Madestone Ltd is a company based in the South of England. The company manufactures and sells agricultural machinery. The company has been trading for 50 years; the majority shareholder is the original founder of the company, Max Madestone. The remaining shareholders are all family members. Max Madestone is no longer involved in the day-to-day running of the company. His nephew Samuel Madestone is the managing director. Maxs daughter, Daisy, is the finance director (FD). Daisy is a qualified chartered accountant and has been FD of the company for almost 10 years.

Madestone Ltd prepares its financial statements each year to 31st December and has been subject to an audit for the past 20 years. During the year ended 31st December 2018 the company changed its auditor to Treby and Sons, a local six partner firm with experience in the farming industry.

Dawn Harrow is the audit partner for the audit of Madestone Ltd and from her meetings with the directors of Madestone Ltd she has learnt:

1) The most active overseas market is the US and Canada which has continued to see growth during the year ended 31st December 2018 with a 6% increase in sales compared to the previous year. The European market in contrast has struggled during the year, resulting in a 15% fall in sales compared to the previous year. The UK sales market has seen a 2% reduction in sales

2) Concerns over the uncertainties around the European market have led the company to seek to expand in other parts of the world such as Mexico and Latin America. The directors are aware that there are some large competitors already active in these parts of the world but think there is market share to exploit. Daisy and Samuel have carried out extensive research on the areas and put together a detailed business plan. They have agreed to meet with the bank once the current audit is signed off to seek funding. Treby and Sons have provided support to Madestone Ltd in preparing their business plan although Dawn Harrow has not been involved.

3) During the year ended 31st December 2018 the company signed a significant contract with a customer in Canada to manufacture and supply 100 new agricultural machines over a 5-year period.

4) Madestone has warehouses in the UK, in the USA and in Germany. Manufacturing takes place exclusively in the UK and the factory will shut down completely over the period from 24th December to 2nd January.

5) Madestone Ltd owns the factory in the UK but leases all the warehouses.

Required: a) Consider all the information above and prepare a memo detailing the potential audit risks that Dawn Harrow should consider in planning the audit of Madestone Ltd for the year ended 31st December 2018. You should explain why the issue may pose an audit risk and the additional information required or action to be taken in response to the risk. (15 marks)

b) What factors should the auditors take into account when setting the materiality level? (10 marks