Green, CPA, is considering audit risk, including fraud risk, at the financial statement level in planning the audit of National Federal Bank (NFB) Company's financial statements for the year ended December 31, 2005. Audit risk at the financial state- ment level is influenced by the risk of material misstatements, which may be indicated by a combination of factors related to management, the industry, and the entity. In assessing such factors Green has gathered the following information concerning NFB's environment. Company profile NFB is a federally insured bank that has been consistently more profitable than the industry average by marketing mort- gages on properties in a prosperous rural area, which has experienced considerable growth in recent years. NIB packages its mortgages and sells them to large mortgage investment trusts. Despite recent volatility of interest rates. NFB has been able to continue selling its mortgages as a source of new lendable funds. NFB's board of directors is controlled by Smith, the majority stockholder. who also acts as the chief executive officer. Management at the bank's branch offices has authority for directing and controlling NFB's operations and is compensated based on branch profitability. The internal auditor reports directly to Harris, a minority shareholder, who also acts as chairman of the board's audit committee. 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. Recent developments During 2005, NIB 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 banks, management believes that the branch will be profitable by 2007. Also, during 2005, NFB increased the efficiency of its accounting operations by installing a new. sophisticated computer System. Audit and Frand Risk Fraud Situation Discussion Research Communication Based only on the information above, indicate by marking the appropriate button whether the following factors indicate an increased or decreased audit risk. Also, indicate whether the factor is a fraud risk factor. Factor increased audit risk Decreased mall rat Emnid risk factor 1. Branch management authority 2. Government regulation 3. Company profitability 4. Demand for product 5. Interest rates 6. Availability of mortgage funds 7. Involvement of principal share- holder in management S. Branch manager compensation 9. Internal audit reporting relationship 10. Accounting department turnover 11. Continuing audit relationship 12. Internal controls over accounting estimates 13. Response to proposed accounting adjustments 14. New unprofitable branch 15. New computer system 0 0 0 0 0000 0 000000 0 0 0 0 0000 0 000000 O0 0 0 0600 0 060600