The following is the assessment of inherent risks in case of Soundworld Ltd:
There are high risks of the management of the given company showing more revenues in order to meet the projections of profits done by it. So there are chances that the company would show a higher amount of sales in the profit and loss account than that actually happen . In this case the company would show fictitious sales. In order to order to conceal the irregularity the company can make fictitious bills to show as vouchers confirming that the sales have actually happened. In other case, the company would overstate the amount of sale made to a party. For example an actual sale of $20000 is recorded in the books of accounts as a sale of $ 30000. In this case it is the sale account that would be affected. This would lead to overstatement of profit in the profit and loss account. The balance of the profit and loss account of the company would be higher than it should be and this would be a case of material misstatement in the financial report. Further the amount of profit shown in the balance sheet would also be overstated. Moreover as fictitious credit sales are shown the amount of debtors in the balance sheet would also be overstated than the actual amount .
It is also given that credit worthiness of the buyers of the company has not been done properly. The company therefore needs to make more provisions for bad debts in the profit and loss account. This is an expense which would decrease the amount of profit as shown by the profit and loss account . But the company seems to have ignored the risk of high bad debts due to its faulty credit policy as indicated by its highly optimistic estimation of future profits. There is high risk of misstatement of bad debts and provision for bad debts in the profit and loss account of the company. There is also medium risk of other expenses being overstated in the profit and loss account in order to inflate the profits. The given company seems to be overambitious and not able to understand the realities of its business environment.
As the given firm is new in retail business it would have to offer lower prices to attract customers. The company should have therefore relied more on the principle of conservatism while making estimates of future sales. In this case there is a high risk of company overstating balance of its sales account.