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Determiningan audit strategy: QueenIsland 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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Determiningan audit strategy:

QueenIsland Dairy is a boutique cheese maker based on queen island. Over the years,the business has grown firstly by supplying local retailers, and then throughexports. In addition, there is a “farm gate” shop and café located next to themain processing plant on queen island, serving tourist who also visit the otherspecialist food and wine businesses in the region. Quality control over thecheese manufacturing process and storage of raw materials and finished productsat Queen Island Dairy is extremely high. All members of the business arecommitted to high product quality because any poor food handling practiceswhich could result in a drop in cheese quality or contamination of the productswould ruin the business very quickly.

The exportarm has been built up to become the largest revenue earner for the business bythe younger of the two brothers who have run queen island dairy since it wasestablished. Jim Bannock has a natural flair for sales and marketing, but isnot so good at completing the associated detailed paperwork. Some of the exportdeals have been poorly documented and Jim often agrees to different prices fordifferent clients without consulting his older brother, bob, or informing thesales department. Consequently, there are often disputes about invoices and Jimmakes frequent adjustment to debtor accounts using credit notes when clientscomplain about their statements. Jim sometimes falls behind in responding tocustomer complaints because he is very busy juggling the demands of makingexport sales and running his other business, café consulting, which providescontract staff for the café business at Queen Island Dairy.

Requires:

a/identify the factors that would affect the preliminary assessment of inherentrisk and control risk at queen island dairy

b/explain how these factors would influence your choice between the predominantlysubstantive approach and the lower assessed level of control risk approach forsales, inventory and debtors.

Answered Same DayDec 29, 2021

Solution

David answered on Dec 29 2021
36 Votes
A) Identify the factors that would affect the preliminary assessment of inherent risk and control
isk 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. Account balances...
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