You are working with William Bond, CPA, and you are considering the risk of material misstatement in planning the audit of Toxic Waste Disposal (TWD) Company's financial statements for the year ended December 31, 20X0. TWD is a privately owned entity that contracts with municipal governments to remove environmental waste.
Based only on the information below, indicate whether each of the following factors would most likely increase (I), decrease (D), or have no effect (NE) on the risk of material misstatement.
Information
Because municipalities have received increased federal and state funding for environmental purposes, TWD returned to profitability for the first year following three years with losses.
TWD's Board of Directors is controlled by Janice Mead, the majority stockholder, who also acts as the chief executive officer.
The internal auditor reports to the controller and the controller reports to Janice Mead.
The accounting department has experienced a high rate of turnover of key personnel.
TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to monitor TWD's
tinancial pertormance.
TWD's employees are paid biweekly.
TWD has such a strong financial presence in its industry to allow it often to dictate the terms or conditions of transactions with its suppliers.
During 20X1, TWD changed its method of preparing its financial statements from the cash basis to
generally accepted accounting principles.
During 20X1, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant influence over UEL.
During 20X1, litigation filed against TWD from an action 10 years ago that alleged 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 from the 20X1 financial statements.
During December 20X1, TWD signed a contract to lease disposal equipment from an entity owned by Janice Mead's parents. This related party transaction