Case 10

Please answer the question below

You have been given the information below for one of your audit clients: "In the next year, the company intends to undertake a stock exchange listing. The company has spent $2m on the development of new product lines which is included within intangible assets. Additionally, it purchased and installed a new manufacturing line. All costs, incurred in the purchase and installation of that asset, have been included within property, plant and equipment. In order to finance the new manufacturing line, the company issued $3m of irredeemable preference shares. The company offered extended credit terms to its customers. In addition, it provided a 'price promise': that it would match the prices of any competitor for similar products purchased within one month of the date of purchase. During the year, a product recall has been initiated for one product as a result of faults in the production process.

Required

Using the information provided, describe Five situations where audit risks are existed and explain the auditor's response to each risk in planning the audit process. Note: Prepare your answer using three columns headed The Issue, Audit risk and Auditor's response respectively.