Assessing inherent risk and other specific business risks

Case 3

You are the audit manager on Highland Ltd, a property investment company owned by a small number of wealthy investors. Last year the owners brought in new managers, who made substantial changes to the organisational structure of Highland. The new management team acquired a substantial parcel of shares in Highland and has also implemented a bold acquisitions strategy, resulting in a number of new business interests across the Asia–Pacific region.

A new staff member of the finance team, Kirsten Roberts, has been given responsibility for liaising with the auditor in respect of related-party transactions. Kirsten is responsible for identifying, recording, summarising and disclosing related-party transactions. This responsibility, along with a long list of other accounting responsibilities, has been delegated to her by the new management team. Kirsten has given you a list of related-party transactions that has not changed from previous years. However, given the changes in the business and the new acquisitions, you believe there is a risk of unidentified related parties. You meet with Kirsten to discuss this and soon realise that Kirsten does not really know much about the related-party framework in AASB 124 (IAS 24). Kirsten informs you of the following information:

• Highland provides management services to a company in Fiji called Sunshine. However, no invoice has yet been processed and Kirsten is unaware of the terms of the arrangement. It is Kirsten’s understanding that Sunshine is owned by members of the new management team.

• During the year Highland sold a property located in Singapore to a company called Clayton, which was set up specifically for the purpose of buying this particular property. Kirsten indicates that Clayton is not related to Highland, as Clayton is owned 100 per cent by a Singaporean bank. However, Kirsten does not understand why there are still property management fees for this property in Highland’s accounts relating to the period after the property was sold.

• Since the new management team has come on board, Highland has done a lot of business with a company called Diamond, in which one of the directors of Highland has a substantial interest. Kirsten tells you that all transactions with Diamond are on normal commercial terms, so she has not included Diamond on her list of related parties.

REQUIRED

Based on the information given, list three factors that would increase the risk of a material misstatement occurring due to fraud or error resulting from the entity’s related parties or transactions.