You are the auditor for Mega Ltd and you are currently planning the audit for the year ended 31 December 2019 Mega mainly produces and sells products made from imported timber. Over the past few years, Mega had increased its product range to include premium children's garden swings and jungle gyms, which are sold with an 8-year guarantee. The majority of Mega's customers are from the domestic (local) market, but the company also has a small export market which has been expanding steadily over the last few years. During the recent planning meeting with the finance director, the following matters were discussed:

Operating activities

Mega's revenue increased by 20% and the gross and operating profit increased by 5% and 3% respectively during the year. Due to the increase in revenue, the inventory and trade receivable balances are significantly higher than the previous year. In recent years, an online ordering system was set up for customers to make purchases through the company's website. Although sales made through this channel have been increasing steadily, it still only represents a small percentage of the total sales. Nevertheless, in order to maintain its speed and ease of use for customers, the company continues to invest significant sums in the website.

Payroll

Payroll processing, which had been outsourced for many years, was brought back in-house from 1 March 2019 with the successful implementation of a new computer system two years ago. This is largely due to the management being unhappy with the service provided by the external payroll company and therefore, cancelled the contract with the payroll company. Additional staff have been hired to process the payroll in-house.

Managing director (MD)

The MD has announced his intention to sell all his shareholding in Mega in order to concentrate on his other business interests. He is currently negotiating with a potential buyer for his shares. Required

a) Using the information provided above, discuss FIVE (5) audit risks and outline the auditor's response to each risk. (15 marks)

b) Advise FIVE (5) substantive procedures the auditor should perform to confirm the accuracy and completeness of Mega's payroll charge. (5 marks)

c) Discuss what is meant by materiality and explain its impact on an audit. (5 marks) [Total: 25 marks]