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Michael Hannigan
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Determine if the following items increase risk, decrease risk,

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Determine if the following items increase risk, decrease risk, or have not effect on audit risk for TWD. TWD is private waste company. Company's financial statements are for the year ending 2006.

1.This was the first year TWD operated at a profit since 2000 because the municipalities received increased federal and state funding for environmental purposes.
2. TWD’s board of directors is controlled by Mead, the majority stockholder, who also acts as the chief executive officer.
3. The internal auditor reports to the controller, and the controller reports to Mead.
4. The accounting department has experienced a high rate of turnover of key personnel.
5. TWD’s bank has a loan officer who meets regularly with TWD’s CEO and controller to monitor TWD’s financial performance.
6. TWD’s employees are paid biweekly.
7. Bond has audited TWD for five years.
8. During 2006, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
9. During 2006, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL.
10. During 2006, litigation filed against TWD in 1996 alleging that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years’ financial statements are being removed for the 2006 financial statements.

Here are answers along with the reasoning. Please let me know if you have any other questions.

1. (D) Since TWD returned to profitable operation, its healthier financial condition leads to a decrease in the risk of material misstatement.
2. (I) The risk of material misstatement increases when management is dominated by a single person. Since Mead controls the Board of Directors, is a majority stockholder, and is the CEO, it would appear that Mead dominates management.
3. (I) The risk of material misstatement increases when the internal auditor reports to top management rather than to the audit committee because it is less likely that the internal auditor will be able to objectively perform the function.
4. (I) The risk of material misstatement increases when the key management positions (particularly senior accounting personnel) encounter turnover.
5. (D) The loan officer’s continual monitoring of TWD decreases the risk of material misstatement.
6. (N) Timing of payroll cycles would normally have no impact on the risk of material misstatement.
7. ?? Not sure who Bond is. If the point is that the same person has audited the company for 5 years, this increases risk.
8. (I) A change to generally accepted accounting principles will increase the risk of material misstatement because the change in basis requires management to prepare a number of entries that have not been made in the past; these entries may be made improperly. Also, difficulties in determining beginning accrual basis balances increases the risk of misstatement.
9. (I) The sale of one-half of the company’s controlling interest in United Equipment Leasing is an entry that is out of the ordinary course of business, and accordingly, increases the risk of material misstatement.
10. (D) Litigation results in contentious and difficult accounting valuation issues because an accountant must attempt to determine the likelihood of loss and the amount.


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