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Question One (20 Marks) You are the auditor of Commercial Property Management Ltd ('CPM'}, a property maintenance company. The company was founded by Tony Daniels in 1983, and since that time has grown from a onerman business to become the largest outsourced property and facilities maintenance organisation in Australia. The company's service engineers are trained to service most plant and equipment, including heating, ventilation and airconditioning, lifts, mechanical, electrical, and hydraulic systems. You have been auditor ofCPM for the last 9 years and have issued unqualified audit opinions. You are currently planning the audit for the year ended 3'1St March 2021. The CFO, Rhys Martin provided you with some preliminary numbers for you to review, as detailed below. 2021 2020 5:11 (unaudited) $m (audited) Revenue Service income ' Contract 188.5 176.1 Do-and-charge 1 14.3 107.4 Sale of replacement parts 34.0 32.8 336.8 316.3 Expense Wages expense 248.9 236.5 Cost of goods sold 28.3 29.8 Rent and administrative expenses 26.7 24.9 Interest expense 3.5 0.? 307.4 291.9 Net profit after tax 29.4 24.4 * The company has two types of clients: 0 Contract an annual contract to cover all service requirements, payable monthly. This contract covers labour charges but excludes the cost of replacement parts used. 0 Dosandrcharge 7 services charged based on a standard call out fee, a charge for labour (on an hourly basis) and the cost of replacement parts used. In addition, you have ascertained the following information. 0 Given the nature of the services provided, there is no history of bad debts. 0 Consumables are expensed when purchased, reecting actual usage. 0 No inventory of replacement parts is maintained 7 they are ordered for specic client work. Replacement parts are sold based on a 10% markrup to cover administrative costs. - During the year CPM hired an advertising agency to create a television and radio advertising campaign to promote the company's services. Total cost for development of campaign advertisements was $2.6m and has been capitalised by the CFO on the basis that it is expected to provide an enduring benet to CPM in the future. 0 CPM's purchasing process requires all purchases be approved by departmental managers. Suppliers are requested to send invoices directly to the CPM employee who requested the purchase. This process often delays the payment of invoices, requiring accounts payable clerks to chase employees for submission of approved invoices for payment. 0 CPM took on additional mediumterm borrowings in the year to fund the development ofa new internet-based communication system, so that real time information on progress of service work is available, to help improve utilisation ofthe company/S service engineers. Documentation relating to these borrowings was quickly drawn up, and not all relevant parties to the agreement were noted, and some details, regarding payment terms appear to be ambiguous. lnhouse legal counsel recently instigated a review of loan documentation to ensure these errors are identified and corrected, but this work is not complete. - When the company's service engineers attend to clients' premises to perform services, a digital worksheet is prepared, detailing the nature of the service required, the work completed and a record of hours. Invoices for Doand-charge work are raised subsequently by the invoicing department and posted to the accounting system based on the invoice date on a fortnightly basis. 0 Employees are hired on a mixture of bases: permanent fulltime, permanent parttime, fixedterm contract and casual. Penalty rates are applicable where employees work on a Sunday. In August 2020, changes to penalty rates by the Fair Work Ombudsman [the Government) were introduced resulting in penalty rates reducing from 200% to 150% of ordinary wage rates for permanent staff, and 200% to 175% for casual employees. The payroll system used by CPM was amended to reflect these new pay conditions. Many employees subsequently queried their revised pay resulting in signicant work for the payroll department, particularly in respect of large numbers ofemployees incorrectly classified as permanent in the payroll system. Required: Using the information provided above. describe ve {5) signicant business risks for CPM. For each risk you should also indicate the key accountote disclosure and key assertion at risk and provide a specic and practical test of detail that you would use to gather audit evidence in respect ofthe risk. Note, your risks must specically relate to the information that is provided in the nancial and non-nancial information in the case study. There are four marks for each risk (1 for the risk, 1 for the account, 1 for the assertion and 1 for the test of detail) for a total of 20 marks