You have been assigned the role of audit manager for the external audit of Fixers Upper...

   

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You have been assigned the role of audit manager for the external audit of Fixers Upper Berhad (Fixers Upper) for the year ended 31 May 20X2. You have replaced Daniel Osman who was the audit manager for the previous three years until he joined Fixers Upper as finance director in January 20X2, You have not previously worked on the Fixers Upper audit. Jennifer Ong is the engagement partner and has been responsible for the audit of Fixers Upper since it became a client of your firm 7 years ago. Jennifer has asked you to consider the following key areas of audit risk as part of your audit planning: (1) Work in progress (2) Freehold premises On reading the background information you ascertain the following: The principal activity of the company is the provision of restoration services in respect of residential and commercial properties which have been damaged by fire, flood or subsidence. The majority of the work undertaken by Fixers Upper is commissioned by insurance companies, which require Fixers Upper to quote a fixed fee for each restoration contract. Once the work has been completed and signed off by the property owner as being satisfactory, Fixers Upper issues an invoice to the insurance company. Insurance companies' payment policies vary - some pay within 30 days of invoice date, others pay within 60 days and one insurance company pays within 90 days. All direct costs (labour and materials) relating to each contract are recorded in Fixers Upper's job costing system which is integrated with the purchases and payroll systems. The job costing system is used to estimate the value of work in progress for the monthly management accounts and for the year-end financial statements. For the work in progress valuation, a percentage is added to the direct costs to cover overheads. The percentage is determined by taking attributable overheads in the management accounts as a percentage of direct costs in the management accounts. At a meeting with Daniel, he informed you of the following: In April 20X2, Fixers Upper obtained a bank loan which is repayable over five years with interest payable quarterly in arrears. The loan is secured on the company's freehold premises, which were valued by an external valuer in April 20X2. The premises are currently included in the accounting records at cost less accumulated depreciation which is lower than the revalued amount. The directors wish to recognise the revalued amount in the financial statements for the year ended 31 May 20X2 The company has grown rapidly during the past year and consequently exceeded its overdraft limit on a number of occasions. The overdraft is due to be reviewed in September 20X2 and the company's bank has requested that the audited financial statements are available for this review. The company has managed to pay its trade suppliers on time by delaying payments of Sales and Service Tax (SST) and payroll taxes to Malaysia Inland Revenue Board (IRB). Daniel has recently agreed a deferred payment plan with IRB in order to pay the arrears of tax over the next four months. The company has made a loss for the year ended 31 May 20X2 due to the costs incurred on a number of contracts exceeding the fixed fee. This was due to the former operations manager, Lim Da, failing to control direct labour costs. Historically, the direct labour costs have been 60% of revenue but during the year ended 31 May 20X2, they rose to 70% of revenue. Lim Dan also failed to monitor the progress of contracts resulting in a delay in obtaining the property owners' confirmation of satisfactory completion of the work and consequently a delay in the issue of invoices to insurance companies. Lim Dan resigned in April 20X2 and has set up his own company, Restore & Refurbish Sdn Bhd, providing similar restoration services in respect of damaged properties. A replacement operations manager, Jannah Nick, has been recruited. She is focusing on reducing the direct labour percentage and monitoring the progress of contracts to ensure they are signed off as soon as the work is completed to the property owners' satisfaction. Requirement: Justify why the items listed in (1) to (2) in the scenario have been identified as key areas of audit risk and, for each item, describe the procedures that should be included in the audit order to address those risks. plan in You have been assigned the role of audit manager for the external audit of Fixers Upper Berhad (Fixers Upper) for the year ended 31 May 20X2. You have replaced Daniel Osman who was the audit manager for the previous three years until he joined Fixers Upper as finance director in January 20X2, You have not previously worked on the Fixers Upper audit. Jennifer Ong is the engagement partner and has been responsible for the audit of Fixers Upper since it became a client of your firm 7 years ago. Jennifer has asked you to consider the following key areas of audit risk as part of your audit planning: (1) Work in progress (2) Freehold premises On reading the background information you ascertain the following: The principal activity of the company is the provision of restoration services in respect of residential and commercial properties which have been damaged by fire, flood or subsidence. The majority of the work undertaken by Fixers Upper is commissioned by insurance companies, which require Fixers Upper to quote a fixed fee for each restoration contract. Once the work has been completed and signed off by the property owner as being satisfactory, Fixers Upper issues an invoice to the insurance company. Insurance companies' payment policies vary - some pay within 30 days of invoice date, others pay within 60 days and one insurance company pays within 90 days. All direct costs (labour and materials) relating to each contract are recorded in Fixers Upper's job costing system which is integrated with the purchases and payroll systems. The job costing system is used to estimate the value of work in progress for the monthly management accounts and for the year-end financial statements. For the work in progress valuation, a percentage is added to the direct costs to cover overheads. The percentage is determined by taking attributable overheads in the management accounts as a percentage of direct costs in the management accounts. At a meeting with Daniel, he informed you of the following: In April 20X2, Fixers Upper obtained a bank loan which is repayable over five years with interest payable quarterly in arrears. The loan is secured on the company's freehold premises, which were valued by an external valuer in April 20X2. The premises are currently included in the accounting records at cost less accumulated depreciation which is lower than the revalued amount. The directors wish to recognise the revalued amount in the financial statements for the year ended 31 May 20X2 The company has grown rapidly during the past year and consequently exceeded its overdraft limit on a number of occasions. The overdraft is due to be reviewed in September 20X2 and the company's bank has requested that the audited financial statements are available for this review. The company has managed to pay its trade suppliers on time by delaying payments of Sales and Service Tax (SST) and payroll taxes to Malaysia Inland Revenue Board (IRB). Daniel has recently agreed a deferred payment plan with IRB in order to pay the arrears of tax over the next four months. The company has made a loss for the year ended 31 May 20X2 due to the costs incurred on a number of contracts exceeding the fixed fee. This was due to the former operations manager, Lim Da, failing to control direct labour costs. Historically, the direct labour costs have been 60% of revenue but during the year ended 31 May 20X2, they rose to 70% of revenue. Lim Dan also failed to monitor the progress of contracts resulting in a delay in obtaining the property owners' confirmation of satisfactory completion of the work and consequently a delay in the issue of invoices to insurance companies. Lim Dan resigned in April 20X2 and has set up his own company, Restore & Refurbish Sdn Bhd, providing similar restoration services in respect of damaged properties. A replacement operations manager, Jannah Nick, has been recruited. She is focusing on reducing the direct labour percentage and monitoring the progress of contracts to ensure they are signed off as soon as the work is completed to the property owners' satisfaction. Requirement: Justify why the items listed in (1) to (2) in the scenario have been identified as key areas of audit risk and, for each item, describe the procedures that should be included in the audit order to address those risks. plan in

Answer rating: 100% (QA)

Based on the information provided as the audit manager you should consider the following key areas of audit risk for Fixers Upper Berhad 1 Work in Pro... View the full answer