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I am auditing a fund for the 2022 year that is in the process of constructing a residential property that will be sold once construction is completed (completion due 2023 year). The builder is a related party. The fund has entered into an agency agreement & has signed a building contract prior to construction commencing.
The fund has opened a new bank account where the builder is also a signatory on the account & transferred funds into the account for the purpose of materials purchases. The builder has also been paid from this account.
The building contract is for $38,000 with the usual breakdown for each stage. however, they have not provided any details around how this amount was calculated. three invoices have been paid to the builder, the invoices provided do not agree to the stages in the contract nor the amounts. however, the three invoices added together agree to the total up to the final stage amount.
What should I be looking at in this scenario and should I be requesting any further details?
I think you might need to consider the sole purpose test and whether the building contract constitutes a current benefit to a related party from the fund. Alternatively, were quotes sought from the open market for the construction? If not you may have a non-arms' length transaction to deal with. It is the transaction that is considered, not just the parties.