JJ Hi-Fi Limited (JJH), an Australian listed company, has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in JJH's operations and consequently margins have been falling. Over the last 2 months, warranty claims on JJH's best-selling product line, M4 - a ‘no frills' microwave oven, have increased from 1.5% to 4.5% of sales. This problem appears to relate to the glass turntable, which shatters if the oven is constantly used. The average cost of repair has risen by 20% to $200 per claim. While the bankers are presently happy to continue providing JJH with loan facilities, they do expect to see improved results in the next financial report.
Required for the above independent situations, answer the following:
(a) Identify and discuss why the above situation represents a risk.
(b) By applying auditing knowledge, identify the main account or group of accounts affected by this risk in the audit plan.
(c) Identify how the audit plan will be affected by the risks and recommend specific audit procedures to address these risks.