Question

One factor and the effect on the risk of material misstatement

9-38 (oBJECTIVES 9.5,9-6, 9.7) Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2016. Henderson Energy is regulated by the state utility commission, and because it is a publicly traded company the audited financial statements must be filed with the Securities and Exchange Commission (SEC). Henderson Energy is considerably more profitable than many of its competitors argely due to its extensive investment in information technologies used in its energy dis- tribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 2016 operations. Additionally, Henderson Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks. Because of the complexi- ties of the underlying accounting associated with these activities, Henderson Energy added several highly experienced accountants within its financial reporting team. Internal audit, which has direct reporting responsibility to the audit committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis. Whitehead's discussions with the predecessor auditor revealed that the client has ex- perienced some difficulty in correctly tracking existing property, plant, and equipment tems. This largely involves equipment located at its multiple energy production facilities. During the recent year, Henderson acquired a regional electric company, which the number of energy production facilities. Whitehead plans to staff the audit engagement with several members of the firm who e experience in auditing energy and public companies. The extent of partner review of key accounts will be extensive

Answer 1

The factors are self-explanatory in natureand alsothe question is very specific, so explanation is not required.

The model is given below:

Factor	Effect on the Risk of Material Misstatement	Audit Risk Model Component
1. Henderson is a new client (Audit will be done by the firm for the first time)	Increases	Inherent Risk
2. Henderson is operating in a regulated industry and is subject to various forms of regulatory compliances	Increases	Acceptable Audit Risk
3. Henderson is a publicly traded company	Increases	Acceptable Audit Risk
4. Henderson's recent growth has affected its operations	Increases	Acceptable Audit Risk
5. Henderson is more profitable than its competitors	Decreases	Acceptable Audit Risk
6. Acquisition of a regional electrical company	Increases	Inherent Risk
7. Henderson's increase in the use of derivatives and hedging instruments	Increases	Inherent Risk
8. Increase in competent accounting staff	Decreases	Control Risk
9. Internal audit function reporting directly to audit committee	Decreases	Control Risk
10. Financial statements having accounting estimates made by management	Increases	Inherent Risk
11. Difficulty in tracking property, plant and equipment	Increases	Control Risk
12. Use of experienced audit staff	Decreases	Planned Detection Risk
13. Extensive partner review of key accounts	Decreases	Planned Detection Risk

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