Simulation Michael Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company's financial statements for the year ended December 31, 20X1. Audit risk at the financial statement level is influenced by the risks of material misstatements (including fraud risks), which may be indicated by a combination of factors related to management, the environment, and the entity. For each of the following factors, indicate whether they increase or decrease the risk of material misstatement and (2) whether they create a risk of fraud.
Factor
Effect on Risks of Material Misstatement (Increase or Decrease)
Create a Risk of Fraud? (Yes or No)
a. NFB is a continuing audit client.
b. The banking industry has been significantly impacted by the downturn in the economy in recent years.
c. NFB operates in a growing, prosperous area and has remained profitable over the years.
d. Government regulation and overview of the banking industry is extensive and effective.
e. NFB’s board of directors is controlled by Smith, the majority stockholder, who also acts as the chief executive officer.
f. Interest rates have been very volatile recently.
g. Management at the bank’s branch offices has authority for directing and controlling NFB’s operations and is compensated based on branch profitability.
h. The internal auditor reports directly to Harris, a minority shareholder, who also acts as chairman of the board's audit committee.
i. The accounting department has experienced little turnover in personnel during the five years Green has audited NFB.
j. During 20X1, NFB increased the efficiency of its accounting operations by installing a new, sophisticated computer system.
k. NFB’s formula has consistently underestimated the allowance for loan losses in current years.
I. Management has been receptive to Green's suggestions relating to accounting adjustments.