Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company's financial statements for the year ended December 31, 19X0. Audit risk at the financial statement level is influenced by the risk of material mistatements, which may be indicated by a combination of factors related to management, the industry, and the entity. In assessing such factors Green has gathered the following information concerning NFB's environment.

Company Profile: NFB is a federally insured bank that has been consistently more profitable than the industry average by marketing mortgages on properties in a prosperous rural area, which has experienced considerable growth in recent years. NFB packages its mortgages and sells them to large mortgage investment trusts. Despite recent volatility of interest rates, NFB has been able to continue selling its mortgages as a source of new lendable funds.

NFB's board of directors is controlled by Smith, the majority stockholder, who also acts as the chief executive officer. Management at the bank's branch offices has authority for directing and controlling NFB's operations and is compensated based on branch profitability. The internal auditor reports directly to Harris, a minority shareholder, who also acts as chairman of the board's audit committee.

The accounting department has experienced little turnover in personnel during the five years Green has audited NFB. NFB's formula consistently underestimates the allowance for loan losses, but its controller has always been receptive to Green's suggestions to increase the allowance during each engagement.
Recent Developments: During 19X0, NFB opened a branch office in a suburban.town 30 miles from its principal place of business. Although this branch is not yet profitable due to competition from several well-established regional banks, management believes that the branch will be profitable by \(19 \mathrm{X} 2\).
Also, during 19X0, NFB increased the efficiency of its accounting operations by installing a new, sophisticated computer system.
Required:
Based only on the information above, describe the factors that would most likely have an effect on the risk of material misstatements. Indicate whether each factor increases or decreases the risk. Use the format illustrated below.

Transcribed Image Text:

Environmental factor Branch manager has authority for directing and controlling operations. Effect on risk of material misstatements Increase