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QUESTION 5 (Audit Risk) You are the audit supervisor of Delta and are currently planning the audit of an existing client, Xubasa, whose year-end was 30 June 2017. Xubasa is a pharmaceutical company which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of $35-6 million and profit before tax of $5-9 million Xubasa's previous finance director left the company in December 2016 after it was significant period of time. A new finance director was appointed in January 2017 who was discovered that h e had been claiming fraudulent expenses from the company for a usly a financial controller of a bank, and she has expressed surprise that Delta had not uncovered the fraud during last year's audit. During the year Xubasa has spent $1.8 million on developing several new products. These projects are at different stages of development and the draft financial statements show the full amount of $1.8 i million was borrowed from the bank and is due for repayment over a ten-year bank has attached minimum profit targets as part of the loan covenants. 8 million within intangible assets. In order to fund this development, $2-0 period. The The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of July over $0.5 million of goods sold in June were returned. Delta attended the year-end inventory count at Xubasa's warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled. During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of $210,000. REQUIRED (a) Explain audit risk and the components of audit risk (4 marks) (b) Describe FOUR (4) audit risks, and explain the auditor's response to each risk, in planning the audit of Xubasa (4 x 2-8 marks). Please use the following table format to answer the question in the answer booklet Audit risk Auditors response (iv) 14+8-12 marks]

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