Question: You are an audit senior with Crampton and Hasaad and you are planning the audit of Mining supplies LTD (MSL) for the year ended 30 June 2015. MSL sells mining equipment and spare parts to mining companies across Australia. MSL has operational centes in Perth, Newcastle, and Mt. Isa. Each operational centr warehouses the equipment and spare parts and provides sales and maintenance services. MSL's head office is located in Melbourne where finance, IT and other corporate services are provided.
MSL has equipment purchase order contracts with a number of manufacturing suppliers based in Europe, Us and China. These manufactures build the specialised, made- to-order equipment and spare parts and ship them to MSL's operational centrs.
Each item of equipment purchased by a customer comes with a two-year spare parts and labour warranty from MSL. The warranty entitles the customer to a maximum of one free maintenance service per year during the warranty period.
Depending on the type of equipment and customer's location, a maintenance service can take between one day and one week. MSL uses contracted mobile mechanics who travel to the customer's location to carry out all maintenance services. Some services require the mechanic to travel long distances, due to the remote locations. Any maintenance services that are inside that are outside the warranty conditions are billed to the customer. The billing covers a daily labour rate for the mechanic's time, any parts replaced and reimbursement for travel, accommodation and living expenses incurred by the mechanic.
Required: (a) In relation to the purchasing of equipment and spare parts, describe two business risks to MSL that Crampton and Hasaad will consider in planning the 2015 audit.
(b) For each business risk identified in (a) describe a specific audit risk that could arise. Each responses should include the identification of account balances that are impacted directly by the audit risk.