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.

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