Your audit client is Quality Constructions (QC), a company that builds small office buildings (3-5 floors) in capital cities around Australia and which is wholly owned by its founder, Kerry Bricker. QC currently has 10 projects at various stages of completion. QC has been profitable for many years, partly because of its policies of offering fixed-price contracts and a 10% refund if projects aren't finished on time. Due to recent flooding in QLD and NSW, QC has been affected by the difficulty of obtaining building supplies and the higher cost of supplies that are available. Consequently, 7 out of the current 10 projects are behind schedule and it is expected that only 6 of these projects will be profitable.

In order to protect the viability of the business, QC has decided to pursue larger projects and has just secured a contract to construct a 15-story tower, for which they received a 30% deposit payment just before year-end. QC's finance director (Jessie Smith) tells you that 'this new deal means there's plenty of cash in the bank, even if we lose a few dollars on the small projects'.

 

 

Required

1) Explain two business risks faced by Quality Constructions. 
 

2) State and justify your assessment of the Inherent Risk for the completeness of "Cash at bank" for Quality Constructions (high, medium, or low) and provide two reasons to justify your answer. 
 

3) In relation to the accuracy, valuation and allocation of the provision for refunds account for Quality Constructions, state a control that would mitigate the risk and state how you as the auditor would test that control.