Princess Island Vineyards is a boutique wine-maker based on Princess Island. Over the years, the business has grown firstly by supplying local retailers, and then through exports. In addition, there is a cellar door shop and café located next to the main processing plant on Princess Island, serving tourists who also visit the other specialist food and wine businesses in the region. Quality control over the wine manufacturing process and storage of casks and bottles at Princess Island Vineyards is extremely high.

All members of the business are committed to high product quality because any poor practices which could result in a drop in wine quality 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 Princess Island Vineyards 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 adjustments 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 Princess Island Vineyards.

Required

(a) Identify the factors that would affect the preliminary assessment of inherent risk and control risk at Princess Island Vineyards.

(b) Explain how these factors would influence the auditor’s reliance on control testing and substantive testing for sales, inventories and debtors.