$ Symbol Highlight + This scenario relates to four requirements. It is 1 July 20X5. Your firm, Hercules & Co, has recently won the audit of a new client, Knight Electronics Co, for the year ending 30 September 20X5. Knight Electronics Co sells products enabling 'smart building' systems which allow customers to efficiently control their security, lighting and networking needs. The audit manager held a preliminary meeting with the finance director and has provided you with the following notes: Planning meeting notes Since its launch five years ago, Knight Electronics Co has experienced high levels of growth such that the founder and CEO, William Knight, is considering a stock exchange listing next year. Knight Electronics Co has both corporate and domestic customers. On 1 October 20X4 Knight Electronics Co began to offer customers the option to purchase a three- year servicing agreement. This provides three annual services for products purchased. Customers pay for the servicing agreement in full at the start of the agreement. Component parts are purchased from a number of suppliers. Prices of components have been steadily increasing over the past two years leading to a reduction in the gross profit margin. The forecast financial statements for the year ending 30 September 20X5 show inventory valued at cost. In June 20X5, Knight Electronics Co decided to revalue its premises, which had previously been accounted for using the historic cost model. Properties with a carrying amount under the cost model of $3.8m were revalued to $8.4m based on a valuation performed by management. The finance director also carried out an extensive review of non-current asset lives and decided to extend the useful life of plant and equipment from five years to eight years. In May 20X5, defective equipment used by Knight Electronics Co resulted in a small fire at its premises. The company has commenced legal action against the supplier of the equipment. Knight Electronics Co's lawyers have advised that the legal action is likely to be successful and, as a result, the finance director has included a receivable for the damages likely to be received from the supplier in the forecast financial statements. An instance of payroll fraud was also discovered during the year. A payroll clerk had set up a number of fictitious employees and the wages were then paid into the clerk's own bank account. Controls have now been implemented to prevent this from re- occurring and the clerk involved no longer works for the company. However, the audit manager is concerned that additional fraud may have taken place in the payroll department prior to the controls being implemented. William Knight would like the audit to be completed by 31 October 20X5. Help (b) Describe EIGHT audit risks and explain the auditor's response to each risk in planning the audit of Knight Electronics Co. (16 marks) D A Paragraph Audit risk QBIU X2 X2 USX2 Ix == Auditor's response