CPA Quiz: Internal Factors And Governance Structure
20 questions · exam conditions
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Internal Factors And Governance StructureQuestion 1 of 20

You are conducting a review engagement for a nonissuer not-for-profit organization. The organization's governance structure includes a volunteer board that approves the budget, but there is no documented conflict-of-interest policy and no record of annual disclosures by board members. Management informs you that a board member's company provides significant services to the entity. Which factor would most likely affect the auditor's governance assessment?

Whether the board has documented conflict-of-interest policies and performs periodic related-party disclosures and approvals.
Whether the auditor can design and implement the entity's conflict-of-interest policy to improve governance before issuing the review report.
Whether the entity is required to obtain an audit under Public Company Accounting Oversight Board standards because it receives donations.
Whether the existence of a related-party transaction eliminates the need for the practitioner to perform inquiries in a review engagement.
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CPA Quiz

CPA Quiz: Internal Factors And Governance Structure

Practice Internal Factors And Governance Structure in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Internal Factors And Governance Structure, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

You are conducting a review engagement for a nonissuer not-for-profit organization. The organization's governance structure includes a volunteer board that approves the budget, but there is no documented conflict-of-interest policy and no record of annual disclosures by board members. Management informs you that a board member's company provides significant services to the entity. Which factor would most likely affect the auditor's governance assessment?

  1. Whether the board has documented conflict-of-interest policies and performs periodic related-party disclosures and approvals. (correct answer)
  2. Whether the auditor can design and implement the entity's conflict-of-interest policy to improve governance before issuing the review report.
  3. Whether the entity is required to obtain an audit under Public Company Accounting Oversight Board standards because it receives donations.
  4. Whether the existence of a related-party transaction eliminates the need for the practitioner to perform inquiries in a review engagement.
Explanation: This question tests governance considerations in a review engagement under AR-C 90. The key facts are a nonissuer not-for-profit review engagement with no documented conflict-of-interest policy, no annual board disclosures, and a board member's company providing significant services. The correct answer (A) focuses on whether proper policies and procedures exist for identifying and managing conflicts, which affects the practitioner's understanding of the entity under AR-C 90.28. Answer B is incorrect because the practitioner cannot design or implement entity policies, which would impair independence (ET 1.295). Answer C is incorrect because receiving donations does not trigger PCAOB audit requirements; only being an issuer does. Answer D is incorrect because related-party transactions require additional inquiries in reviews, not fewer (AR-C 90.A58). The professional framework is: in review engagements, assess whether governance structures adequately identify and manage conflicts of interest that could affect financial reporting.

Question 2

You are auditing an issuer pharmaceutical distributor. The audit committee is independent, but management has not implemented a formal process to evaluate compliance risks related to new regulations, and internal audit reports are not shared with the audit committee. As part of understanding the control environment and governance oversight, you must determine how these conditions affect the audit approach. Based on the entity's control environment, which response is most appropriate?

  1. Increase the assessed risks of material misstatement related to compliance-sensitive accounts and disclosures, expand inquiries of the audit committee, and design procedures responsive to the heightened risk. (correct answer)
  2. Assume compliance risks are outside the scope of financial reporting and therefore do not affect the audit plan.
  3. Rely on the independence of the audit committee to conclude controls over compliance are effective without further work.
  4. Delegate the auditor's responsibility for risk assessment to internal audit because internal audit identified issues previously.
Explanation: This question tests the impact of compliance risk management weaknesses on audit planning under AS 2110. The key facts are an issuer pharmaceutical distributor without formal compliance risk evaluation processes and internal audit reports not shared with the audit committee. The correct answer (A) properly requires increasing assessed risks for compliance-sensitive areas and designing responsive procedures, consistent with AS 2110.71 regarding fraud and compliance risks. Answer B is incorrect because compliance risks that could result in material misstatements are within the audit scope (AS 2110.12). Answer C is incorrect because audit committee independence alone doesn't ensure effective controls without proper information flow (AS 2110.25). Answer D is incorrect because the auditor must perform their own risk assessment and cannot delegate this responsibility (AS 2110.59). The professional framework is: when compliance risk management is weak in regulated industries, increase assessed risks and expand procedures for accounts and disclosures sensitive to noncompliance.

Question 3

You are the auditor of a nonissuer manufacturing company in a financial statement audit. The entity has an owner-managed governance structure with a three-member board that meets quarterly, but minutes are not retained and the board does not review whistleblower complaints or related-party transactions. During planning, you note management override risk is elevated because the controller can post journal entries and approve vendor setup without independent review. Which action should the auditor take regarding governance weaknesses?

  1. Rely on management representations about governance oversight because governance matters are outside the scope of a financial statement audit.
  2. Communicate the governance deficiencies and related control implications to those charged with governance in writing and adjust the risk assessment and planned procedures accordingly. (correct answer)
  3. Issue an adverse opinion on internal control over financial reporting because board minutes are not retained.
  4. Perform an integrated audit under Public Company Accounting Oversight Board standards to address the governance weaknesses.
Explanation: This question tests the auditor's required response to governance deficiencies under AU-C 265, Communicating Internal Control Related Matters. The key facts are that this is a nonissuer financial statement audit with weak board oversight (no retained minutes, no review of whistleblower complaints or related-party transactions) and elevated management override risk due to lack of segregation of duties. The correct answer (B) aligns with AU-C 265.09, which requires written communication of significant deficiencies and material weaknesses to those charged with governance, and AU-C 315.A88, which requires adjusting the risk assessment when governance is weak. Answer A is incorrect because governance matters directly affect the auditor's risk assessment and are within the audit scope (AU-C 260). Answer C is incorrect because this is a financial statement audit, not an integrated audit, and the auditor does not issue an opinion on internal control for nonissuers. Answer D is incorrect because PCAOB standards apply only to issuers, not nonissuers. The professional judgment framework is: when governance weaknesses create or exacerbate risks of material misstatement, communicate in writing and modify the audit approach accordingly.

Question 4

You are auditing a nonissuer retail chain. The governance structure includes a board with an independent chair, but day-to-day control is centralized with the chief executive officer, who also approves manual price overrides and has authority to modify user access. Your walkthroughs show that store managers can both receive inventory and approve vendor invoices when staffing is tight, and compensating controls are informal. Based on the entity's control environment, which response is most appropriate?

  1. Assess control risk at the maximum for affected assertions and design more substantive procedures because segregation of duties weaknesses increase the risk of material misstatement. (correct answer)
  2. Reduce substantive testing because centralized oversight by the chief executive officer compensates for the lack of segregation of duties.
  3. Treat the segregation of duties weakness as immaterial by default because it occurs only during staffing shortages.
  4. Rely on the board chair's independence as sufficient evidence that control activities are operating effectively.
Explanation: This question tests the auditor's response to segregation of duties weaknesses under AU-C 315 and AU-C 330. The key facts are significant segregation of duties issues (CEO can approve overrides and modify access; store managers can receive inventory and approve invoices) with only informal compensating controls. The correct answer (A) properly requires assessing control risk at maximum for affected assertions and designing more substantive procedures, consistent with AU-C 330.08 when controls are not expected to be effective. Answer B is incorrect because centralized oversight by someone with override capabilities increases rather than decreases risk (AU-C 240.A28). Answer C is incorrect because segregation of duties weaknesses affecting significant processes are not immaterial by default, regardless of frequency (AU-C 265.A7). Answer D is incorrect because board independence alone cannot compensate for operational control deficiencies (AU-C 315.A79). The professional framework is: when segregation of duties is compromised and compensating controls are weak or informal, assess control risk at maximum and increase substantive testing accordingly.

Question 5

You are auditing a nonissuer healthcare clinic. Governance consists of a physician-owner and an advisory board that meets semiannually; there are no retained minutes, no documented approval of significant accounting policies, and no formal process for reviewing related-party arrangements with physician-owned labs. During the audit, you identify several late journal entries posted by the owner after the trial balance was provided. Which action should the auditor take regarding governance weaknesses?

  1. Expand procedures addressing management override (including testing journal entries and reviewing related-party transactions) and communicate governance and control deficiencies to those charged with governance. (correct answer)
  2. Accept the late journal entries as routine because owner-managed entities typically do not maintain formal governance documentation.
  3. Issue an adverse opinion on the financial statements because the advisory board does not retain minutes.
  4. Perform only analytical procedures because governance weaknesses reduce the need for detailed tests of transactions.
Explanation: This question tests the auditor's response to management override risks in owner-managed entities under AU-C 240. The key facts are a physician-owned clinic with minimal governance documentation, no formal related-party review process, and late journal entries posted by the owner after providing the trial balance. The correct answer (A) requires expanding management override procedures including journal entry testing and related-party review, plus communicating deficiencies, consistent with AU-C 240.32 and AU-C 265. Answer B is incorrect because late post-closing entries by owners require investigation regardless of entity size (AU-C 240.A42). Answer C is incorrect because lack of board minutes doesn't automatically require an adverse opinion on financial statements (AU-C 705). Answer D is incorrect because governance weaknesses and override indicators require more detailed testing, not less (AU-C 240.33). The professional framework is: in owner-managed entities with weak governance, presume elevated override risk and expand procedures specifically addressing journal entries, estimates, and related-party transactions.

Question 6

You are performing a financial statement audit of an issuer technology company. The audit committee is newly formed and receives management-prepared risk reports, but there is no documented process for identifying emerging cybersecurity and revenue-recognition risks, and the committee rarely challenges management assumptions. You need to understand whether the entity's risk assessment process is adequate for identifying risks of material misstatement. What is the most appropriate procedure for assessing risk management frameworks?

  1. Obtain an understanding of how management identifies and analyzes business risks, corroborate through inquiries of the audit committee and inspection of risk reports, and evaluate whether the process is implemented and monitored. (correct answer)
  2. Limit procedures to inquiries of management because risk management is not relevant to the auditor's risk assessment.
  3. Assume the risk assessment process is effective because an audit committee exists and meets periodically.
  4. Replace the auditor's risk assessment with management's enterprise risk management conclusions without performing corroborating procedures.
Explanation: This question tests understanding of risk assessment procedures for an issuer's risk management framework under AS 2110 (formerly AS 12). The key facts are that this is an issuer with a newly formed audit committee receiving management-prepared reports but lacking a documented risk identification process and rarely challenging management. The correct answer (A) requires obtaining an understanding through multiple sources (management and audit committee inquiries plus inspection of risk reports) and evaluating implementation, consistent with AS 2110.28-.30. Answer B is incorrect because AS 2110.11 explicitly requires understanding the entity's risk assessment process as it directly affects the auditor's risk assessment. Answer C is incorrect because the mere existence of an audit committee does not guarantee an effective risk assessment process (AS 2110.A5). Answer D is incorrect because AS 2110.28 requires the auditor to perform their own risk assessment and cannot simply adopt management's conclusions. The professional framework is: always corroborate management's risk assessment process through multiple procedures and evaluate whether it adequately identifies risks relevant to financial reporting.

Question 7

You are performing an attestation engagement (examination) for a nonissuer on compliance with a loan covenant requiring quarterly board review of liquidity metrics. Board minutes show the review occurred only once during the year, and management prepared the covenant calculations without independent review. What type of report should be issued for these governance deficiencies?

  1. An examination report with a qualified or adverse conclusion (as appropriate) because the entity did not comply with the specified covenant requirement for board review. (correct answer)
  2. An unmodified examination report because governance deficiencies do not affect compliance with covenants.
  3. A disclaimer of conclusion automatically because any missing board minutes is a pervasive scope limitation.
  4. An integrated-audit ICFR opinion describing the governance deficiency as a material weakness.
Explanation: This question addresses reporting in a nonissuer attestation on compliance under AT-C Section 205. Key facts include covenant non-compliance with infrequent reviews and no independent calculations. Choice A is correct as AT-C 205 requires modified conclusions for non-compliance. Choice B is incorrect because deficiencies affect compliance; Choice C is wrong as limitations are not automatically disclaimers; Choice D is inappropriate as ICFR opinions are for integrated audits. Practitioners issue modified reports for material issues. A rule is to base conclusions on evidence against criteria, qualifying for deviations.

Question 8

You are performing an attestation engagement for a nonissuer service organization's management assertion about the effectiveness of its controls over customer billing (a SOC 1-type engagement). The entity has a risk management process that identifies billing risks, but it is informal and not consistently updated for new customer contract terms. You need to assess whether the risk assessment process supports the control design described in management's assertion. What is the most appropriate procedure for assessing risk management frameworks?

  1. Inspect documentation of risk identification and assessment, inquire of process owners about how changes in contracts are evaluated, and trace selected recent contract changes to updates in identified risks and control activities. (correct answer)
  2. Accept management's assertion without further procedures because the engagement is attestation and not an audit.
  3. Apply issuer internal control reporting requirements and require management to provide an annual internal control report under securities regulations.
  4. Evaluate risk management only by recalculating billed amounts for a sample of invoices, without considering how risks are identified or updated.
Explanation: This question tests risk assessment procedures in a SOC 1 attestation engagement under AT-C 320. The key facts are a service organization attestation on billing controls with an informal risk assessment process not consistently updated for contract changes. The correct answer (A) appropriately requires inspecting documentation, making inquiries, and tracing changes through the risk management process, consistent with AT-C 320.28 requirements to evaluate control design. Answer B is incorrect because attestation engagements require obtaining evidence about the subject matter, not just accepting assertions (AT-C 105.A28). Answer C is incorrect because SOC engagements follow AICPA attestation standards, not PCAOB requirements for issuers (AT-C 320.01). Answer D is incorrect because evaluating risk assessment requires understanding how risks are identified and managed, not just testing outputs (AT-C 320.A35). The professional framework is: in SOC engagements, evaluate whether the risk assessment process adequately identifies changes that could affect control objectives and whether controls are updated accordingly.

Question 9

You are the auditor of an issuer in an integrated audit of financial statements and internal control over financial reporting. The company has an audit committee that meets regularly, but internal audit reports repeated failures in the entity-level control for monitoring user access changes, and management has not remediated them. You conclude the monitoring control deficiency is pervasive and affects multiple significant accounts. What type of report should be issued for these governance deficiencies?

  1. An unmodified opinion on internal control over financial reporting because entity-level controls are not relevant if substantive testing is increased.
  2. A disclaimer of opinion on the financial statements because governance deficiencies automatically create a scope limitation.
  3. An adverse opinion on internal control over financial reporting if the deficiency constitutes a material weakness, while still issuing the appropriate financial statement opinion based on the audit evidence obtained. (correct answer)
  4. A qualified opinion on internal control over financial reporting because material weaknesses are reported as qualifications under issuer standards.
Explanation: This question tests integrated audit reporting requirements for issuers under AS 2201. The key facts are an issuer integrated audit with pervasive entity-level monitoring control deficiencies affecting multiple significant accounts that management has not remediated despite internal audit findings. The correct answer (C) correctly identifies that a material weakness in internal control requires an adverse ICFR opinion under AS 2201.90, while the financial statement opinion depends on audit evidence obtained (AS 2201.86). Answer A is incorrect because entity-level control deficiencies cannot be ignored even with increased substantive testing (AS 2201.24). Answer B is incorrect because governance deficiencies do not automatically create a scope limitation for the financial statement audit (AS 3101). Answer D is incorrect because PCAOB standards require adverse opinions, not qualified opinions, for material weaknesses (AS 2201.90). The professional framework is: material weaknesses in ICFR require an adverse ICFR opinion, but the financial statement opinion depends on whether sufficient appropriate audit evidence was obtained through alternative procedures.

Question 10

You are the auditor of an issuer in an integrated audit. Management's entity-level control over financial reporting includes a quarterly disclosure committee meeting, but attendance is inconsistent and key members do not review draft filings before submission. The audit committee is unaware that the disclosure committee process is not functioning as designed. Which action should the auditor take regarding governance weaknesses?

  1. Test the design and operating effectiveness of the disclosure committee control, communicate deficiencies to the audit committee, and assess the impact on ICFR and financial statement audit procedures. (correct answer)
  2. Assume the control is effective because it is documented and therefore no testing is required.
  3. Treat the issue as a minor documentation matter and avoid communication to the audit committee.
  4. Conclude the deficiency is irrelevant because disclosure committees relate to legal compliance, not financial reporting.
Explanation: This question tests governance weakness handling in an issuer integrated audit under PCAOB AS 2201 and AS 265. Key facts include inconsistent disclosure committee attendance and unawareness by audit committee. Choice A is correct as AS 2201 requires testing entity-level controls and deficiency communication. Choice B is incorrect because documentation does not ensure effectiveness; Choice C is wrong as communication is required; Choice D is inappropriate since disclosures affect ICFR. Auditors test and communicate control gaps. A framework is to evaluate operating effectiveness, classifying based on misstatement potential.

Question 11

You are the auditor of a nonissuer in a financial statement audit. Management refuses to provide the auditor with access to audit committee minutes, stating they are confidential, but allows inquiry of the committee chair. The entity has significant related-party transactions and complex revenue arrangements. Which action should the auditor take regarding governance weaknesses?

  1. Treat the refusal as a scope limitation, attempt alternative procedures where possible, and consider the effect on the auditor's opinion if sufficient appropriate evidence cannot be obtained. (correct answer)
  2. Accept inquiry of the committee chair as sufficient because minutes are never considered audit evidence.
  3. Continue the audit without modification because governance documents are outside the scope of a nonissuer audit.
  4. Report the refusal to the Public Company Accounting Oversight Board as required for all audits.
Explanation: This question tests responses to evidence refusals in a nonissuer audit under AU-C Section 500 and 705. Key facts include denied minutes access but allowed inquiry, with complex transactions. Choice A aligns with AU-C 705, treating as scope limitation requiring alternatives or opinion modification. Choice B is incorrect as minutes are evidence; Choice C is wrong because governance affects scope; Choice D is inappropriate as PCAOB is for issuers. Auditors pursue alternatives for limitations. A framework is to evaluate limitation pervasiveness before qualifying opinions.

Question 12

You are the auditor of an issuer in an audit of financial statements and internal control over financial reporting (integrated audit). The audit committee is independent and meets quarterly, but management has a history of overriding approval limits for manual journal entries at period-end. The entity's risk management function identifies override risk but has not implemented additional monitoring controls. Based on the entity's control environment, which response is most appropriate?

  1. Reduce substantive testing because an independent audit committee compensates for management override risks.
  2. Treat management override as a presumed fraud risk, increase testing of journal entries and estimates, and evaluate whether the control deficiency is a significant deficiency or material weakness. (correct answer)
  3. Rely on the risk management function's identification of override risk as sufficient evidence that controls are operating effectively.
  4. Limit procedures to inquiry and analytics because integrated audits focus primarily on governance rather than transaction-level controls.
Explanation: This question tests the auditor's response to control environment risks, including management override, in an integrated audit of an issuer under PCAOB AS 2201 and AS 2401. Key facts include an independent audit committee but management's history of overriding controls, unmitigated override risks, and lack of monitoring. Choice B is appropriate as AS 2401 presumes management override as a fraud risk, requiring specific procedures like journal entry testing and deficiency evaluation per AS 265. Choice A is incorrect because strong governance does not eliminate override risks under AS 2110; Choice C is wrong as reliance requires testing per AS 2201; Choice D is inappropriate since integrated audits require both control and substantive testing. Auditors must integrate governance evaluations into fraud risk responses. A professional framework is to always test for override risks separately, classifying deficiencies based on severity and communicating to governance.

Question 13

During the planning phase of an audit, the auditor notes that the client's CEO is known for an aggressive operating style and dominates all major decisions with little input from other senior managers. This internal factor most directly increases the risk of:

  1. errors in complex accounting estimates.
  2. management override of internal controls. (correct answer)
  3. failure to detect noncompliance with laws and regulations.
  4. inefficiencies in the client's operational processes.
Explanation: A dominant CEO with an aggressive operating style creates an environment where there is a significant risk that management can override controls that are otherwise effective. This concentration of power can lead to circumvention of established procedures to achieve specific financial reporting objectives, directly threatening the integrity of the financial statements.

Question 14

A client has recently adopted a complex new accounting standard for valuing financial instruments. When evaluating this internal factor, what is the auditor's primary concern regarding the risk of material misstatement?

  1. The cost-effectiveness of the client's operational activities.
  2. The competence of the client's personnel to apply the new standard correctly. (correct answer)
  3. The approval of the new standard by the company's board of directors.
  4. The historical accuracy of the client's previous financial statements.
Explanation: The adoption of a complex new accounting standard creates a risk that the client's accounting personnel may not have the necessary skills or training to understand and apply it correctly. This lack of competence could lead to material misstatements in the financial statements, making it a primary concern for the auditor during risk assessment.

Question 15

An auditor is planning the audit of a large, decentralized company where subsidiary managers have significant autonomy over their operations and financial reporting. Which of the following audit planning adjustments is the most appropriate response to this governance structure?

  1. Relying exclusively on analytical procedures at the consolidated level.
  2. Reducing the sample sizes for substantive testing at all locations.
  3. Assessing the control environments at individual components or subsidiaries. (correct answer)
  4. Focusing audit procedures solely on the parent company's transactions.
Explanation: In a decentralized organization, the control environment and internal controls can vary significantly between different components or subsidiaries. Therefore, the auditor must assess the control environment at the component level to understand risks specific to those locations. A single, centralized assessment would be insufficient to identify risks that may exist in autonomous business units.

Question 16

An auditor notes that a client's management compensation plan is heavily weighted toward achieving aggressive, short-term earnings targets. This internal factor creates the most significant pressure for management to:

  1. understate liabilities and expenses. (correct answer)
  2. overstate liabilities and expenses.
  3. understate revenues and assets.
  4. improve the efficiency of operations.
Explanation: Aggressive, short-term earnings targets create a powerful incentive for management to manipulate financial results to maximize their compensation. The most direct way to boost earnings is to overstate revenues or understate liabilities and expenses. This pressure creates a significant fraud risk factor that the auditor must address in the audit plan.

Question 17

A client relies heavily on debt financing that includes several restrictive covenants, such as maintaining a minimum debt-to-equity ratio. The existence of these covenants most likely increases the inherent risk related to which of the following?

  1. The completeness of cash receipts from customers.
  2. The proper classification of balance sheet accounts.
  3. The accuracy of the inventory obsolescence reserve.
  4. The valuation of assets and recognition of liabilities near year-end. (correct answer)
Explanation: Restrictive debt covenants create pressure on management to meet specific financial ratios. This increases the risk that management may manipulate financial statement elements to avoid violating the covenants. This could involve overstating assets (e.g., delaying impairment charges) or understating liabilities (e.g., delaying recognition of expenses), particularly near the measurement date.

Question 18

The control environment component of internal control is significantly influenced by management's philosophy and operating style. Which of the following management actions would best demonstrate a commitment to a strong control environment?

  1. Setting aggressive sales targets without considering ethical implications.
  2. Consistently overriding established purchasing controls for expediency.
  3. Taking corrective action in response to identified internal control deficiencies. (correct answer)
  4. Limiting the internal audit function's access to certain departments.
Explanation: A strong control environment is demonstrated by management's attitude and actions toward internal control. When management takes timely and appropriate corrective action on deficiencies identified by either internal or external auditors, it shows that they take internal control seriously and are committed to maintaining its effectiveness. This is a key element of the 'tone at the top'.

Question 19

An audit client, a small, family-owned business, has no formal code of conduct. The owner-manager has a reputation for integrity and is heavily involved in daily operations. However, one employee handles all cash receipts, maintains accounts receivable records, and authorizes customer credit memos.

Based on this information, the auditor's primary concern regarding the company's internal factors should be the:

  1. owner-manager's philosophy and operating style.
  2. lack of a formal organizational structure.
  3. inadequate assignment of authority and responsibility. (correct answer)
  4. absence of human resource policies and practices.
Explanation: The most significant weakness described is the lack of segregation of duties, where one employee has custody of assets (cash), record-keeping responsibility (accounts receivable), and authorization ability (credit memos). This relates directly to the assignment of authority and responsibility within the governance structure and creates a significant opportunity for fraud or error.

Question 20

When obtaining an understanding of an entity and its environment, an auditor should evaluate the entity's selection and application of accounting policies. Which situation would be of most concern to the auditor?

  1. The entity consistently applies accounting policies that are common within its industry.
  2. The entity changes an accounting principle and properly discloses the change and its effect.
  3. The entity adopts an aggressive accounting policy in an area where authoritative guidance is ambiguous. (correct answer)
  4. The entity's accounting policies are clearly documented and communicated to relevant personnel.
Explanation: While not necessarily a misstatement, the selection of an aggressive accounting policy, especially in a gray area, indicates a potential management bias toward more favorable reporting. This increases inherent risk and requires the auditor to apply a higher degree of professional skepticism when examining the related accounts and disclosures.