Question

CASE STUDY

You are a part of the team responsible for planning the Land & Homes Group (ASX code – LHM), a property development company, audit engagement for 2020. You are required to gather relevant background information and prepare a report for a meeting with your audit seniors. Assume that this is the first time that the audit will be conducted by your audit firm for this client. Your report must address the following issues:

QUESTIONS

1) What do you consider to be the three major business risks associated with the current year’s audit? Explain. (300 WORDS)

2) Based on your risk analysis and understanding of LHM and its environment, list and explain three accounts that could be at risk of material misstatements. You also need to

identify the key assertion at risk for each identified account. (350 WORDS)

ANSWER SHOULD BE RELATED TO Land & Homes Group (LMS) DO GIVE GENERAL ANSWER

Answer 1

The 3 major business risks associated with current year's audit of Land & Homes Group are as follows -

1. Interest Rate Risk

Exposure to interest rate risk arises on financial assets and financial liabilities recognised at the end of the reporting period, whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. The Group is exposed to earnings volatility on floating rate instruments. The Group monitors its interest rate exposure continuously and also considers on a continual basis alternative financing opportunities.

2. Credit Risk

Exposure to credit risk relating to financial assets arises from the potential non-performance by counterparties of contract obligations that could lead to a financial loss to the Group and arises principally from the Group's cash deposits and receivables. It is the Group’s policy that all customers who wish to trade on credit terms undergo a credit assessment process which takes into account the customer’s financial position, past experience and other factors. Credit limits are then set based on ratings in accordance with the limits set by the Board of Directors. These limits are reviewed on a regular basis. The maximum exposure to credit risk, without taking into account the value of any collateral or other security, in the event that the other parties fail to perform their obligations under financial instruments for each class of reporting recognised financial asset at the reporting date is the carrying amount of those assets as indicated in the statement of financial position.

3. Impact of Covid-19

It is difficult to determine the full extent of the impact of Covid-19 on business operations of the Group. The level of uncertainty in the economy and the restrictions imposed by State governments around the country has clearly resulted in less activity in most industries. The Group will continue to monitor the situation and further updates will be provided in due course.