Question 2: INHERENT RISK Midhaven Home Builders (MHB) was incorporated in December of 2017 and started operating in January of 2018. The company operates a retail web site that sells home building products to contractors in Ontario. MHB is owned and managed by two brothers, Mark and Roger Smith. Despite a slowdown in the very competitive construction sector, the brothers have developed several unique interactive on-line shopping features that have led to significant revenue growth. As a result of this revenue growth, the owners have had to hire more sales, customer service, IT, and accounting staff. This has increased the payroll costs to the extent the company is now experiencing cash flow difficulties. The local bank has provided interim financing, but a new cash injection is required. Buster and Jay are considering making a public share offering to raise further capital. The brothers have approached a CPA firm to determine what may be involved with an initial public offering. They have been advised that one requirement is annual audited financial statements. They have discussed this requirement with their Chief Financial Officer, who believes they may have some challenges obtaining an unqualified audit opinion. She has expressed this concern due to the issues she has had with the new accounting hires and the turnover within the accounting area. She has had to let a couple of the staff go as they made several material accounting errors. She has since implemented stronger controls over the accounting processes, but she is still uncertain whether material errors remain.

Required: (a)Define inherent risk (2 marks). (b)Discuss the factors that will increase the inherent risk of MHB (8 marks),