A manufacturer's main product is being displaced by a cheaper rival technology, and the manufacturer's sales volumes fell sharply in the last quarter of the financial year. Which risk of material misstatement in the financial statements arises most directly from this business risk?

Correct answer: A) Finished goods inventory may be overstated because its net realisable value may have fallen below cost

Explanation

Falling demand for a product means some inventory may be slow-moving and may have to be sold at reduced prices. Inventory must be measured at the lower of cost and net realisable value, so there is a risk that it is overstated if no write-down is made. The auditor would respond with procedures such as reviewing post year-end selling prices and inventory ageing. Duplicate invoices, share capital classification and ghost employees are not caused by this business risk.