9-33

a. The following significant risks were identified:
the related party transactions with CCC-2 Ltd. are below market value, so income, assets and
liabilities of CCC Inc. may be misstated; there do not appear to be controls in place to ensure
that related party transactions are recorded correctly

the risk of fraud (and other irregularities) is increased as several employees feel they are
underpaid (increased reasons for rationalization), particularly for non-managers

the risk of fraud is increased due to the fact that the controller does not take vacations, so her
duties may not be checked by someone else (increasing opportunity for the controller)

high staff turnover increases the risk of error in transaction processing (since employees may
not be adequately trained)

risk of overstatement of revenues is high as the company is already using related party
transactions to overstate – they may be using other methods as well
b. All those risks are related to the control environment and would increase the risk of
misstatement at the overall financial statement level.
c. Given the many weaknesses and that they all indicate a weak control environment, they are
likely to have a pervasive impact on controls in the control activities. Therefore, it is
unlikely that the auditor would plan to test the effectiveness of controls.