Bohrer, CPA (Chartered Professional Accountant), is considering the following factors in assessing audit risk at the financial


Bohrer, CPA (Chartered Professional Accountant), is considering the following factors in assessing audit risk at the financial statement level in planning the audit of Waste Remediation Services (WRS), Inc.’s financial statements for the year ended December 31, 2020. WRS is a privately held company that contracts with municipal governments to close landfills. Audit risk at the financial statement level is influenced by the risk of material misstatements, which may be indicated by factors related to the entity, management, and the industry environment.
1. This was the first year WRS operated at a profit since 2012 because municipalities received increased federal and provincial funding for environmental purposes.
2. WRS’s board of directors is controlled by Tucker, the majority shareholder, who also acts as the chief executive officer.
3. The internal auditor reports to the controller and the controller reports to Tucker.
4. The accounting department has experienced a high rate of turnover of key personnel.
5. WRS’s bank has a loan officer who meets regularly with WRS’s CEO and controller to monitor WRS’s financial performance.
6. WRS’s employees are paid biweekly.
7. Bohrer has audited WRS for five years.

8. During 2020, WRS changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
9. During 2020, WRS sold one half of its controlling interest in Sanitation Equipment Leasing Co. (SEL). WRS retained a significant interest in SEL.
10. During 2020, litigation filed against WRS in 2010 alleging that WRS discharged pollutants into provincial waterways was dropped by the province. Loss contingency disclosures that WRS included in prior years’ financial statements are being removed for the 2020 financial statements.
11. During December 2020, WRS signed a contract to lease disposal equipment from an entity owned by Tucker’s parents. This related-party transaction is not disclosed in WRS’s notes to its 2020 financial statements.
12. During December 2020, WRS increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.
13. WRS recorded a substantial increase in revenue in the fourth quarter of 2020. Inquiries indicated that WRS initiated a new policy and guaranteed several municipalities that it would refund provincial and federal funding paid to WRS on behalf of the municipality if it failed a federal or provincial site inspection in 2021.
14. An initial public offering of WRS stock is planned in 2021.

For each of the 14 factors listed above, complete the following:
1. Indicate whether the item is an inherent risk factor, control risk, or detection risk factor.
2. Explain whether the item has an impact on the risk of material misstatement, at what level—the overall financial statement level or assertion level and whether it increases or decreases the relevant risk
3. For those risks at the assertion level, indicate the account and the relevant assertion*

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Auditing The Art And Science Of Assurance Engagements

ISBN: 9780136692089

15th Canadian Edition

Authors: Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan, Joanne C. Jones

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