SECTION 1:

Max, CPA is considering audit risk at the financial statement level in planning the audit of Toxic Waste Disposal (TWD) Companys financial statements for the year ended December 31, 2017. TWD is a privately-held entity that contracts with municipal governments to remove environmental wastes. Audit risk at the financial statement 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.

Based ONLY on the information below, indicate whether each of the following factors (items 1-5) would most likely increase (I), decrease (D), or have no effect (N) on audit risk of material misstatement. Simply record I, D or N in CAPITAL LETTERS on the answer sheet.

This was the first year TWD operated at a profit since 2012 because the municipalities received increased federal and state funding for environmental purposes.

TWDs Board of Directors is controlled by Mead, the majority stockholder, who also acts as Chief Executive Officer.

The internal auditor reports to the controller and the controller reports to Mead.

The accounting department has experienced a high turnover of key personnel.

TWDs bank has a loan officer who meets regularly with TWDs CEO and controller to monitor TWDs financial performance.

SECTION 2:

Items 1-5 present various audit situations. For each situation, indicate which type of audit report will most likely be issued based ONLY on the information provided in the situation.

Unmodified opinion standard report.

Unmodified opinion explanatory paragraph

Qualified opinion

Adverse Opinion

Disclaimer of opinion.

Simply record the letter corresponding to the opinion type IN CAPITAL LETTERS. Each opinion may be used once, more than once or not at all.

ABC electronics manufactures electrical components. During the year, market conditions resulted in a significant reduction in the demand for these products. These products are now being sold below cost. Management refuses to write off the products or increase the allowance for obsolescence.

You were unable to observe the inventory counting at Stevens industries due to circumstances. The amount of inventory is material to the overall financial statements. However, you were able to satisfy yourself to the existence and amount of inventory through alternative procedures.

Auto Company has a fleet of delivery trucks. In the past, the company has purchased all equipment. This year they decided to lease the trucks. As compared to previous years, trucks are now recorded as capital leases. This new policy is fully disclosed in the footnote disclosures.

You complete the audit of New England Department Store. In your opinion, the financial statements are fairly stated. However, on the last day of the audit, you discover that one of the supervisors assigned to the audit has a material investment in New England Department Store.

Your client YummyYogurt has experienced significant decline if customer traffic over the past several months due to increased competition from other frozen yogurt stores. You have substantial doubt the companys ability to continue as a going concern. You believe the financial statements are fairly stated.