ACCA Audit and Assurance (F8) Practice Exam

Which condition could lead to a client being deemed "High Risk"?

1. Lack of unusual transactions

2. Strong financial position

3. Presence of significant related party transactions

4. Stable management team

The correct answer is: Presence of significant related party transactions

A client can be deemed "High Risk" due to the presence of significant related party transactions because these transactions may obscure the true nature of a company's financial position. Related party transactions can introduce risks such as conflicts of interest, potential manipulation of financial results, and issues related to the arm's length principle. Because these transactions may not be conducted on normal commercial terms, they can lead to misstatements in the financial statements and increased susceptibility to fraud. Thus, auditors need to approach such clients with enhanced scrutiny and perform additional procedures to ensure that these transactions are appropriately disclosed and valued. The other options reflect situations that generally indicate lower risk. A lack of unusual transactions suggests stability and predictability in operations, which typically signals a lower risk environment for auditors. A strong financial position can indicate that a company is well-managed and less likely to encounter financial difficulties that could lead to misstatement. Similarly, a stable management team is often associated with consistency in corporate governance and strategy, which can mitigate risk factors that could affect financial reporting.