Audrey Pearce is an audit partner of Pearce Green, a firm of accountants. She is considering audit risk at the overall financial statement level in planning the audit for the finance company Homes South Ltd (HS) for the year ending 30 June 2020. This risk is influenced by a combination of factors related to management, the industry and the entity. Audrey has gathered the following information concerning HSs 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.

2. HSs board of directors is controlled by George Watson, the majority shareholder, who also acts as the chief executive officer. Management at the companys branch offices has authority for directing and controlling HSs operations, and is compensated according to branch profitability. The internal auditor reports directly to Henry Stevenson, a minority shareholder, who is chairman of the audit committee.

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

4. During 2019, HS opened a branch office in a metropolitan area 30 kilometres 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 2021.

5. During 2019, the company increased the efficiency of its operations by installing a new computer system.

Required Based only on the information provided, indicate the factors that would affect the risk of material misstatement and explain why.