Explain FIVE audit risks, and the auditor’s response to each risk, in planning the audit of Eagle Heating Co.

You are the audit supervisor of Seagull & Co and are currently planning the audit of your existing client, Eagle Heating
Co (Eagle), for the year ending 31 December 2014. Eagle manufactures and sells heating and plumbing equipment
to a number of home improvement stores across the country.
Eagle has experienced increased competition and as a result, in order to maintain its current levels of sales, it has
decreased the selling price of its products significantly since September 2014. The finance director has informed your
audit manager that he expects increased inventory levels at the year end. He also notified your manager that one of
Eagle’s key customers has been experiencing financial difficulties. Therefore, Eagle has agreed that the customer can
take a six-month payment break, after which payments will continue as normal. The finance director does not believe
that any allowance is required against this receivable.
In October 2014 the financial controller of Eagle was dismissed. He had been employed by the company for over
20 years, and he has threatened to sue the company for unfair dismissal. The role of financial controller has not yet
been filled and so his tasks have been shared between the existing finance department team. In addition, the
purchase ledger supervisor left in August and a replacement has been appointed in the last week. However, for this
period no supplier statement reconciliations or purchase ledger control account reconciliations were performed.
You have undertaken a preliminary analytical review of the draft year to date statement of profit or loss, and you are
surprised to see a significant fall in administration expenses.
Required:
Explain FIVE audit risks, and the auditor’s response to each risk, in planning the audit of Eagle Heating Co.
(10 marks)

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