The year under audit is Year 3. Company ProfileAirinfo Inc. Company Airinfo Inc. is a manufacturer of unmanned aerial vehicles (UAVs) and is headquartered in San Clemente, CA. Airinfo designs and manufactures UAVs for both the defense and commercial markets. Airinfo operates in a highly regulated industry. Business Structure Currently, Airinfo is one large company. The CEO would like to create two segments: (1) Defense and (2) Commercial. Currently, the commercial UAVs account for 70% of the profit. The CEO will appoint a vice president to lead each division. Airinfo has five directors on its board who are charged with governance. The board of directors are all independent of the entity. The board of directors reviews the operational and financial results often and helps provide direction for the company.The CEO, CFO, and CAO are very supportive of Airinfo; they have all personally guaranteed the debt of Airinfo, should it default. Business Projection In Year 1 and Year 2, Airinfo reported substantial profits. Airinfo attributes its success to its hardworking employees. To reward employees for their hard work, Airinfo bases their bonus on the year over year increase in profit. In the past two years, employee bonuses were approximately 70-75% of their total take-home salary. Management announced in their 3rd quarter earnings call on October 18, Year 2, that they expect profits to increase 20% in Year 3. The Federal Aviation Administration (FAA) just announced on February 15, Year 3, that all UAV's must register with the FAA. The FAA stated that only a certain number of UAV flying permits will be allowed for commercial purposes. The cost of the permit is high and there are rumors that the flying permits available only cover approximately 2% of the currently flying UAVs. Since the announcement, the revenue of UAV's at Airinfo has decreased significantly, resulting in a net profit of just 3% for Year 3. Some of Airinfo's competitors have gone bankrupt. Management is currently creating an advertising plan that will focus more on obtaining defense contracts. Other information Airinfo may default on its debt in future years if this decrease in revenue continues. Airinfo is planning on issuing additional stock to pay its debt and its employees. Airinfo understands that employees want to work hard even in this tougher market, but still requires its employees to take mandatory vacation.

Based on the information in the Company Profile of Airinfo, indicate by clicking the appropriate box next to each item whether the item would most likely increase, decrease, or have no effect on fraud risk.

1. The CEO would like to open two segments: (1) Defense and (2) Commercial Market

2. Management's bonus is based on profit.

3. The board of directors are all independent of the entity.

4. The CEO, CFO, and CAO have personally guaranteed the debt of Airinfo.

5. Management is currently creating an advertising plan that will focus more on obtaining defense contracts.

6. Airinfo is planning on issuing additional stock to pay its debt and its employees.

7. Airinfo requires its employees to take mandatory vacations, even though, the company is experiencing low profits.