Below are the extracts from the draft notes to the financial statements for the year ended 30 June 2020, of your audit client, Roma Group Limited (RG). RG is a large construction/property development and commercial property management group. You are currently auditing these draft financial statements and are due to sign your audit report on 14 August 2020.

The following are the critical judgements and estimations that management has made in the process of applying RGs accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

1. Construction revenue

RG has recognised construction revenue earned on construction projects amounting to $98,144,000 (2019: $68,209,000) using the percentage-of-completion method. This method is determined by calculating the expenses incurred to date as a percentage of total estimated costs. Management is confident that the percentage of completion calculated in determining the above revenue represents that actual percentage of completed contracts.

2. Inventories

RG is required to carry inventory, which represents underdeveloped land holdings, at the lower of cost or net realisable value. The net realisable value of inventories is the estimated selling price in the ordinary course of business less estimated costs of completion and cost to sell. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise and the estimate of costs to complete. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

The key assumptions require the use of management judgement and are reviewed annually. During the period RG has expensed $7,871,000 (2019: $12,258,000) in relation to inventory that was carried in excess of the net realisable value.

3. Goodwill

RG annually tests whether goodwill has suffered any impairment. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating business units to which goodwill has been allocated, using a suitable discount rate in order to calculate a net present value. The carrying amount of goodwill at the balance date was $259,474,000 (2019: $212,727,000). There was no impairment loss recognised during the period (2019: nil).

Required:

1. For each of the three accounts to which the notes relate, explain the reason that these may potentially represent a significant audit risk. (3*2= 6 marks)
2. For each account in (i) above, identify the key assertion at risk. (3*1= 3 marks)
3. For each assertion at risk outlined in (ii) above, describe one substantive test of detail that is specifically responsive to the risk of material misstatement. (3*1= 3 marks)