Inherent risk during auditing refers to the risk that an important financial misstatement will happen and the management of the business or firm takes to measures to control it. A detection risk to an auditor refers to the risk that a material misstatement has occurred in the financial statements of a business or firm but the tests or procedures established by an auditor to detect and assess those risks have not been able to identify those material misstatements. Control risk, on the other hand, refers to the chance that a misstatement in the financial statements of the business or firm has occurred which is very material but could not be prevented, detected nor corrected on time because of the nature of the accounting as well as internal control systems of the business or the firm (Statement of Auditing Standards, 2004). Looking at the definitions of the various risks associated with auditing, a few factors can be deduced that could affect the preliminary assessments of inherent and control risks during an audit at Queen Island Dairy: Inherent risk; In the assessment of inherent risk, an auditor focuses mainly on the financial statements of the company looking at the account balances as well as the various classes of transactions that are material.
Factors that should be considered which affect the preliminary assessment of inherent risk could include; the management’ s integrity, the experience and knowledge or lack of experience and knowledge of the manager, changes in management systems during the financial period, unnecessary pressure on management, nature of the business, external environmental factors influencing the business operations, transactions that are complex in nature, nature of financial statements and their susceptibility to being misstated, level of judgment when dealing with account balances and nature of transactions among others (Houghton and Fogarty, 1991). Looking at Queen Island Dairy factors that will affect the assessment of inherent risks during the audit process will therefore be; lack of experience and knowledge in one of the managers (Jim Bannock) as well as integrity given that he makes decisions that affect the business without consulting his brother as well as other managers in the business especially in the sales department.
Lack of communication on Jim’ s part makes it difficult for the preparation of final financial statements since not all information is provided.
Jim is also prone to making changes in the business such as making offering different prices for different customers on the same products. There is also a lack of integrity because Jim barely makes time for the business given that he has another business to take care of outside the Queen Island Dairy though his side benefits from the Queen Island Dairy. There is a certain level of the doubt when it comes to the determination of account balances given that Bob Bannock may force the account and finance department to manipulate the figures to ensure that the business seems profitable.
The kind of problems being caused by Jim to the business is very risky to the future of the business and the relationship of the business with various stakeholders so there is a chance that some information especially damning information brought about by Jim’ s inappropriate behaviors may be omitted making it impossible to make a proper judgment on the business’ progress. Control Risks; Factors that could affect the preliminary assessment of control risks include; Jim does not conduct business transactions for Queen Island Dairy in accordance with the authorization of the business’ s management.
He offers different prices for different customers, he does not inform others of the decisions he makes, and also he does not make proper entries of the transactions he conducts.
Houghton, C.W., and J. A. Fogarty. (1991). Inherent Risk. Auditing: A Journal of Practice and , pp. 1-21.
Statement of Auditing Standards, (2004). Audit Risk Assessments and Accounting and Internal Control Systems. Pp. 1-12. Statement of Auditing Standards 300.
Waller, W, S. (1993). Auditor’s Assessments of Inherent and Control Risks to Audit Adjustments. Journal of Accounting, Auditing and Finance, pp. 459-484.