Question

You are an auditor at a public accounting firm. You are conducting an audit for the financial year ending December 31, 2019. Your client has go public. This client is a property development company. Your client builds property in the form of apartment units, housing / real estate and also property investment products in the form of lots ready to build. In addition, this client also has a project development cooperation with its customers. The client is bound by a contract signed by both parties before a notary for the construction of a project with this customer. The project has not been completed 100%, however, the client says that the project has been completed 60% and the client acknowledges 60% of the development as revenue in the 2019 financial year.

a. In your opinion, as an auditor, what account should the client classify the apartment and housing / real estate complex be? Explain your answer!

b.   What is the audit procedure that you will apply to ensure the recognition of revenue that is 60% of the project!

c. What audit evidence will you examine and what are the related assertions? Explain your answer!

Answer 1

a. IFRS 15 provides that a Company can recognise revenue using the percentage of completion method when either of the following 3 conditions have been satisfied-

i. the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs

ii. the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced

iii. the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

In the given case, the Company is in business of real estate development which is 60% complete. Since, the property is yet to be fully completed, customer cannot use the apartment and also, in abscence of information, one based on industry practice understands that where a customer cannot pay for the apartment, companies can sell it to another customer thus providing an alternative us to the Company.

Hence, the Company should classify the property as Inventory.

b. FOllowing audit procedures shall be peformed-

i. Testing of budget and its completeness

ii. Test of controls, test of details aroung actual cost incurred

iii. completeness check of the budget and actual cost incurred

iv. Arithmatical accuracy of computation of 60% and re-computatin

v. Verification of the satisfaction of percentage of completeness criteria given in IFRS 15.

vi. Verification of probability of customer collection

vii. Verify presentation and disclosure based on IFRS 15 requirement.

c. Following evident and assertions will be tested-

	Evidence	Assertion
1	Customer contract	Existence, Rights and obligation
2	Vouchers, bills of cost incurred	Existence, Rights and obligation, valuation
3	Approval of budget based on ALM	Completeness, Rights & Obligation
4	Complete cost incurred report	Completeness, accuracy and valuation
5	Revenue computation sheet	Accuracy and valuation
6	Disclosure template	Presentation and disclosure
7	Accounting memo	Rights & obligation and valuation