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Bestwood Furniture, Inc. a non-issuer that produces wood furniture, is undergoing a Year 2 audit. The situations in the table below describe changes Bestwood made during Year 2 that may or may not contribute to audit risk. Audit risk is a function of (1) the risks of material misstatement, the components of which are inherent risk and control risk, and (2) detection risk. For each situation, select from the list provided the effect, if any, that the situation has on a specific element of audit risk for the Year 2 audit. A choice may be used once, more than once, or not at all.

Effect on

Component of

Situation Audit Risk

During Tear 2, the company instituted a new procedure whereby the

internal audit function distributes payroll checks to employees for

selected payroll cycles. _____

In Year 2, the auditor noted that the company newly hired purchasing

agent was not obtaining competitive bids for all major purchase requisitions. _____

Early in Year 2, the company extended its existing warranty program on some

of its major products in an effort to increase revenue. _____

At the beginning of Year 2, the company changed the insurance carriers for

the fire insurance on its building. _____

During Year 2, the company repaid a floating-interest-rate loan on which it

had purchased a derivative as a hedge. The hedge was also sold. _____

Choices

a.) Decreases control risk.

b.) Decreases detection risk.

c.) Decreases inherent risk.

d.) Increases control risk.

e.) Increases detection risk.

f.) Increase inherent risk.

g.) No effect on audit risk.

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