Armour Inc. has been in the defense contracting business for about 22 years. From its small factory in Wales, it manufactures boots, belts, ammo holders, and assorted accessories for foot soldiers in the British Army. Raw materials are obtained from sources around the world. Armour bids on a few dozen contracts a year, winning about six. Each contract requires a certain number of items built to a well-established minimum standard. Government inspectors reserve the right to return any lot they feel does not live up to standards, at which time they may assess penalties for non-performance.

Senior management consists primarily of retired army noncommissioned officers who performed these same operations, from the military's side, when they were in the service. Although they have always enjoyed a good reputation with the military, they have expressed considerable alarm at the lack of profitability on the contracts. This is your second year as their auditor.

Discuss the factors that would affect your assessment of inherent risk for Armour Inc.