Case

Green builders Pte Ltd (“GPL”) is a local construction company which specialises in providing bespoke Design and Build construction services for private residential homes that are designed to be environmentally friendly. Due to the niche market GPL caters to, demand for such homes usually come from the more affluent class in Singapore. You are an audit senior conducting an audit on the company for the year ending 30 June 2022.

GPL also owns an office building that it leases out to earn rental income. In recent years, tenancy rates have dwindled as some of its tenants whom are Small and Medium Enterprises (“SMEs”) became insolvent and wound up.

The war between Russia and Ukraine has resulted in rising labour and material costs in the construction industry. As the country has opened up its borders, the construction industry still faces a labour crunch and rising costs from the ongoing Covid situation and aftermath of the geopolitical impacts.

During the course of your audit, the following information was documented following initial discussions with the Finance Director:

Construction Revenue

GPL has a policy of recognising revenue based on the Percentage of Completion of the properties under construction. The Finance Director however, believes that all its projects have a very high chance of being delivered given that the worse of the labour crunch is over. He also believes that payment from its clients can be fully received given that they are more affluent than the average Singaporean. As such, GPL fully recognised revenue for some of it smaller projects that were still ongoing. On average, GPL’s current list of outstanding projects will need another 3 years to complete.

Sub-contracting costs

To cope with the project backlogs arising from the pandemic, GPL had to sub-contract some of the work to other contractors. The company’s policy is to fully recognise sub-contracting costs upon payment to its sub-contractors. The Finance Director noted that there has been a backlog of outstanding payments to sub-contractors but asserted that GPL has good relationships with its sub-contractors and outstanding payments can be settled gradually given the current economic situation.

Office building

The office building is not located in a prime area but it still attracts some tenants. The Finance Director noted that valuation of the property performed by professional valuers in the past have been consistent and on that basis, has applied the same valuation as 2021 but applied a 10% haircut to be conservative given the pandemic situation. The Finance Director believes this to be a fair valuation of the property.

Question 1

(a) Assess and discuss one (1) inherent risk that GPL is currently facing from each of the three (3) processes: construction or rental revenue, sub-contracting costs and valuation of the office building property

(b) For each of the inherent and/or control risk assessed, evaluate one (1) risk of material misstatement (RMM) and discuss one (1) corresponding management assertion that you will be most concerned with.

Question 2

(a) For each of the three (3) Risk of Material Misstatements identified, analyse one (1) key control that GPL should implement for each.

(b) For each of the RMMs documented, assuming the audit team is not able to rely on the client’s controls, assess one (1) substantive procedure to be performed and explain how this substantive procedure will identify possible audit exceptions.

Answer rating: 100% (QA)

Inherent risk Construction or rental revenue One inherent risk that GPL is facing is the possibility that demand for environmentally friendly homes may not continue at the same level as in the past le... View the full answer