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Prancer Construction Answer

Prancer Construction Co is a new audit client, requiring the audit team to obtain a thorough understanding of the company and maintain professional skepticism. Key audit risks include work in progress being incorrectly calculated based on percentage completion, warranty provisions being understated, non-refundable deposits being incorrectly recognized as revenue, receivables being overvalued, and potential manipulation of financial results to meet overdraft covenants. The audit team should perform additional procedures to assess these risk areas, such as evaluating work in progress measurements, comparing warranty provisions to actual claims, reviewing revenue recognition of deposits, and obtaining trade payable confirmations.

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98 views3 pages

Prancer Construction Answer

Prancer Construction Co is a new audit client, requiring the audit team to obtain a thorough understanding of the company and maintain professional skepticism. Key audit risks include work in progress being incorrectly calculated based on percentage completion, warranty provisions being understated, non-refundable deposits being incorrectly recognized as revenue, receivables being overvalued, and potential manipulation of financial results to meet overdraft covenants. The audit team should perform additional procedures to assess these risk areas, such as evaluating work in progress measurements, comparing warranty provisions to actual claims, reviewing revenue recognition of deposits, and obtaining trade payable confirmations.

Uploaded by

Aayush Thapa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Prancer Construction

Audit Risk & Audit Responses

Audit Risk Audit Response


New Audit Client Obtain a thorough understanding of the company
along with the nature of business. Also, ensure the
Prancer Construction Co is a new client for Cupid & audit team has sufficient experienced members and
Co. maintain professional skepticism throughout the
audit.
The audit team is unfamiliar with the accounting
policies, transactions, nature of business and systems
of internal control of the company.

As a result, there is an increased detection risk.


Work In Progress Discuss with the management the basis of
calculation of percentage completion for work in
Prancer Co has recognized work in progress of progress and assess its appropriateness. If the work
$1.8m which comprised property construction in in progress is measured by the expect, the audit team
progress as well as ongoing maintenance services for needs to further assess the competence and
finished properties on prior year. objectivity of the expert.

Work in progress needs to be calculated based on


percentage completion for partially constructed
building which is likely to be subjective.

If the percentage completion is not calculated


correctly, the inventory valuation may be misstated.
Warranty Provision Compare the prior year warranty provision with the
actual level of warranty claims in the year and assess
Prancer Construction Coo offers its customers a the reasonableness of the judgments used by the
building warranty of five years, which covers any management.
construction defects. The finance director anticipates
this provision will be lower than last year.

As per IAS 37 Provision, Contingent liability and


Contingent Asset, an appropriate warranty provision
needs to be calculated.

There is a possible risk that warranty provision could


be understated if the anticipation used by the finance
director is incorrect.
Non- Refundable Deposits Obtain the breakdown of revenue and assess if 5%
deposits are incorrectly recognized as revenue. If this
Customers who wish to purchase a property are is the case, kindly request the management to comply
required to place an order and 5% non- refundable with relevant IFRS.
deposits prior to the completion of the building.

As per IFRS 16 Revenue from contract with


customer, revenue should only be recognized once
the performance obligation is satisfied.

There is a possible risk that the management might


recognize the 5% deposits as a revenue in the
statement of profit and loss instead of deferred
income resulting in overstatement of revenue and
understatement of deferred income.
Overvaluation of Receivables Review the post year end cash receipts to assess the
reasonableness of the assumption used by the
When the building is complete, customers will pay a management regarding the allowances for credit
further 92.5% with the final 2.5% due to be paid six losses/ receivables.
months later. The finance director has anticipated
that the allowance for credit losses/receivable will be
significantly reduced.

As 2.5% is due to be paid, some of the balances may


not be recovered if adequate allowances for credit
losses is not made.

There is a possible risk of overstatement of


receivable and understatement of expenses if the
anticipation of the finance director regarding the
reduction in allowances is insufficient.

Overdraft Covenants Perform detail substantive procedures to ensure all


the line of items are true and fair and maintain high
Prancer Construction Co has a material overdraft level of professional skepticism throughout the audit.
which has minimum profit and net assets covenants
were to be breached attached to the overdraft.

Since, the management has an incentive to present


the better position of the entity to meet the
covenants attached to overdraft, there is possible risk
of manipulation of profit and net assets.
Trade Payables Obtain balance confirmation from the creditors and
review the supplier statement reconciliation to ensure
A review of the management accounts shows the the completeness of trade payables booked
payables period was 56 days for June 20X5,
compared to 87 days for September 20X4. The
finance director anticipates that the September 20X5
payables will be lower than those in June 20X5.

Since the forecast profit is higher than last year,


indicating an increase in trade, the company’s cash
position has also continued to deteriorate and
therefore it is unusual for the payable to decrease.

There is a possible risk of misstatement within trade


payables in order to meet the covenants (increase net
assets) resulting in understatement of trade payable.

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