audit homework

ENGAGEMENT PLANNING MODULE 1 (15 to 25 minutes) (594,AUDIT 3) Problem 3 This problem consists of 15 items pertaining to an auditor's risk analysis of an entity. Select the best answer for each item. Use a No. 2 pencil to blacken the appropriate ovals on the Objective Answer Sheet to indicate your answers. Answer all items. Your grade will be based on the total number of correct answers. Bond, CPA, is considering audit risk at the financial statement level in planning the audit of Toxic Waste Disposal (TWD) Company's financial statements for the year ended December 31, 1996. TWD is a privately-owned entity that contracts with municipal governments to remove environmental wastes. Audit risk at the financial statement level is influenced by the risk of material misstatements, which may be indicated by a combination of factors related to man- agement, the industry, and the entity. Required: Based only on the information below, indicate whether each of the following factors (Items 1 through 15) would most likely increase audit risk , decrease audit risk D, or have no effect on audit risk N, and blacken the cor- responding oval on the Objective Answer Sheet. Items to be Answered Company Profile 1. This was the first year TWD operated at a profit since 1992 because the municipalities received increased federal and state funding for environmental purposes. 2. TWD's Board of Directors is controlled by Mead, the majority stockholder, 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 five years. Recent developments 8. During 1996, TWD changed its method of preparing its financial statements from the cash basis to generally ac- cepted accounting principles 9. During 1996, TWD sold one half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL. 10. During 1996, litigation filed against TWD in 1991 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 1996 financial statements. 11. During December 1996, TWD signed a contract to lease disposal equipment from an entity owned by Mead's par- ents. This related party transaction is not disclosed in TWD's notes to its 1996 financial statements. 12. During December 1996, 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 1997. 13. During December 1996, 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 1996 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 1997. 15. An initial public offering of TwD's stock is planned for late 1997