Audit response

1) Audit risk is risk of incorrect cut-off which could give risk not only to misstatement (over or under) of inventory but also revenue/trade receivables (if goods going out) and purchases/trade payables (if goods coming in). Profit would clearly be overstated if items were included in the count but also sold and included in revenue for the year. The auditor’s response depends on whether it is (i) a risk for an inventory count which hasn’t taken place yet (e.g. because we’re at the interim stage and this is something that happened last year) or (ii) this is what actually happened at the year-end count. If (i) – the auditor’s response would be to help ensure it doesn’t happen (e.g. by reviewing the adequacy of the client’s count instructions and discussing with management how movements can be kept to a minimum). If (ii) – the auditor’s response would be to extend cut-off tests.
2) It is not clear to me what you mean by this
3) As stated, this is an audit risk – the auditor’s response would depend on what gave rise to the risk. If, for example, it arises because fictitious sales are made at the year end (to improve results/performance-related bonuses) the other side of the entry would be trade receivable – so the auditor’s response might be to extend testing for existence of debtors (direct confirmation) and review of credit notes issued after the year end.