Niagara Dairy is a boutique cheese maker based in the Niagara region of Ontario. Over the years, the business has grown by supplying local retailers and, eventually, by exporting cheese products. In addition, there is a "farm-gate" shop and caf located next to the main processing plant in Niagara-on-the-Lake, which serves tourists who also visit other specialist food and wine businesses in the region. Quality control over the cheese manufacturing process and storage of raw materials and finished products at Niagara Dairy is extremely high. The company is committed to high quality control because poor food-handling practices could cause a drop in cheese quality or contamination of cheese products, which 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 Niagara Dairy since it was established. Jim Bannock has a natural flair for sales and marketing but is not as 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 accounts receivable 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, Caf Consulting, which provides contract staff for the caf business at Niagara Dairy.

Which of the following are inherent risk factors?

• Cheese is perishable, suggesting a high risk of spoilage, affecting inventory valuation.
• It is a boutique cheese operation with highly skilled processes requiring skilled staff.
• Export sales and foreign exchange transactions mean complicated transactions with a risk of incorrect pricing.
• Effective quality control over cheese operations, affecting saleability of product.
• There is a lack of communication between Jim and Bob and other staff, affecting efficiency and effectiveness of management.
• A heavy reliance on export sales increases the vulnerability of the business to this source of revenue, and potential difficulty making product available to meet this demand.
• Often different prices are offered to different clients.

Which of the following is true with respect to the auditor's assessment of audit risk for Niagara Dairies?

• If inherent risk is high and control risk is high, then detection risk is low.
• If inherent risk is low and control risk is low, then detection risk is high.
• If inherent risk is low and control risk is low, then detection risk is low.
• If inherent risk is high and control risk is high, then detection risk is high.
• If the risk of material misstatement is high, the auditor will plan a substantive audit.
• If the risk of material misstatement is high, the auditor will plan a combined audit.