The direct influence of phonological awareness (PA) on reading outcomes has been widely demonstrated, yet PA may also exert indirect influence on reading outcomes through other cognitive variables such as morphological awareness (MA). However, PA's own development is dependent and influenced by many extraneous variables such as auditory processing, which could ultimately impact reading outcomes. In a group of pre-reading children with a family risk of dyslexia and low-risk controls, this study sets out to answer questions surrounding PA's relationship at various grain sizes (syllable, onset/rime and phoneme) with measures of auditory processing (frequency modulation (FM) and an amplitude rise-time task (RT)) and MA, independent of reading experience. Group analysis revealed significant differences between high- and low-risk children on measures of MA, and PA at all grain sizes, while a trend for lower RT thresholds of high-risk children was found compared with controls. Correlational analysis demonstrated that MA is related to the composite PA score and syllable awareness. Group differences on MA and PA were re-examined including PA and MA, respectively, as control variables. Results exposed PA as a relevant component of MA, independent of reading experience.