Question

TWD's Board of Directors is controlled by Mead, the majority stockholder, who also acts as the chief executive officer. The audit risk would:

A)Increase, as there is a lack of independent oversight.
B)Decrease, as Mead is actively involved in the company's operations.
C)Remain unchanged, as audit risk is not affected by corporate governance structure.
D)Fluctuate, depending on the size of the company.

Answer 1

Audit risk in TWD's case would likely increase due to a lack of independent oversight since Mead, the majority stockholder, also acts as CEO and controls the Board of Directors. This concentration of power can impede objective auditing, thus posing a higher risk.

Step-by-step explanation:

When evaluating audit risk, the structure of a company's corporate governance can play a significant role. In this scenario, TWD's Board of Directors being controlled by a majority stockholder, Mead, who also serves as the chief executive officer, may lead to a lack of independent oversight.

This concentration of power typically increases audit risk, as it could give rise to certain conflicts of interest and make it more challenging for auditors to obtain unbiased and objective information. The theory of corporate governance suggests that a firm's board of directors should act in the best interests of the shareholders.

In reality, top executives often influence board selection, which can undermine this process and lead to governance issues, as seen with the failure of Lehman Brothers' governance to provide accurate financial information. Therefore, having a majority stockholder also acting as an executive can exacerbate these issues, further increasing audit risk.