(b) Alpha Manufacturing Ltd. (AML) is engaged in the production of speciality machinery for the automotive industry. The company operates in a…

(a) (i) Responses to the Assessed Risks of Material Misstatement due to Fraud at the Financial Statement Level: In determining overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level, the auditor shall: (a) Assign and supervise personnel taking account of the knowledge, skill, and ability of the individuals to be given significant engagement responsibilities and the auditor's assessment of the risks of material misstatement due to fraud for the engagement; (b) Evaluate whether the selection and application of accounting policies by the entity, particularly those related to subjective measurements and complex transactions, may be indicative of fraudulent financial reporting resulting from management's effort to manage earnings; and (c) Incorporate an element of unpredictability in the selection of the nature, timing, and extent of audit procedures. (ii) Audit Procedures Responsive to Assessed Risks of Material Misstatement due to Fraud at the Assertion Level: (a) The auditor shall design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement due to fraud at the assertion level. In doing so, the auditor may change the nature, timing, and extent of audit procedures to obtain audit evidence that is more reliable and relevant or to obtain additional corroborative information. (b) If the auditor identifies that management is under pressure to meet earnings expectations, there may be a related risk that management is inflating sales by entering into sales agreements that include terms that preclude revenue recognition or by invoicing sales before delivery. (i) In these circumstances, the auditor may, for example, design external confirmations not only to confirm outstanding amounts, but also to confirm the details of the sales agreements, including date, any rights of return, and delivery terms. (ii) In addition, the auditor might find it effective to supplement such external confirmations with inquiries of non-financial personnel in the entity regarding any changes in sales agreements and delivery terms.