently taken on board, Royal.
6. The contract was signed on the basis of Pale Co receiving the Gold Standard accreditation for its timber.
7. Legal case
The legal case recently brought up by the employees claiming that breaches of health and safety guidelines
regularly take place at Pale company. This legal could potentially damage company’s reputation and result in
fines and penalties. Further this issue of non-compliances of health and safety regulations could bring doubt of
continuity of gold standard as for gold standard the business should have adherence to ethical business practices

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8. industrial action at the country’s ports meant no containers of processed timber could be shipped to our export
customers( inventory level has increased)
Industrial action
If the industrial action continues it will affect Pale company future sales and prospects. The customer who buys
from Pale will switch to other competitors due to restrictions on port. Export sales is very important to Pale
making a total contribution of 30% to sales. Further the piling inventory levels by 67% due to restriction at port
means that the warehousing or storage cost of timber will increases for business impacting the business profit
margin.
9. cash levels are depleted this year
Cash levels
The cash levels have gone down over the last year by 33.8% signals liquidity issues for the business. The working
capital seems ineffective as due to industrial action inventory level is piling up and it cant be sold to translate
into cash soon. Thus currently the business is in grieve liquidity issues.

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Business risk
Export
Pale company exports 30% of its timber, which exposes company to foreign exchange risk and volatility. Further
the export case exposes company to any international trade restriction which could adversely impact on future
exports sales. The volatility in exchange rate if any, could affect the company profitability.
Farland
This is the first time that the company has expanded to an international location which means that company
initially will have less knowledge of the new country, its laws and regulations etc. This exposes the company to
any risk of non-compliances with the laws and regulations relating to Farland which can increases company
exposure to fines and penalties which could adversely affect company reputation and bring into risk the gold
standard accreditation.
Bank borrowing
The company is at the limit of bank borrowing which means that the company is highly geared and any possibility
of securing further loan is dim. If no further loans is negotiated it can impact or worsen company liquidity
position as already the cash balance over the last year has gone down by 33.8 %. The worsening liquidity can
bring into doubt any possible repayment of the government grant if condition are not adhered.
Gold standard
The gold standard is very important for Pale to keep it competitive advantage in the timber business. If there is
any issues pertaining to non-compliances with strict standard required for gold accreditation, the company could
lose the gold standard status which could negatively impact pale future sales and profit and potentially results
in losing one of its main customer recently taken on board, Royal.
7. Legal case
The legal case recently brought up by the employees claiming that breaches of health and safety guidelines
regularly take place at Pale company. This legal could potentially damage company’s reputation and result in
fines and penalties. Further this issue of non-compliances of health and safety regulations could bring doubt of
continuity of gold standard as for gold standard the business should have adherence to ethical business practices
Industrial action
If the industrial action continues it will affect Pale company future sales and prospects. The customer who buys
from Pale will switch to other competitors due to restrictions on port. Export sales is very important to Pale
making a total contribution of 30% to sales. Further the piling inventory levels by 67% due to restriction at port
means that the warehousing or storage cost of timber will increases for business impacting the business profit
margin.
Cash levels
The cash levels have gone down over the last year by 33.8% signals liquidity issues for the business. The working
capital seems ineffective as due to industrial action inventory level is piling up and it cant be sold to translate
into cash soon. Thus currently the business is in grieve liquidity issues.

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CONCLUSION- Business risk

 Pick up a problem from case

 Translate or explain the problem – as to how it will impact the business objective adversely whether in
present or in future
 2 mark per business risk
 If any business risk involve any trend or financial results an additional ½ a mark will be gained up to a
max of 2 marks.
Assignment

 Dec 18 Q1
 Dec 17 Q1
 + Tutor will share with you on Whatsapp group links of business risk webinar so that you gain more
practice from past paper

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