Question 3 (8 marks)You are an assurance services senior at Bailey & Associates and have noted the followingindependent issues in relation to the audit of Sleek Ltd:(i) The accounting system at Sleek Ltd did not operate effectively during the first year ofoperations. Consequently, some general ledger accounts had to be based on estimates, asthe actual data relating to these balances had been lost.(ii) As a result of cost constraints, the directors of Sleek Ltd did not implement effective internalcontrols for debt collection. The debtors turnover is 3.2 times.(iii) Due to increased competitive pressures, Sleek Ltd has recently moved the manufacture ofsome of its clothing lines out of Melbourne into regional areas. While Sleek Ltd savesaround 20% in costs, the manufacturing process takes longer and on several occasions latedelivery has resulted in lost sales.Required: Explain the impact of each of these separate issues on your assessment of audit risk, themateriality level and the audit strategy that would be adopted. Question 4 (8 marks)You are the audit senior on the audit of Harmony Pty Ltd, a large manufacturing company, for the year ended 30 June 20X7. It is now 25 August, 20X7 and you are reviewing the audit working papers prepared by the audit assistant, Susan Jones, and notice the following matters:

(a) Susan attended the stocktake on 30 June and observed that the client followed the stocktake instructions. She selected numerous items for test inventory from the clients inventory sheets and all were found to be correct. Cut-off details were noted and subsequently checked and found to be correctly treated. Susan concluded that inventory was fairly stated.

(b) Susan selected 20 invoices to test the control that the sales clerk checks that the prices agree with the authorised price list. She found 3 instances where the sales clerk had not signed the prices checked box in the invoice. The sales manager explained that the sales clerk always checks the prices but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list, Susan concluded that the control was operating satisfactorily.

(c) As part of her work on subsequent events, Susan noted that there were a large number of returns in July of Product 75L. However, as this product was first sold in June and represented only 1% of sales for the year, Susan concluded that the amount was immaterialand no further work was necessary.

d) Advertising expenses are material, although only 50% of last years balance. Susan selected a large sample of entries and agreed them to supporting documents. No errors were found. Susan concluded that advertising expenses was reasonable