Michael Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company’s financial statements for the year ended December 31, 20X1. Audit risk at the financial statement level is influenced by the risks of material misstatements (including fraud risks), which may be indicated by a combination of factors related to management, the environment, and the entity.
1. For each of the following factors, indicate whether it increases or decreases the risk of material misstatement and (2) whether it creates a risk of fraud.
Factor Effect on risks of material misstatement (Increase or decrease) Create a risk of fraud (Yes / No)
a. NFB is a continuing audit client.
b. NFB operates in a growing. prosperous area and has remained profitable over the years.
c. Interest rates have been very volatile recently.
d. Government regulation and overview of the banking industry is extensive and effective.