Your firm has recently been appointed as auditor of Wasachi (Pty) Ltd. The previous auditor resigned from the engagement and emigrated to somewhere in India. Your firm is a medium sized firm based in Durban with three other offices in Johannesburg, Cape Town and Port Elizabeth. You performed your preliminary audit procedures before accepting the engagement. The financial year-end date is 31 March 2019. Extracts from relevant working papers follow. CLIENT Year End 31/03/2019 WP Ref PREPARED BY Wasachi (Pty) Ltd E Ring I Checked Date 17/12/2018 A 03 REVIEWED BY Date 18/12/2018 SUBJECT Background Information regarding new client Wasachi (Pty) Ltd, is a manufacturer and distributor of costume jewelry and accessories. The company sells mainly to middle - and upper-class fashionable women and men and has built up a good reputation in the market. The company's head office, design studio and factory are situated in Pinetown. The factory manufactures jewelry and leather products. The company also has a number of sales outlets in the major shopping malls throughout South Africa. The company specializes in diamonds, cubic zirconia and crystal jewelry. All the cubic zirconia's and gold are purchased locally, with most of the leather, diamond, crystal and some rare stones being imported from neighboring countries or overseas. The company has been in operation for the past ten years and sales have generally been good in the previous years. Sales during the current financial year, have however decreased substantially. 10 January 2019 Mr Shiny Stone, the company's managing director informed you that the audited annual financial statements must be available by no later than 18 April 2019 as the financial statements are urgently required by the company's bankers, Medbank. The bank is concerned about the size of the overdraft. CLIENT Year End 31/03/2019 WP Ref PREPARED BY Wasachi (Pty) Ltd E Ring I Checked Date 11/02/2019 F 07 REVIEWED BY Date 15/02/2019 SUBJECT The information system - General Ledger Identifying and assessing risks of Material misstatement: The board of directors on 6 June 2018 approved in principle the acquisition of software to replace the existing Book Keeper software which could barely cope with the large volume of inventory items, and had become inadequate for their needs. The company employed an information technology (IT) manager and two IT administrators at the beginning of the financial year. They were all hired because of their competent IT skills and to attend to looming problems with the Book Keeper software being used. We were not involved with the change-over to the new system which took place before our appointment. The conversion was handled in-house, and the new system was in operation within record time. Problems are being experienced with the accounting of certain transactions, and the accounting department is searching for and correcting errors in the accounts on a full-time basis. QUESTION THREE [20] Define audit risk and discuss the audit risks that exist in respect of the current year's audit of Wasachi (Pty) Ltd. based on all the information given in the