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 i s an Australian based manufacturer specialising in handtools. It is listed on the local stock exchange. The Chairperson is an experienced company director who has been with MCL for more than 20 years. 2.MCLs executives are experienced company directors whose appointments were made in the last 5 years. You noted that the executives possess diverse qualifications and experiences. Some of the executives came from different industries.3.An increase in competition has seen a steady decline in MCLs market shares. You note that the Chairperson has been working with the executives to introduce a number of initiatives aimed at improving the situation. The initiatives seemed to be working as the companys market share has stabilised in the last 2 years.4.One of the initiatives is the outsourcing of the manufacturing of some handtools to an overseas manufacturer. For quality control purposes, MCL regularly conduct quality control testing on a sample of handtools made by the overseas manufacturer. Handtools that fail quality control testsare investigated and returned to the overseas manufacturer.5.MCL has an Audit Committee whose members include the Chairperson and 4 Executives. There are 2 independent members on the committee. One is an Audit Partner with a major accounting firm and the other is a retired CEO. The internal audit function is outsourced to a local accounting firm. 6.All accounting functions are carried out by a team of accountants. The accountants are assigned specific tasks. The Finance Manager is responsible for overseeing the accounting team. You note that when the Finance Manager is away on company business, a Senior Accountant would be acting in his/her position. 7.On examining MCLs annual budget, you note that the companys revenue is budgeted to increase by 10 per cent this year whilst expenditure is expected to increase by only 5 per cent. You believe that the budget estimates are realistic. 8.In the first 6 months of the financial year, MCL recorded an increase in manufacturing expenditure due to unfavourable movements in the exchange rate. The Chairperson tells you not to be too concerned as movements in the exchange rate had been factored into MCLs budget. In addition, an unusual increase in faulty handtools has been recorded and MCL has sent a team of quality control personnel to the overseas manufacturer to investigate.

Required:Apply the audit risk model to the audit of MCL as a whole, and:(a)State the qualitative level you would assign to each of the four elements of the model and why. (b)State the level of evidence required based on your assessment of audit risk in (a). (c)Identify and discuss two (2) key risk areas you would concentrate your audit effort on. Explain why you have selected these areas.