In: Accounting
9-33 (Objective 9-6 ) 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, 2016. 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.
This was the first year WRS operated at a profit since 2011 because the municipalities received increased federal and state funding for environmental purposes.
WRS’s Board of Directors is controlled by Tucker, the majority shareholder, who also acts as the chief executive officer.
The internal auditor reports to the controller and the controller reports to Tucker.
The accounting department has experienced a high rate of turnover of key personnel.
WRS’s bank has a loan officer who meets regularly with WRS’s CEO and controller to monitor WRS’s financial performance.
WRS’s employees are paid bi-weekly.
Bohrer has audited WRS for five years.
During 2016, WRS changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
During 2016, WRS sold one half of its controlling interest in Sanitation Equipment Leasing Co. (SEL). WRS retained a significant interest in SEL.
During 2016, litigation filed against WRS in 2003 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 2016 financial statements.
During December 2016, 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 2016 financial statements.
During December 2016, WRS increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.
WRS recorded a substantial increase in revenue in the fourth quarter of 2016. 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 2017.
An initial public offering of WRS stock is planned in 2017.
Required
For each of the 14 factors listed above, indicate whether the item would likely increase audit risk, decrease audit risk, or have no effect on audit risk.*
*AICPA adapted. Copyright by American Institute of CPAs. All rights reserved. Used with permission.
1.This was the first year WRS operated at a profit since 2011 because the municipalities received increased federal and state funding for environmental purposes. Decreased Audit Risk as its a healthier financial condition
2.WRS’s Board of Directors is controlled by Tucker, the majority shareholder, who also acts as the chief executive officer. Increased Audit Risk as single person is dominating the management
3.The internal auditor reports to the controller and the controller reports to Tucker.Increased Audit Risk as internal audit reports to the top management and not Audit Committee
4.The accounting department has experienced a high rate of turnover of key personnel.Increased Audit Risk as there is a turnover in the key management positions
5.WRS’s bank has a loan officer who meets regularly with WRS’s CEO and controller to monitor WRS’s financial performance. Decreased Audit risk as the bank loan officer is monitoring it.
6.WRS’s employees are paid bi-weekly. No Effect on Audit Risk, timing o payment to employee has no impact
7.Bohrer has audited WRS for five years. Decreased Audit risk as audiotor has a past experience with client
8.During 2016, WRS changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles. Increased Audit Risk,due to a new reporting method has risk of misstatements
9.During 2016, WRS sold one half of its controlling interest in Sanitation Equipment Leasing Co. (SEL). WRS retained a significant interest in SEL. Increased Audit Risk as its an unusual transaction
10.During 2016, litigation filed against WRS in 2003 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 2016 financial statements. Decreased Audit risk as the risk related to disclosure of the litigation is reduced by the lawsuit's resolution
11.During December 2016, 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 2016 financial statements.Increased Audit risk as its a related party transaction.
12.During December 2016, WRS increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost. No effect on audit risk, as the amount of insurance coverage hardly has an impact on audit risk
13.WRS recorded a substantial increase in revenue in the fourth quarter of 2016. 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 2017. Increased Audit risk for improper revenue recognition
14.An initial public offering of WRS stock is planned in 2017.Increased audit risk, as the offering is planned increases the chances of misstating the financial statements.