Bradley is performing a risk assessment prior to the annual audit of one of his companys long-term clients, Callahan Corporation. Callahan offers a variety of services, primarily to elderly clients. In-home health care and assistance, transportation, and shopping services are the primary services Callahan offers. Callahan has 30 regular full-time employees and approximately 100 independent contractors that they use to provide services. Some of Callahans services are paid for by their clients insurance coverage and the rest are direct payments. Last year, a client had accused Callahan of charging for services the client didnt receive. Upon further investigation, Callahan discovered that an independent contractor had charged for assigned service calls but did not actually go to the clients home to provide service. The contractor was barred from Callahan and is now facing criminal charges related to the incident. Callahan views this as an isolated incident and feels that the current background checks they do for all employees and contractors are sufficient. Callahans financial manager and the human resources director have provided Bradley with all of the relevant documentation regarding this incident.

In two to three paragraphs, address the following:

Identify the three components of audit risk.

Briefly describe the characteristics for each of the three components of audit risk.

Explain how each risk component may be impacted by Bradleys assessment of Callahan Corporation.