You have recently been appointed as the external auditor of MCL Ltd (MCL). In order to gain an understanding of the nature of the business and to plan the audit as required by ASA315, you visit the business and make some enquiries. During these activities, you discover the following:

1. MCL is an Australian based manufacturer of medical equipment. It is listed on the local stock exchange. The Chairperson is an experienced company director who has been working in the medical industry for more than 20 years.
2. MCL has set up an audit committee comprising five executives and two independents. The two independent members are a retired medical doctor and finance manager. The internal audit team is comprised of three auditors.
3. An increase in competition from overseas medical equipment manufacturer has seen a steady decline in MCLs market share. You note that the Chairperson has been working with the executives to introduce a number of initiatives aimed at improving the situation. The initiatives seem to be working as the companys market share has stabilised.
4. One of the initiatives is the provision of 24 hours repair and maintenance services of the equipment. Under this initiative, MCL would contract another company for the purpose of providing on-call repair and maintenance services to its customers. Management admit that this has the potential to affect the companys reputation if the services are of poor quality or are not completed within a specific timeframe.
5. Another initiative is to offer scaling discounts to corporate customers. It means customers get a bigger discount when ordering larger quantity. Management believe that this initiative helps to build brand loyalty which would be beneficial to the company in the long term. The issue with this initiative is that MCL would have to set up different discount rates in the system.
6. All accounting functions are carried out by a team of accountants. The accountants are trained to perform tasks specific to their roles. Accountants learn new tasks upon taking on new roles. The Finance Manager approves all the forms and schedules prepared by the accountants.
7. On examining MCLs annual plan, you note that the companys revenue is budgeted to increase by 10 per cent this year whilst expenditure is expected to increase by eight per cent. You believe that the budget estimates are realistic.
8. In the first six months of the financial year, MCL recorded higher than expected discount expenses. The Chairperson told you that the increase is within budget. In addition, you noted that there have been complaints by customers that repair and maintenance services were not of a high quality or within a reasonable time as per MCLs promises.

Required:

Apply the audit risk model to the audit of MCL as a whole, and:

1. State the qualitative level you would assign to each of the four elements of the model and why. (8 marks)
2. State the level of evidence required based on your assessment of audit risk in (a). (1 mark)
3. Identify and discuss two (2) key risk areas you would concentrate your audit effort on. Explain why you have selected these areas. (1 mark)