Question

Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of 20X1 disclosed a new policy. TWD guaranteed to several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails federal or state site cleanup inspection in 20X2. The audit risk would:

A)Increase, as the new policy introduces potential liabilities that may impact TWD's financial statements.
B)Decrease, as the guarantee policy enhances TWD's financial stability.
C)Remain unchanged, as the audit risk is not influenced by changes in refund policies.
D)Fluctuate, depending on the financial impact of the guarantee policy on TWD's revenue and liabilities.

Answer 1

The new refund policy introduces potential liabilities that may impact TWD's financial statements, which increases the audit risk.

Step-by-step explanation:

The answer to this question is A) Increase, as the new policy introduces potential liabilities that may impact TWD's financial statements.

The introduction of the refund policy creates a potential liability for TWD as it guarantees to refund federal and state funding if any municipality fails the site cleanup inspection in 20X2. This introduces uncertainty and risk to TWD's financial statements, which increases the audit risk.

Therefore, the correct answer is A) Increase, as the new policy introduces potential liabilities that may impact TWD's financial statements.