Question

Know that :

• Conducting an audit for the financial year ending December 31,2019.
• Client has go public and property development company.
• Client builds property like apertment unit, housing, real estate, and property invesment products.
• Has project development cooperation with its customer.
• Client is bound by a contract signed by both parties before notary for the construction of a project with this customer.
• Project been completed 60% and the client acknowledged 60% of the development as revenue in the 2019 financial year

Question :

1. In your opinion, as an auditor, what account should the client classify the apartment and housing / real estate complex be? Explain your answer!
2. What is the audit procedure that you will apply to ensure the recognition of revenue that is 60% of the project?
3. What audit evidence will you examine and what are the related assertions? Explain your answer!

Answer 1

a.) Client builds property like apartment unit, housing, real estate, and property invesment products.

Since, client is in the business of building property like apartment unit, housing, real estate, and property invesment products, it should account all this things under the account Inventory. The operating business of client is to make a apartment and sell, therefore, its a inventory for the client not fixed assets. Inventory is the array of finished goods or goods used in production held by a company. In this case, it is apartment unit. If the client business is to make car and sell then balance cars are accounted as inventory not fixed assets. To identify we just need to check the operating business of client.

b.) Audit procedure to ensure the recognition of revenue: -

As an auditor, we need to check which revenue recognition method has been adopted by company for recognising revenue. Like most renoe\wned method is Percentage of completion method. As per this method, we can recognise revenue by following the below mentioned formula: -

Percentage of completion method = Cost Incurred till date/Total Cost*100

As per the formula, we can recognise proportionate amount of revenue for proportionate amount of cost incurred.

Therefore, as an auditor, we need to check the cost incurred till date and total cost of the project and check whether correct revenue has been recognised or not.

c.) Audit evidences to examine and their related assertions: -

-To manupulate revenue recognisition, cost is being manipulated, As an auditor, we need to check supporting documents for cost incurred and also conduct external confirmation from the party.

-Total Cost estimation is sources needs to checked and figure out whether assumptions taken while estimating total cost is feasable or not.

-Need to check their past record of total cost esrimation and percentages of breaches acceptable or not.