Question: Your client Cardinal Homes Corp is a large residential real

Your client, Cardinal Homes Corp., is a large residential real estate developer that currently has over 100 projects in process across the southeast of the United States. Similar to most companies in the land development and home building industry, the Company must make many estimates in preparation of their financial statements. Below is an excerpt from Cardinal Homes’ 2008 annual report (10-K):
“These estimates include, but are not limited to, those related to the recognition of income and expenses; impairment of assets; estimates of future improvement and amenity costs; estimates of sales levels and sales prices; capitalization of costs to inventory; provisions for litigation, insurance and warranty costs; cost of complying with government regulations; and income taxes.”

You are a senior associate and this is your third year on the Cardinal Homes engagement. You have never performed the audit steps for the estimations but this year you were assigned these steps. The manager of the Cardinal Homes engagement team has performed these audit steps the last two years without identifying any misstatements. Management of the company has informed the audit team during the planning stage that no “major” changes were made to the assumptions or method of calculation for all estimates. Do you still have to perform any audit steps for these estimations? Explain. If so, what audit steps would you perform?

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  • CreatedJanuary 21, 2015
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