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    APr7 Activity No. 1

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    Joannah mae
    This document discusses factors that may increase or decrease the risk of material misstatement and risk of fraud in planning an audit of Local Bank's 2020 financial statements. Some key factors that were identified as increasing risk include the banking industry being impacted by economic downturn, the board being controlled by the majority shareholder who is also the CEO, branch management being compensated based on profitability, and the internal auditor reporting to a minority shareholder who is also the chairman of the audit committee. Consistently underestimating loan losses and installing a new computer system were also flagged as increasing risk.

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    APr7 Activity No. 1

    Uploaded by

    Joannah mae
    83 views1 page
    This document discusses factors that may increase or decrease the risk of material misstatement and risk of fraud in planning an audit of Local Bank's 2020 financial statements. Some key factors that were identified as increasing risk include the banking industry being impacted by economic downturn, the board being controlled by the majority shareholder who is also the CEO, branch management being compensated based on profitability, and the internal auditor reporting to a minority shareholder who is also the chairman of the audit committee. Consistently underestimating loan losses and installing a new computer system were also flagged as increasing risk.

    Original Title

    APr7-Activity-No.-1

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    This document discusses factors that may increase or decrease the risk of material misstatement and risk of fraud in planning an audit of Local Bank's 2020 financial statements. Some key factors that were identified as increasing risk include the banking industry being impacted by economic downturn, the board being controlled by the majority shareholder who is also the CEO, branch management being compensated based on profitability, and the internal auditor reporting to a minority shareholder who is also the chairman of the audit committee. Consistently underestimating loan losses and installing a new computer system were also flagged as increasing risk.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    83 views1 page

    APr7 Activity No. 1

    Uploaded by

    Joannah mae
    This document discusses factors that may increase or decrease the risk of material misstatement and risk of fraud in planning an audit of Local Bank's 2020 financial statements. Some key factors that were identified as increasing risk include the banking industry being impacted by economic downturn, the board being controlled by the majority shareholder who is also the CEO, branch management being compensated based on profitability, and the internal auditor reporting to a minority shareholder who is also the chairman of the audit committee. Consistently underestimating loan losses and installing a new computer system were also flagged as increasing risk.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 1

    APr7

    Activity

    Michael Jordan, CPA, is considering audit risk at the financial statement level in planning
    the audit of Loca Bank (LB) Company’s financial statements for the year ended December 31,
    2020. 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 it increases or
    decreases the risk of material misstatement and (2) whether it creates a risk of fraud.

    Effects on Risk Create a


    of Material Risk of
    Factor Misstatement Fraud?
    (Increase or (yes or
    Decrease) now)
    a. NB is a continuing audit client.
    b. The banking industry has been significantly
    impacted by the downturn in the economy in
    recent years.
    c. NB 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. NB'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 NB'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 NB.
    j. During 2020, NB increased the efficiency of its
    accounting operations by installing a new,
    sophisticated computer system.
    k. NB's formula has consistently underestimated the
    allowance for loan losses in current years.
    l. Management has been receptive to Green's
    suggestions relating to accounting adjustments.

    - End -

    Page 1 of 1

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