Gireen, CPA, is considering audit risk, iNF) Cmpevel utors re planning the audit of National Federal Bank(lalstlesation of tasen has level in ended fraud risk at the financial statement statemet level is influenced by the risk of a combination of factors related to material misstatements, which may be indica 31, 20x5, Audit risk at the financial statement the industry, and the entity, In assessing such Bank (NFB Company's financial statement for the year management, the industry, and the smtisyenvironment. following information conceming gathered the sry, and thbindic factors, Green Company profile NFB is a federally insured bank that has been consistently prwhich bas ex been consistently profitable than the industry average by considerable marketing mortgage on properties in a rural area, w investment growth in recent years. NFB packages its mortgages and sells them to ts. Despite rpackages its mortgages and sells them to large mortgage iv mortgage as a source of new lendable funds. trusts. recent volatility of olatility of interest rates, NFB has been able to continue selling its of directors is controlled by Smith, the majority stockholder, who also acts as Management at the bank's branch offices has authority for directing and controlling NFH's the oprations and is compensated based on branch profitability. The internal auditor reports directly to Harris, a minority shareholder, who also act as chairman of the audit committee. NFB's board CEO. operations and is com The accounting department has experienced little turnover in personnel during the five years Green has audited NFB. NFB's formula consistently underestimates the allowance for loan losses, but its controller has always been receptive to Green's suggestions to increase the allowance during each engagement Moreover, during the audit, auditor found that the employee who handle cash receipts is not a CPA, and office equipment are sometimes sold at a loss before being fully depreciated. Recent developments During 20x5, NFB opened a branch office in a suburban town thirty miles from its principal place of business. Although this branch is not yet profitable due to competition from several well-established regional Also, during 20x5, NF sophisticated computer system wel- establishodregora heks,munagembstathe branch vil he profiableiby o7. B increased the efficiency of its accounting operations by installing a new 12