Indicate factors that would affect the risk of material

Assignment Help Financial Accounting

Reference no: EM13143280

Audrey Pearce is an audit partner of Pearce Green, a firm of accountants. She is considering audit risk at the overallfinancialÂ statementÂ level in planning the audit for the finance company Homes South Ltd (HS) for the year ending 30 June 2008. This risk is influenced by a combination of factors related tomanagement, the industry and the entity. Audrey has gathered the following information concerning HS''s environment. 1.HS has been consistently more profitable than the industry average by marketing mortgages on properties in a prosperous rural area, which has experienced considerable growth in recent years. HS packages and sells mortgages to large investment trusts. Despite recent volatility of interest rates, HS has been able to continue selling its mortgages as a source of new lendable funds.Â

2.HS's board of directors is controlled by George Waltson, the majority shareholders, who also acts as the chief executive officer. Management at the company's branch offices has authority for directing and controlling HS's operations and is compensated according to branch profitability. The internal auditor reports directly to Henrry Stevenson, a minority shareholders, who is chairman of the audit committee.

3. The accounting department has experienced little turn over in personnel during the five years for which Audrey has audited HS. HS"s formula constantly underestimates the allowance for loan losses, but its financial controller has always been receptive to Audrey's suggestions to increase the allowance.

4. During 2009, HS opened a branch office in the metropolitan area 30 kms from its principal place of business. Although this branch is not yet profitable ( as a result of competition from several well-established banks), management believes it will be profitable by 2011.

5. During 2009, the company increased the efficiency of its operation by installling a new computer system.

REQUIRED:

Based only on the information above, indicate the factors that would affect the risk of material mistatement and explain why

Reference no: EM13143280

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