Moranda and Sills, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assessment procedures.

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Requirements

a.	Describe any risks of material misstatement at the financial statement level.
b.	Describe any risks of material misstatement at the assertion level.
c.	Which, if any, risks would be considered a significant risk?

Requirement a. Describe any risks of material misstatement at the financial statement level. (Select all that apply.)

1.

The expansion of online service options for customers could trigger risks across a number of accounts, given customers use online options to make deposits and withdraw funds from both checking and savings accounts. As online service options increase, more financial statement accounts may be impacted.

2.

The integration of the pending acquisition of the small community bank into Highland's operations and financial reporting processes may trigger the potential for misstatements across a number of accounts that must be integrated into the financial reporting system. The accounting for assets and liabilities acquired can be complex and there are a number of valuation and disclosures issues that may lead to increased risks of misstatements in those accounts and disclosures.

3.

The expansion of online service operations may affect the occurrence, completeness, and accuracy of checking and savings account transactions. If there are flaws in the online system, deposits might be overstated due to fictitious deposits or errors in the amounts recorded, thereby affecting the occurrence and accuracy assertions related to those transactions. If transactions are not properly posted to the correct customer accounts, misstatements related to the posting and summarization transaction-related audit objective may occur.

4.

Challenges associated with retaining key personnel with IT skills could have a pervasive effect on a number of financial statement accounts, if those individuals leave Highland and there are issues related to the performance of IT systems that impact financial reporting.

5.

Challenges related to credit evaluation may ultimately lead to misstatements in the allowance for loan loss reserves, impacting the realizable value balance-related audit objective (the accuracy, valuation and allocation assertion). Risks of material misstatements may also affect several of the presentation and disclosure related assertions for loans outstanding, including disclosures related to loan loss reserves.

6.

Any challenges associated with the integration of IT systems of the acquired bank with Highland's systems could trigger errors in a number of financial statement accounts, if the IT systems affected impact financial reporting.

7.

The bank should not have dedicated underwriting staff. The evaluation of the collectibility of loans outstanding should be performed by the bank president only, in order to reduce the risk of error.

8.

The acquisition of another bank was not a recommendation from the auditor; therefore, it is a risky investment.

9.

The expansion into new types of investments subject to fair value accounting where the bank does not have employees with the appropriate valuation skills and competencies increases the risks of material misstatement related to the accuracy and realizable value balance related audit objectives, which impact the accuracy, valuation and allocation assertion. Risks of material misstatements may also affect several of the presentation assertion for investments.

10.

The integrity and competency of personnel from the acquired bank who join Highland could have a pervasive impact on the quality of financial reporting of the combined bank, if they lack integrity or competency.

Requirement b. Describe any risks of material misstatement at the assertion level. (Select all that apply.)

1.

Challenges related to credit evaluation may ultimately lead to misstatements in the allowance for loan loss reserves, impacting the realizable value balance-related audit objective (the accuracy, valuation and allocation assertion). Risks of material misstatements may also affect several of the presentation and disclosure related assertions for loans outstanding, including disclosures related to loan loss reserves.

2.

The expansion of online service options for customers could trigger risks across a number of accounts, given customers use online options to make deposits and withdraw funds from both checking and savings accounts. As online service options increase, more financial statement accounts may be impacted.

3.

The integrity and competency of personnel from the acquired bank who join Highland could have a pervasive impact on the quality of financial reporting of the combined bank, if they lack integrity or competency.

4.

The bank should not have dedicated underwriting staff. The evaluation of the collectibility of loans outstanding should be performed by the bank president only, in order to reduce the risk of error.

5.

The acquisition of another bank was not a recommendation from the auditor; therefore, it is a risky investment.

6.

Challenges associated with retaining key personnel with IT skills could have a pervasive effect on a number of financial statement accounts, if those individuals leave Highland and there are issues related to the performance of IT systems that impact financial reporting.

7.

The integration of the pending acquisition of the small community bank into Highland's operations and financial reporting processes may trigger the potential for misstatements across a number of accounts that must be integrated into the financial reporting system. The accounting for assets and liabilities acquired can be complex and there are a number of valuation and disclosures issues that may lead to increased risks of misstatements in those accounts and disclosures.

8.

Any challenges associated with the integration of IT systems of the acquired bank with Highland's systems could trigger errors in a number of financial statement accounts, if the IT systems affected impact financial reporting.

9.

The expansion into new types of investments subject to fair value accounting where the bank does not have employees with the appropriate valuation skills and competencies increases the risks of material misstatement related to the accuracy and realizable value balance related audit objectives, which impact the accuracy, valuation and allocation assertion. Risks of material misstatements may also affect several of the presentation assertion for investments.

10.

The expansion of online service operations may affect the occurrence, completeness, and accuracy of checking and savings account transactions. If there are flaws in the online system, deposits might be overstated due to fictitious deposits or errors in the amounts recorded, thereby affecting the occurrence and accuracy assertions related to those transactions. If transactions are not properly posted to the correct customer accounts, misstatements related to the posting and summarization transaction-related audit objective may occur.

Requirement c. Which, if any, risks would be considered a significant risk?

The risks noted in part a

The risks noted in part b

The risks noted in part a and part b

None of the risks noted above

would be considered as significant risks in the current year's audit.