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https://docs.google.com/document/d/1heHUG6Q62EzbkPxbZJJ6blApVebwwZc6/edit?usp=share_link&ouid=116135662403021627331&rtpof=true&sd=true

a. Justification for each key area of audit risk:

1. Revenue: Revenue is a key area of audit risk because it is a significant driver of the company’s financial performance and is subject to management estimation and judgement, particularly in the recognition of revenue from contracts. The company’s policy of recognizing revenue upon customer confirmation of successful installation also creates the potential for manipulation of revenue recognition timing.

2. Work in progress: Work in progress is a key area of audit risk as it represents the value of work completed on contracts that have not yet been invoiced. The company’s job costing system and the use of estimates for overheads increase the risk of misstatement, particularly if the system is not robust or if estimates are inaccurate.

3. Trade receivables: Trade receivables are a key area of audit risk as they represent amounts owed to the company by its customers. The company’s policy of requiring payment within 30 days of invoice date increases the risk of default or delay in payment, which could lead to bad debts or impairment of receivables.

4. Freehold premises: Freehold premises are a key area of audit risk as they are a significant asset on the company’s balance sheet and are subject to valuation estimates. The company’s desire to recognize the new valuation in the financial statements for the year ended 30 November 20X1 increases the risk of management bias in the valuation process.

b. Audit procedures to address the key areas of audit risk:

1. Revenue:

• Evaluate the company’s system of internal controls over the revenue recognition process and perform tests of controls to ensure that the controls are operating effectively.
• Test the accuracy and completeness of revenue recorded in the financial statements by performing substantive procedures, such as testing a sample of contracts to ensure that revenue is recognized in accordance with the company’s policies and that the company has appropriately applied the percentage of completion method.
• Obtain and review evidence of customer acceptance of completed work to support the recognition of revenue.

1. Work in progress:

• Test the completeness and accuracy of the company’s job costing system by tracing a sample of direct and indirect costs to specific contracts.
• Evaluate the appropriateness of the percentage used to allocate overheads to work in progress and test a sample of contracts to ensure that the percentage is accurately applied.
• Test the accuracy and completeness of the provision for contract losses by reviewing a sample of contracts and evaluating the basis for the provision.

1. Trade receivables:

• Test the completeness and accuracy of trade receivables by reconciling the accounts receivable ledger to the general ledger and confirming a sample of trade receivables with customers.
• Evaluate the adequacy of the company’s provision for bad debts and test the accuracy and completeness of the provision by reviewing a sample of aging schedules and customer payment histories.

1. Freehold premises:

• Obtain an understanding of the company’s process for valuing and recognizing freehold premises and evaluate the adequacy of the process.
• Test the completeness and accuracy of the external valuation report by obtaining an understanding of the valuer’s methodology and testing the inputs used in the valuation.
• Evaluate the appropriateness of the company’s decision to recognize the new valuation in the financial statements and test the accuracy of the resulting valuation adjustment by performing analytical procedures and reviewing supporting documentation.