Final answer:
Inherent risk and control risk are factors considered during the preliminary assessment of risk at Avery Island Dairy. Factors affecting the assessment include the nature of the business, regulatory environment, and management integrity.
Step-by-step explanation:
Inherent risk and control risk are two key factors considered during the preliminary assessment of risk at Avery Island Dairy. Inherent risk refers to the susceptibility of financial statements to misstatements or errors caused by various factors, such as the nature of the business, industry regulations, and management integrity. Control risk, on the other hand, pertains to the effectiveness of internal controls in preventing or detecting and correcting material misstatements in financial statements.
Several factors can affect the preliminary assessment of inherent risk and control risk at Avery Island Dairy:
- Nature of the business: The specific industry and nature of operations at the dairy may introduce unique risks. For example, if the dairy is located in an area prone to natural disasters, such as hurricanes, there may be a higher risk of inventory or property damage.
- Regulatory environment: Dairy operations are subject to various regulations regarding food safety, labeling, and environmental requirements. The level of compliance with these regulations can impact the control risk assessment.
- Management integrity: The ethical behavior and competence of management play a crucial role in assessing control risk. If management is known to have a history of financial misconduct or lack of oversight, it increases the risk of control failures.