Bohrer, CPA is considering the following factors in assessing audit risk at the financial statement level in planning the audit of Waste Remediation Services (WRS), Inc.’s financial statements for the year ended December 31, 2011. WRS is a privately-held company that contracts with municipal governments to close landfills. Audit risk at the financial statement level is influenced by the risk of material misstatements, which may be indicated by factors related to the entity, management, and the industry environment.
1. This was the first year WRS operated at a profit since 2006 because the municipalities received increased federal and state funding for environmental purposes.
2. WRS’s Board of Directors is controlled by Tucker, the majority shareholder, who also acts as the chief executive officer.
3. The internal auditor reports to the controller and the controller reports to Tucker.
4. The accounting department has experienced a high rate of turnover of key personnel.
5. WRS’s bank has a loan officer who meets regularly with WRS’s CEO and controller to monitor WRS’s financial performance.
6. WRS’s employees are paid bi-weekly.
7. Bohrer has audited WRS for five years.
8. During 2011, WRS changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
9. During 2011, WRS sold one half of its controlling interest in Sanitation Equipment Leasing (SEL) Co. WRS retained a significant interest in SEL.
10. During 2011, litigation filed against WRS in 2001 alleging that WRS discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that WRS included in prior years’ financial statements are being removed for the 2011 financial statements.
11. During December 2011, WRS signed a contract to lease disposal equipment from an entity owned by Tucker’s parents. This related party transaction is not disclosed in WRS’s notes to its 2011 financial statements.
12. During December 2011, WRS increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.
13. WRS recorded a substantial increase in revenue in the fourth quarter of 2011. Inquiries indicated that WRS initiated a new policy and guaranteed several municipalities that it would refund state and federal funding paid to WRS on behalf of the municipality if it failed a federal or state site inspection in 2012.
14. An initial public offering of WRS stock is planned in 2012.
Required
For each of the 14 factors listed above, indicate whether the item would likely increase audit Requiredrisk, decrease audit risk, or have no effect on audit risk.*
* AICPA adapted.
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