QUESTION 5 (18 marks - 6 marks each scenario] lan Hammo is an audit senior at Datt & Prasad, 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: (1) Identify the impact (i.e. 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. Audit risk NB: The situations are independent of each other and are to be treated separately in your answers Prime audit assert Impact on the Prime Best audit Description of audit risk component of audit assertion(s) procedure to risk affected (1 mark) (1 mark) and reduce risk (2 and explanation as to key account marks) why it is an audit risk balance(s) (1 mark) affected (1 mark) (a) A subsidiary of the client is Estate Jewellers Ltd. The company specialises in jewellery from deceased estates, purchases pieces at auction, cleans and remodels them and then sells them to the general public. At year- end, Estate Jewellers expects to have around 2,000 pieces of jewellery on hand, ranging from small items worth $50 to more expensive items worth over $10,000. No two items of jewellery are the same. Because of the complex nature of the inventory, Estate Jewellers engaged an expert to provide year-end valuation report. The expert used the client's inventory price list and amended according to his estimate of the (lower of cost or net realisable) value of each item. a Impact on the component of audit risk affected (1 mark) and explanation as to why it is an audit risk (1 mark) Description of audit risk Prime assertion(s) (1 mark) and key account balance(s) affected (1 mark) Best audit procedure to reduce risk (2 marks) the (b) A subsidiary of the client manufactures and sells small tools. Notes in the working papers regarding controls included following observations: The client's software doesn't allow a sale to be made unless a credit manager approves the sale with a credit check authorisation number to be included in the sale transaction. All new customers need to be approved before a debtor account can be opened, and the account has to be open before a sale can be processed to that customer. The system would prevent a sale being made if the sale took the account balance beyond the approved credit limit, unless authorised by the credit manager. (c) In auditing the client's accounts payable processes, the audit manager has noted in the working papers that the client requires (1) the supplier code and invoice number to be input at time of processing payment, and (2) reconciliation of supplier accounts each month with an emphasis on detecting debit balances (.e. accounts more payments than invoices). with