Question 2 - Audit risk Sam Singh is an audit partner of Singh High, a firm of accountants. She is considering audit risk at the overall financial statement level in planning the audit for the finance company Property Now Ltd (PN) for the year ending 30 June 2018. This risk is influenced by a combination of factors related to management, the industry and the entity. Sam has gathered the following information concerning PN's environment. 1. PN 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. PN packages and sells mortgages to large investment trusts. Despite recent volatility of interest rates, PN has been able to continue selling its mortgages as a source of new lendable funds. 2. PN's board of directors is controlled by Alex Webb, the majority shareholder, who also acts as the chief executive officer. Management at the company's branch offices has authority for directing and controlling PN's operations, and is compensated according to branch profitability. The internal auditor reports directly to Ty Wong, 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 Sam has audited PN. PN's formula constantly underestimates the allowance for loan losses, but its financial controller has always been receptive to Sam's suggestions to increase the allowance. 4. During 2017, PN opened a branch office in a metropolitan area 30 kilometres 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 2019 5. During 2017, the company increased the efficiency of its operations by installing a new computer system. Required: Based only on the information provided, indicate the factors that would: a) most likely increase the risk of material misstatements b) most likely decrease the risk of material misstatements