You have graduated with your business degree and recently commenced work with a leading firm of public accountants in north Queensland. Your firm has just received a request from a client for an audit and your firm's audit partner has asked you to prepare a report for the audit team. Your firm has been approached by Queensland Fun In The Sun Pty Ltd (Qld FITS), a family owned resort company based on the Great Barrier Reef. Qld FITS offers holiday and leisure activities. As well as a five-star resort, they also offer backpackers' accommodation and a family hotel. Its operations also include boating, surfing and diving activities. Robert and Eunice Leatherwood own the majority of the shares in the Leatherwood Group which controls Qld FITS. Eunice is the CFO of Qld FITS as well as director of both companies and Robert is the chairman of the board of directors of both Qld FITS and the Leatherwood Group. The audit partner has informed you that in January 2015, Robert Leatherwood approached your audit firm to carry out the Qld FITS audit for the financial year ending 30 June 2015. As an unlisted company, there has been no requirement for Qld FITS to be audited in the past, however the company's bank and a new private equity investor group (which has just acquired a 25 per cent share of Qld FITS) has requested an audit of the 2015 financial statements. Qld FITS employs full-time staff, part-time staff and casual staff. While part-time and casual staff are used during peak periods, the business also employs 35 full-time staff in administration, accounting, catering, cleaning and hotel/ restaurant duties. Robert and Eunice have a fairly relaxed management style. They trust their workers to work hard for the company and reward them well. The accounts staff, in particular, are very loyal to the company. Robert told the audit partner that some accounts staff enjoy their jobs so much that they have never taken any annual leave, and hardly any workers ever take sick leave. The accounts department currently consists of three people. Senior accounts manager, Mary Lamb, reports directly to the CFO, Eunice Leatherwood. Mary has started her transition to retirement and hopes to fully retire within two to three years. She delegates most of the work to the two accounts staff, George and Katie. Mary claims that she has to do this because she is very busy developing a policy and procedures manual for the accounting department. This delegated work includes opening mail, processing payments and receipts, banking funds received, performing reconciliations, posting journals and performing the payroll function. Katie is a recent CPA graduate. George works part-time, coming into the office three days per week. He is responsible for posting all journal entries into the accounting system and the payroll function. Katie does the balance of the work, but they often help each other out in busy periods. An investigation has recently been completed (by a Royal Commission) into the effects of global warming on the Great Barrier Reef. The Royal Commission's report reveals that climate change is likely to cause increasing damage to the coral reefs and devastating tropical storms over the next 10 years. Requirements The audit partner requires a written short report to be presented in simple language and in an interesting, easy-to-read format. It should: a) Examine the background information in relation to the types of risk that you would consider when determining preliminary materiality for the 2015 audit of Qld FITS b) Identify the factors that would impact on the risk of material misstatement and explain the effect of those factors on planning materiality and risk.