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) 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

In the construction industry, auditors may find that a significant risk exists with regards to:

• the accuracy of management’s estimates of costs to complete for contracts in progress

• contract revenues due to the possible effects of unsigned or unpriced change orders and claims

*the significant measurement uncertainty associated with the application of the percentage-of- completion method of accounting for contracts

Assertion

The relevant assertions to construction projects are as follows:

• Existence of revenue recognition benchmarks: Auditors could have visited the construction sites to determine whether the revenue recognition milestones had actually been reached? It could be justified with the billed and unbilled receivables associated with each project.

• Justification of Un-invoiced construction costs: Un-invoiced construction cost is a red flag for control issues. Auditors could have sought to reconcile these costs by confirming amounts with the vendors.

• Classification: Company made changes to its accounting methods used for percentage-of-completion accounting. The auditors should have tested that assertion for the correct revenues and expenses.

• Completeness: It includes examination of construction costs by comparing those estimates to those of similar construction projects by other companies