Question 5 [10 Marks] Jonny Depp an audit senior at Amber Heard Pty Ltd, a large international audit firm. He has been asked by the audit partner to evaluate the following audit risks of a major international client. For each of the audit risks described below complete the following: (0) Identify the impact (ie, increase or decrease) on the component(s) of audit risk affected and explain why it is an audit risk; and (ii) Identify the prime audit assertion(s) to be tested and the key account balance(s) affected; and (iii) Identify the best audit procedure you would use to reduce the risk of material misstatement. NB: The situations are independent of each other and are to be treated separately in your answers. Situation 1 As part of the business risk assessment for a major audit client, the auditor reviews monthly newsletters of the client and discovered that six weeks prior to year-end, the payroll manager was dismissed because it was discovered he had included his wife and daughter on the payroll for the past five years. They hadn't worked there at all. Identify the impact Explain why it is an Identify the prime Identify the best "(i.e., increase or audit risk. (1/2 assertion(s) (1/2 audit procedure decrease) on the mark) components of the mark) to be tested and the key account balance(s) you would use to reduce the risk of material affected (1/2 mark misstatement (1 each) mark) audit risk (1/2) mark) Situation 2 10 Your client changed its manufacturing processes last year and now uses cheaper components to reduce production costs. This change has not affected sales quantities and prices, but they have been experiencing an increase in warranty claims for product repairs. The client has recently increased its warranty provision account by 10% in anticipation of more claims. Identify the impact Explain why it is an Identify the prime Identify the best (i.e., increase or audit risk.. (1/2 assertion(s) (1/2 audit procedure mark) to be tested you would use to decrease) on the mark) components of the and the key reduce the risk of audit risk (1/2 mark) account balance(s) material affected (1/2 mark misstatement (1 each) mark) 11 Question 3 [10 Marks - 1/2 Mark each test] Listed below are assertions for transactions and accounts. Provide details of two completely different types of tests that an auditor can undertake to gain appropriate evidence about each assertion. (i)) Existence of Inventory (ii) Rights and obligation of Accounts receivable (iii) Completeness of payroll expenses (iv) Cut-off of repairs and maintenance expense (v) occurrence of sales TESTING AN AUDITOR CAN UNDERTAKE TO GAIN APPROPRIATE EVIDENCE ABOUT THE ASSERTION 8