Mark Fay is an audit senior at Holden & Ford, 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:

(i)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.

NB: The situations are independent of each other and are to be treated separately in your answers.

(b) The client changed its manufacturing processes last year and now uses cheaper components in order to reduce production costs. Sales quantities and prices have not been affected by this, but they have been experiencing an increase in warranty claims for product repairs. The client has recently increased its warranty provision account by 10% in anticipation of more claims.

(c) While 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 monthwith an emphasis on detecting debit balances (i.e. accounts with more payments than invoices).