You are an Audit Senior currently planning the 30 June 2017 audit of Pearl Technology Limited (Pearl), an Australian-owned company that is a manufacturer of computer hardware. You note the following situations relating to Pearl.

2. Pearl has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in Pearls operations and consequently margins have been falling. Over the last 2 months, warranty claims on Pearls best-selling product line, M4 has increased from 1.5% to 4.5% of sales. The average cost of repair has risen by 20% to $200 per claim. While the bankers are presently happy to continue providing Pearl with loan facilities, they do expect to see improved results in the next financial report.

Required: 1.

For each of the above situations relating to Pearl Technology Limited, answer the following:

(a) Identify and discuss why the above situation represents a risk.

(b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan.

(c) Identify how the audit plan will be affected by the risks and recommend specific procedures to address these risks. (12 Marks)