Effect on audit risk Kathryn Nary is an audit partner of Nary Matthew, a firm of accountants. She is considering audit risk at the overall financial statement level in planning the audit for the finance company Goulburn Valley Ltd (GV) for the year ending 31 December 20X5, This risk is influenced by a combination of factors related to management, the industry and the entity. Kathryn has gathered the following information concerning GV's environment: 1. GV 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. GV packages and sells mortgages to large investment trusts. Despite recent volatility of interest rates, GV has been able to continue selling its mortgages as a source of new lendable funds. 2. GV's board of directors is controlled by Gary Seymour, the majority shareholder, who also acts as the chief executive officer. Management at the company's branch offices has authority for directing and controlling GV's operations, and is compensated according to branch profitability. The internal auditor reports directly to Peter Jourdain, a minority shareholder, who is chairman of the audit committee. 3. The accounting department has experienced little turnover in personnel during the 5 years for which Kathryn has audited GV. GV's formula constantly underestimates the allowance for loan losses, but its financial controller has always been receptive to Kathryn's suggestions to increase the allowance. 4. During 20X5, GV opened a branch office in a metropolitan area 30 kilometers from its principal place of business. Although this branch is not yet profitable (as a result of competition from several well-established banks), management believes it will be profitable by 20X7. 5. During 20X5, the company increased the efficiency of its operations by installing a new computer system. Required Based only on the information provided: (a) Indicate the factors that would increase the risk of material misstatement and explain why. (10 marks) (b) Indicate the factors that would decrease the risk of material misstatement and explain why. (10 marks)