Question 1 a) ISA 315 (Revised) - Identifying and Assessing the Risk of Material Misstatement requires the auditor to obtain an understanding the entity and its environment. Identify the THREE primary reasons why an auditor should understand a client's industry and external environment. (3 marks) Sticks Limited has been a client of your audit firm for over five years. Below is extracts of notes taken from the planning meeting you attended with the Vice President (VP) of Finance for the year ended 31 October 2021 and financial statement extracts. The management of Sticks Lid was not pleased with the 2020 results and for the financial year 2021 took some initiatives to improve the trading results. This included the introduction of a generous sales-related bonus scheme for their salesmen and a significant advertising campaign. They have also extended the credit period given to customers. The VP of Finance calculated a few key ratios for Sticks Lid; the gross profit margin has increased from 44.4% to 52.2% and receivables days have increased from 61 days to 71 days. She is happy with the 2020 results and feels that they are a good reflection of the improved trading levels. Financial statement extracts for year ended 31 October: Income Statement Extract Draft Actual 2021 2020 $m $m Revenue 29.1 22.8 Cost of sales -13.9 -12.7 Gross profit 15.2 10.1 Operating expenses 9.5 -5.1 Profit before interest and tax 5.7 5.0 Statement of Financial Position Extract Inventory 2.7 2.0 Receivables 5.7 3.8 Cash 2.9 Trade payables 2.0 1.5 Overdraft 1.1 Required b) From the information provided identify THREE matters of concern AND describe the specific audit risks that could result from each matter that you should consider as you plan the audit of Sticks Ltd. (3 marks)c) The audit associate who is assigned to help you appears to be unsure as to which financial statement assertions is addressed by different audit procedures. Your audit file has the following audit procedures: i. Examined sales invoices to see if they were initialled by the credit manager indicating credit approval ii. Compared this year's expenses with last year's expenses and investigated unusual fluctuations. iii. Send letters to a sample of accounts receivable customers to verify whether they have an outstanding balance at 31 October 2021 iv. For a sample of sales transaction, verify that the amount of the transaction has been recorded in the correct account in the accounts receivable subledger. v. Inquire of your audit client whether accounts receivable have been pledged as collateral on a long-term debt. vi. Determine whether long-term receivables and related party receivables are reported separately in the financial statements. vii. Use audit software to total sales in the subledger for the month of July and trace it to posting in the general ledger. vili. Examine a sample of invoices to determine whether each order has been shipped, as evidenced by a shipping document number. Required State the assertion being addressed by each audit procedure above. (4 marks)