You are the ABC's senior auditor assigned to audit AAC as of 30 June 2020. AAC manufactures and sells mainly men's and women's wallets, which are produced at its Malaga factory in Perth and sold by retail outlets in Osborne. 45% of AAC's sales come from three contractors in Western Australia, Kalgoorlie, Leinster and Margaret River. AAC is listed on the Australian Stock Exchange. In recent years, AAC has found it difficult to meet its projected profit forecasts due to new local competitors, competition from imported products and online shopping; the ever-higher Australian dollar; and the impact of the new crown pneumonia citation and the global economic crisis on consumer spending. During the planning and risk assessment phase of the audit, there was a need to understand. 1. AAC had obtained a large loan from the bank. The bank was concerned about AAC's ability to meet specific loan covenants, particularly the return on total assets (net profit/total assets).

2. retail customers in Osborne Park are paying for goods with cash or credit cards. Contractors may purchase merchandise on credit, subject to approval by the credit manager of the contractor's credit familiarity. After credit approval, the Sales Associate and Accounts Receivable Supervisor file pre-numbered charge sheets to establish accounts receivable.

3. The aged trade receivables list shows that the percentage of receivables over 90 days rose from 15% to 42% in the most recent 12 months. The credit manager indicated that it was because some of AAC's customers were currently experiencing financial difficulties.

4. The Accounts Receivable Supervisor independently verifies pricing and other details on fee schedules, corrects errors, prepares invoices, and supervises a part-time employee who mails invoices to contractors by reference to a price list authorized by management. The Accounts Receivable Supervisor electronically posts details of invoices to the Accounts Receivable subsidiary ledger; at the same time, transaction details are transmitted to the bookkeeper. The Accounts Receivable Supervisor also prepares a monthly computer-generated Accounts Receivable subsidiary ledger without reconciliation to the Accounts Receivable control account and prepares a monthly report of past due accounts.

5. The bookkeeper receives transaction details from the Accounts Receivable Supervisor and the Cashier and records them in the journal and general ledger. After recording the remittance advice received from the cashier, the bookkeeper electronically transmits the remittance information to the Accounts Receivable Supervisor for updating the ledger. The bookkeeper sends outstanding monthly statements to the contractor upon receipt of the monthly past due balance report from the Accounts Receivable Supervisor. The bookkeeper authorizes the accounts receivable supervisor to write off uncollectible accounts six months after the initial past due notice is sent and notifies the credit manager not to grant further credit to the contractor.

6. In order to reduce costs, AAC switched a major leather supplier to a cheaper overseas supplier in February 2020. However, the number of product returns has increased since April 2020, and your discussions with management indicate that the returns involve customer complaints about product quality.

7. Your review of PML's payroll system indicates that when an employee is hired or terminated, the payroll clerk immediately prepares documentation and enters the information into a master file in the payroll computer system.

Prepare a memorandum to the Audit Manager, outlining your risk assessment relating to PML. When making your risk assessment:

(a) Identify and describe the inherent risk, control risk, and fraud risk factors affecting PML.