AFM312
Laura Beattie 220109075
Word count
1780
Question 1
a) Identify the factors that would affect the preliminary assessment of inherent risk and control risk at Queen Island Dairy.
The preliminary assessment of risk, also known as the risk assessment phase, is the initial step in an audit that includes gaining an understanding of the client and identifying potential risk factors whilst developing an audit strategy and setting planning materiality. There are three key steps in the risk assessment phase, being; gaining an understand of the client, identifying potential risks and strategies to prevent or control such risks, and risk and materiality assessment. As by this definition there are a few identifiable risks within Queen Island Dairy.
Inherent risk is the susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming there are no related controls.
Control risk is the risk that a client’s system of internal controls will not prevent or detect a material misstatement.
Upon a preliminary assessment it appears that the manufacturing process of Queen Island Dairy is upheld to an extremely high standard. This is evidenced through dedicated staff, high product quality, and extremely high standards of food handling and storage. This aspect of Queen Island Dairy has less apparent inherent and control risk than the paperwork side of the business. It has been suggested that Jim Bannock has been poorly documenting some business processes and disputes with customers, making frequent adjustments to debtor accounts using credit notes to deal with customer complaints (which is not the correct way to deal with customer complaints). This suggests an apparent increase in inherent and control risk within the business, as there do not appear to be any preventative measures in place that would help to reduce inherent and control risk from occurring. Also there is a lack of
Bibliography: Accounting Simplified. (2013). Assertions in the Audit of Financial Statements. Retrieved September 14, 2014, from Accounting-Simplified: accounting-simplified.com/audit/introduction/audit-assertions.html Moroney, R., Campbell, F., & Hamilton, J. (2014). Auditing A Practical Approach (2 ed.). Milton, QLD, Australia: John Wiley & Sons Australia, Ltd. PCAOB. (2010). Auditing Standard 15. Retrieved September 14, 2014, from Public Company Accounting Oversight Board: pcaobus.org/standards/auditing/pages/auditing_standard_15.aspx