You have recently been appointed as the external auditor of 123 Limited, a manufacturer of refrigeration and air conditioning units. It is six months until the company’s year end. 123 Limited had appointed another audit firm at the previous annual general meeting, but that firm has recently resigned. You are the audit senior in the team that will audit 123 Limited for the year ended 31 December 2019.

A junior member of your audit team has identified a number of issues at 123 Limited; however, she is unsure of what impact these will have on the risk based audit approach.

The issues are:

1. 123 Limited operates in a very competitive market with other ten companies. 2. There has been a high turnover of staff within both the finance and operational departments.

3. 123 Limited is hoping to expand the business through acquisition and aggressive sales and marketing targets.

4. The company has been operating close to its overdraft limit for at least two years.

5. The directors are also in the process of preparing an application for a substantial loan. A preliminary analytical review indicates a good year for 123 Limited, despite the market for their product, as a whole, dropping.

REQUIRED:

(a) Explain what you should do before accepting the audit engagement from 123 Limited.

(b) Identify and explain SIX audit risks that exist in the operations of 123 Limited?

(c) Explain why it is not possible to eliminate audit risk completely.