Question

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:

Required:

(1) What are the areas in which LHM conducts its operations?

(2) Are there any events or conditions that may cast significant doubt on the LHM’s ability to continue as a going concern? Explain. Your answer should be supported by at least three factors.

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

(4) 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.

(5) Identify an appropriate base and set planning materiality for LHM. Explain why you have chosen this base and the percentage you have used.

Answer 1

1. LHM, a property development company, is engaged in procurement of land and develop infrastructure and building for sale as understood from it's nature of operation. .The area of operations  are procurement of land, planning,  purchase or hire of machinery, labour regular, casual and specialist,material procurement, power and fuel,, any permission if required by relevant law, operation as per schedule and finance management.

2. There may be few events or conditions that may cast significant doubt on the ability to continue as a going concern. Below are the few examples

(a) Default in loan repayment schedule. If the LHM defaults in repayment of installments which indicates that it's financial commitments   is not fulfilled. The lenders take precautions and may impose strict terms for sanctioning loan for its working capital gap.

(b) If LHM could not raise money as per sale agreement than it would opt for borrowing which will increase its interest cost. over borrowing may leads to increase in  financial cost and reduce profitability.

(c) Material management is an important task for LHM. Untimely and over procurement may cost blockage of fund again under procurement and short procurement may lead to delay in project completion. Delay in procurement will increase will increase other cost like cost of finance, extra labour, administrative cost etc.

3. Three major business risks associated with current year are

(a) Shortage of Finance

(b) Labour unrest

(c) Shortage of supply of material.

4. Based on risk analysis and understanding following three accounts could be at risk of material misstatements.

(a) Assets it may over valued to influence Balance Sheet

(b) Revenue, could be over stated than actual to show higher income

(c) Omission of expense reported in Profit and Loss Account to increase profit.

5.. To assess materiality both qualitative and quantitative method are applicable . As per International Standard of Auditing the following are quantitative factors are prescribe to determine planning material.

0.5% to 1% of Sales Revenue

1% to 2% of Total Assets

1% to 2% of Gross profit

2% to 5% of Shareholders Equity

5% to 10% of Net Profit