Whitehead, CPA, is planning the audit of a newly obtainedclient, Henderson Energy Corporation, for the year ended December 31, 2013. HendersonEnergy is regulated by the state utility commission and because it is a publicly tradedcompany the audited financial statements must be filed with the Securities and ExchangeCommission (SEC).Henderson Energy is considerably more profitable than many of its competitors,largely due to its extensive investment in information technologies used in its energydistribution and other key business processes. Recent growth into rural markets, however,has placed some strain on 2013 operations. Additionally, Henderson Energy expanded itsinvestments into speculative markets and is also making greater use of derivative andhedging transactions to mitigate some of its investment risks. Because of the complexitiesof the underlying accounting associated with these activities, Henderson Energy addedseveral highly experienced accountants within its financial reporting team. Internalaudit, which has direct reporting responsibility to the audit committee, is also activelyinvolved in reviewing key accounting assumptions and estimates on a quarterly basis.Whitehead’s discussions with the predecessor auditor revealed that the client hasexperienced some difficulty in correctly tracking existing property, plant, and equipmentitems. This largely involves equipment located at its multiple energy production facilities.During the recent year, Henderson acquired a regional electric company, which expandedthe number of energy production facilities.Whitehead plans to staff the audit engagement with several members of the firm whohave experience in auditing energy and public companies. The extent of partner reviewof key accounts will be extensive.Based on the above information, identify factors that affect the risk of material misstatements in the December 31, 2013, financial statements of Henderson Energy. Indicatewhether the factor increases or decreases the risk of material misstatements. Also, identifywhich audit risk model component is affected by the factor. Use the format below:Effect on the Risk of Audit Risk ModelFactor Material Misstatement ComponentHenderson is a new client Increases Inherent risk
Whitehead, CPA, is planning the audit of a newly obtained
client, Henderson Energy Corporation, for the year ended December 31, 2013. 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,
largely due to its extensive investment in information technologies used in its energy
distribution and other key business processes. Recent growth into rural markets, however,
has placed some strain on 2013 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 complexities
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
experienced some difficulty in correctly tracking existing property, plant, and equipment
items. This largely involves equipment located at its multiple energy production facilities.
During the recent year, Henderson acquired a regional electric company, which expanded
the number of energy production facilities.
Whitehead plans to staff the audit engagement with several members of the firm who
have experience in auditing energy and public companies. The extent of partner review
of key accounts will be extensive.
Based on the above information, identify factors that affect the risk of material misstatements in the December 31, 2013, financial statements of Henderson Energy. Indicate
whether the factor increases or decreases the risk of material misstatements. Also, identify
which audit risk model component is affected by the factor. Use the format below:
Effect on the Risk of Audit Risk Model
Factor Material Misstatement Component
Henderson is a new client Increases Inherent risk
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