Reference no: EM132702296

You are an Audit Senior on the KESOMSU Ltd (KESOMSU) audit engagement for the financial year ending 31 December 2018. KESOMSU specialises in the design and manufacture of implantable hearing aids and invests more than twice the industry average in research and development. While undertaking audit planning procedures you become aware of the following: KESOMSU has been developing its latest hearing implant, the X5, for a number of years. KESOMSU has invested heavily in research and development of the X5 and has capitalised a significant amount in relation to the development phase of the product. Market studies and prototypes of the X5 have proved successful for bringing it to the market. In July 2017, KESOMSU acquired two technologically advanced machines specifically designed for manufacturing the X5, at a cost of $15 million each. Production and sales of the X5 hearing implant commenced in October 2017, and demand for the product has been extremely high since its launch. KESOMSU has sold large volumes of the product and further manufactured a large stockpile of the X5 in anticipation of on-going high demand, and a substantial number have already been implanted in patients. There has recently been a sharp increase in incidences of the implant shutting down postsurgery, resulting in a number of patients commencing legal action against KESOMSU for damages and prompting the company to initiate a recall. Initial investigations reveal that the defect is attributable to a design flaw. It is likely that the product in its current form cannot be sold. Management of KESOMSU is confident that it will be possible to re-engineer the two machines acquired for the manufacturing of the X5 to enable production of its four other product lines and potentially for other products currently under development. You have raised concerns with KESOMSU's audit committee on improving the competence and objectivity of the internal audit department. Currently, the internal audit department is made up of three recent graduates with no prior experience who periodically report the Kesomsu's Chief Executive Officer Dr. David Collin.

Work out a memorandum to the audit manager, outlining your risk assessment relating to KESOMSU Ltd. When making your risk assessment

Question (a) Identify three (3) key account balances from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the three (3) accounts identified. In your explanation, please mention the key assertion(s) at risk of material misstatement.

Question (b) Identify how the audit plan will be affected and recommend specific audit procedures to address the risks associated with each account identified.