Answer Bank is:

• Increase
• Decrease
• No effect

Bond, CPA, is considering risk of material misstatement (RMM) at the financial statement level in planning the audit of TWD's financial statements for the year ended December 31, Year 6. TWD is a privately owned entity that contracts with municipal governments to remove environmental wastes. RMM at the financial statement level is influenced by a combination of factors related to management, the industry, and the entity. Select from the option list provided whether each factor would most likely increase, decrease, or have no effect on RMM. A choice may be used once, more than once, or not at all. Factor Effect on RMM Company Profile 1. This was the first year TWD operated at a profit since Year 2 because the municipalities received increased federal and state funding for environmental purposes. 2. TWD's board of directors is controlled by Mead, the majority shareholder, who also acts as the chief executive officer. 3. The internal auditor reports to the controller, and the controller reports to Mead. 4. The accounting department has experienced a high rate of turnover of key personnel. 5. TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to monitor TWD's financial performance. 6. TWD's employees are paid biweekly. 7. Bond has audited TWD for 5 years. Recent Developments 8. During Year 6, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles. E E E 9. During Year 6, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) CO. TWD retained a significant interest in UEL. 10. During Year 6, litigation filed against TWD in Year 1 alleging that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years' financial statements are being removed for the Year 6 financial statements. 11. During December of Year 6, TWD signed a contract to lease disposal equipment from an entity owned by Mead's parents. This related-party transaction is not disclosed in TWD's notes to its Year 6 financial statements. 12. During December of Year 6, TWD completed a barter transaction with a municipality. TWD removed waste from a municipally owned site and acquired title to another contaminated site at below market price. TWD intends to service this new site in Year 7. 13. During December of Year 6, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost. 14. Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of Year 6 disclosed a new policy. TWD guaranteed to several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails federal or state site clean-up inspection in Year 7. 15. An initial public offering of TWD's stock is planned for late Year 7. E