Question

During 20X1, TWD sold half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL. The audit risk would:

A)Increase, as the sale of a controlling interest may introduce uncertainties about the consolidated financial statements.
B)Decrease, as the sale of a controlling interest simplifies the consolidation process.
C)Remain unchanged, as the audit risk is not affected by changes in ownership structure.
D)Fluctuate, depending on the fair value of the retained interest in UEL.

Answer 1

The audit risk would increase, as the sale of a controlling interest may introduce uncertainties about the consolidated financial statements.

Step-by-step explanation:

The subject of this question is related to Business.

During 20X1, TWD sold half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL. The audit risk would increase, as the sale of a controlling interest may introduce uncertainties about the consolidated financial statements.

When a company sells its controlling interest in another company, it means that it no longer has the power to make decisions and control the operations of the other company. This introduces a risk factor because the financial statements of the consolidated entity may become less reliable. The remaining interest may have different voting rights, profit-sharing arrangements, or influence over the management of the entity, which can introduce uncertainties for the auditors.

Therefore, option A) Increase, as the sale of a controlling interest may introduce uncertainties about the consolidated financial statements is the correct answer.