Question

An initial public offering of TWD's stock is planned for late 20X2. The audit risk would:

A) Increase, as the IPO introduces additional scrutiny and complexity to the audit.
B) Decrease, as the IPO requires TWD to enhance its financial reporting and controls.
C) Remain unchanged, as the audit risk is not affected by the company's decision to go public.
D) Fluctuate, depending on market conditions and investor interest in TWD's IPO.

Answer 1

An IPO increases audit risk due to heightened scrutiny and complexity, despite the requirement for enhanced financial controls.

Step-by-step explanation:

The question revolves around the effect of an initial public offering (IPO) on audit risk. An IPO introduces additional scrutiny and complexity to the financial reporting and control mechanisms of a company. While the IPO demands that the company enhance its financial controls and systems, the increased scrutiny and the higher expectations from the public, regulatory agencies, and other stakeholders might actually increase the audit risk due to the potential for undetected errors or fraud. Also, the financial statements become more visible and susceptible to external factors, which can affect the stock's value and thereby impact the audit risk assessments.