Required: Based on the discussion with the client, 1. determine wheather the fac

Question

Required: Based on the discussion with the client,

1. determine wheather the factor discussed is an internal or external factor.

2. determine whether this factor most likely increases, decreases, or has no effect on the risk of material misstatement.

Required: Based on the discussion with the client,

1. determine wheather the factor discussed is an internal or external factor.

2. determine whether this factor most likely increases, decreases, or has no effect on the risk of material misstatement.

Information from Client Inquiry 1. Rock Chalk Corp has expanded in recent years and has multiple stores located across the country. 2. A new revenue recognition standard was recently issued, and Rock Chalk Corp transitioned to the new standards in the current year. 3. The board of directors participates actively in overseeing the management of Rock Chalk Corp and is willing to ask difficult questions. The board of directors is compenstated by Rock Chalk Corp. 4. Since the successful launch of Rock Chalk Corp, the market competition has increased greatly. New companies have emerged, and Rock Chalk Corp is worried that its customers may start to shop at other places.

Explanation / Answer

1) This factor is an internal factor as there is no change in external situations, laws and regulations etc.It is expansion of company's business globally. This factor most likely increases the risk of material misstatement because as there is a great increase in the transactions and activities of the business. The increased no. of activities and transactions can result in increase of risk of material misstatement.

2) Change in the standards or issuing of new standards are external factor. In this case a new revenue recognition standard was recently issued and the company had transitioned to new standards in the current year. As company has implemented the change there is no effect of this factor on the risk of material misstatement.

3) This factor is internal because it relates to the management and board od Directors of Rock Chalk Corp. This factor most likely decrease the risk of material misstatement because by overseeing the management, the board of directors has implemented a strong internal control system which can reduce the risk of material misstatement upto some extent.

4) This factor is an external factor because there is change in external market conditions and competitors etc. This factor has no effect on risk of material misstatement because this factor has no direct link with financial statements of the company and thus no effect.

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