Determining
an audit strategy:
Queen
Island Dairy is a boutique cheese maker based on queen island....

Question

Determining
an audit strategy:
Queen
Island Dairy is a boutique cheese maker based on queen island. Over the years,
the business has grown firstly by supplying local retailers, and then through
exports. In addition, there is a “farm gate” shop and café located next to the
main processing plant on queen island, serving tourist who also visit the other
specialist food and wine businesses in the region. Quality control over the
cheese manufacturing process and storage of raw materials and finished products
at Queen Island Dairy is extremely high. All members of the business are
committed to high product quality because any poor food handling practices
which could result in a drop in cheese quality or contamination of the products
would ruin the business very quickly.
The export
arm has been built up to become the largest revenue earner for the business by
the younger of the two brothers who have run queen island dairy since it was
established. Jim Bannock has a natural flair for sales and marketing, but is
not so good at completing the associated detailed paperwork. Some of the export
deals have been poorly documented and Jim often agrees to different prices for
different clients without consulting his older brother, bob, or informing the
sales department. Consequently, there are often disputes about invoices and Jim
makes frequent adjustment to debtor accounts using credit notes when clients
complain about their statements. Jim sometimes falls behind in responding to
customer complaints because he is very busy juggling the demands of making
export sales and running his other business, café consulting, which provides
contract staff for the café business at Queen Island Dairy.
Requires:
a/
identify the factors that would affect the preliminary assessment of inherent
risk and control risk at queen island dairy
b/
explain how these factors would influence your choice between the predominantly
substantive approach and the lower assessed level of control risk approach for
sales, inventory and debtors.

David · Accepted Answer

A)  Identify the factors that would affect the preliminary assessment of inherent risk and control 
risk at Queen Island dairy 
Solution:- 
As an auditor of queen island dairy we should identify and assess the risks of material 
misstatement of the financial statement level, and at the assertion level for classes of 
transactions, account balances, and disclosures. 
Materiality of any misstatement depends upon the nature of the industry. From quantitative 
perspective the overstatement of utility expense by$400 might be a significant misstatement for 
an organization with an Sales turnover of $80000 but on the other hand this overstatement  might 
not be of great significance for an organization with the turnover of $85000000.From qualitative 
perspective the categorization of all expense up to an amount of $5200 as a general expenditure 
may not result in any fundamental misstatement for a unlisted organization whereas this may be 
a fundamental misstatement for a listed organization. 
Audit risk consists of:- 
1. Inherent Risk. 
2. Control Risk. 
3. Detection Risk.  
INHERENT RISK:- 
Inherent risk is the risk of material misstatement that can occur in Financial Statement assuming 
that there were no related internal controls. The inherent risk of misstatement is greater for 
some types of transactions or accounts than for others 
1.

Determining an audit strategy: Queen Island Dairy is a boutique cheese maker based on queen island. Over the years, the business has grown firstly by supplying local retailers, and then...

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