Millwight, CPA, is considering various risks in planning the audit of Arro Finan
ID: 2820009 • Letter: M
Question
Millwight, CPA, is considering various risks in planning the audit of Arro Financial, a securities firm that has recently experienced difficulty due to the global financial crisis. Select from the option list provided whether each factor would most likely increase inherent risk, decrease inherent risk, increase control risk, decrease control risk, or have no effect on risk. Each choice may be used once, more than once, or not at all.
1. Arro replaced member of the audit committee with an outside board member with significantly more financial experience.
2. The internal auditor for Arro reports directly to the CFO
3. Arro was able to increase coverage of their liability insurance by changing the insurance provider
4. Arro has been operating at a loss, but the turnaround in the economy will result in a profitable year
5. Arro has settled a significant lawsuit with a customer that had been ongoing for several years.
6. Arro is in the process of installing a new computer software system that will not be fully operational until the following year. Some of the financial processes have been transferred to the new system, but others have not
7. Arro has recently engaged in hedging activities by the purchase of derivatives
8. Arro has adopted a new code of ethical conduct that each employee must read and agree to abide by
9. Arro's board of directors changed its meeting location from Arro's bank to Arro's facility
10. Arro has received a letter from a federal agency responsible for oversight requesting records of transactions for several significant customer accounts
Explanation / Answer
Inherent risk is the risk arise due to error or any omission in fiancial satetement or arise from other than due to control.
Control Risk is that risk which is not detected and corrected by interal control mechanism in entity.
Following risk are increase or decrese in ARRO's as given below are:
1. In this situation control risk is increased because new member in audit commitee are introduced as it will provide more transperancy and provide true and fair view of financial statements
2. Under this situation contorl risk is decreased as interal auditor is only report to independent auditor. if he report to directly cCFO then it will increase chances of fraud in organisation.
3.This situation has no effect as it change the insurance policy provider.
4. Under this situation their ishave no effect of any risk
5. this is situation where resukt of lawsuit is in favour or against of company so it will narise increase in Inherent risk .
6. Under this situation their is chances that their will be increase in Control risk as some of employee are not aware of computer system in organisation.
7.Helging activities are uncertain which will classified under In herent risk which is not in control. So such activity will increase Inherent risk.
8. New conduct of conduct will decrease the control risk as employee has to follow new rules to work in oragenisation which maybe in detecting and stopping risk in the oragenisation.
9. Change in location will not arise any type of risk as it has not impact.
10. Under such situation the control risk will increase which include detecting of frauds that had already happen in an oragenisation.