In every audit engagement, the auditors should identify fraud risks that may require an audit response. Described below are two circumstances or factors that may create an increased risk of material misstatement of the financial statements due to fraud.

1. The compensation of management of a subsidiary of the client is heavily dependent on the net income of the subsidiary and controls over subsidiary management are weak.

3. A chain discount markets has inconsistent profit margins across stores as indicated by analytical procedures.

Required:

a. For each of the two circumstances above, indicate the fraud risk that the auditors should consider.

b. For each of the two circumstances above, indicate a possible appropriate response by the auditors.