1. Which of the following is an example of an audit risk?

1. The client is being sued by a customer for a defective product and if they lose, the compensation awarded is likely to be significant.
2. The client is being sued by a customer for a defective product with the publicity of the case damaging their reputation.
3. The client will have to spend a significant amount of money on improving their quality control procedures to avoid the same defects occurring again.
4. Provisions may be understated if the probable liability resulting from the court case is not recognised in the financial statements.