Audit Risk Model. Using the audit risk model, state the effect on (increase, decrease, no effect) (1) inherent risk (2) control risk (3)

acceptable audit risk and (4) expected evidence required for each of the following independent circumstances.

A. The company is being investigated by the national authorities for manipulation of stock shares.

B. The financial ratios working capital, debt to equity ratio and other indicators of leverage and liquidity has improved during the past year.

C. Management is planning to sell the business in the next few months.

D. The company materially increased short-term and long-term debt.

E. The company changed from a privately held company to a publicly held company.

E_ The gross margin as a percentage of sales has significantly increased compared with that of the preceding year.

G. The inventory balance increased materially from the preceding year without apparent reason.

H. Several key personnel quit during the year.

I. Due to technology changes in the industry, five per cent of the company’s inventory may be obsolete.

J. The auditor decided to set assessed control risk below maximum.

K. Because there were few misstatements found in the previous year’s audit, the auditor also decided to increase reliance on internal control.