(a) 
Component of audit risk
Explanation of audit risk 2
Explanation of components of audit risk: Inherent, control and detection risk 3
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5

(b) Audit risks and responses (only 7 risks required)
$5 million expenditure on production process 2
Inventory counts at 15 warehouses at year end 2
Treatment of owned v third party warehouses 2
New general ledger system introduced at the beginning of the year 2
Release of opening provision for allowance for receivables 2
Research and development expenditure 2
Damaged inventory 2
Sales returns 2
Management bonus based on asset values 2
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Max 7 issues, 2 marks each

14

(c) Audit strategy document
Main characteristics of the audit 1
Reporting objectives of the audit and nature of communications required 1
Factors which are significant in directing the audit team’s efforts 1
Results of preliminary engagement activities and whether knowledge gained on other
engagements is relevant 1
Nature, timing and extent of resources necessary to perform the audit 1
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Restricted to 4