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

Answer 1

Solution:-

The inherent risk was the hazard emerge because of mistake or any exclusion in financial statement or emerge from other than because of control.

The control risk was that the risk was not detected and corrected by the internal control mechanism was in entity.

1. In this circumstance control chance is expanded on the grounds that new part in review commitee are presented as it will give more transparency and give genuine and reasonable perspective on budget summaries.

2. Under this circumstance control hazard is diminished as internal inspector is just answer to free examiner. on the off chance that he answer to straightforwardly CFO, at that point it will expand odds of extortion in association.

3.This circumstance had no effect as it was changes the insurance policy provider.

4. Under this circumstance their was had no effect of the any risk.

5. this is circumstance where result of claim is in support or against of organization so it will narise increment in Inherent hazard .

6. Under this circumstance their is chances that their will be increment in Control hazard as some of representative don't know about PC framework in association.

7.Helping exercises are unsure which will characterized under Inherent chance which isn't in charge. So such action will increment Inherent hazard.

8. New lead of direct will diminish the control hazard as representative needs to pursue new guidelines to work in organisation which possibly in recognizing and ceasing hazard in the organisation.

9. Change in area won't emerge any sort of hazard as it has not affect.

10. Under such circumstance the control hazard will build which incorporate identifying of cheats that had as of now occur in an organisation.