ABC’s directors are convinced that ABC is a going concern and assure you that exciting alternative uses will be found for the town centre properties recently acquired though they are unable to provide you with any definite plans. a) By undertaking a risk analysis, identify and explain your main concerns regarding the audit of ABC?
You are the audit partner for Anthony’s Building Company Ltd. (ABC), a property developer specialising mainly in residential housing. At the end of 2019, the assets of the company were valued at cost at £250m. Sales totalled £100m for the year with ABC 10% net profit. Seeking to diversify, in the first two months of 2020, ABC borrowed extensively to finance the acquisition of several out-dated high street stores for re-development. The additional borrowing took the company close to the gearing limits imposed by the bank.
In March 2020, the UK entered a two-month lockdown because of the Covid pandemic. Sales of houses collapsed and high street stores were forced to close. Subsequently, UK restrictions have been relaxed and then re-imposed. With an increased demand for outdoor space, house prices rose but business in high street stores remained low with one industry expert predicting that the British high street will never be the same.
In August 2020, ABC featured in a consumer programme on a local TV network in which ABC customers complained about the build quality of ABC housing. The largest estate still being developed was highlighted for defects in workmanship including one house which was so badly built that it had to be demolished and rebuilt. ABC paid for this and for rehousing the occupants in the meantime. ABC’s insurer refused to cover these costs saying that such extreme carelessness was not covered by its policy. The site manager attempted to calm other complainants by offering cash rebates of up to 10% of the purchase price if the complaint was dropped. Potential interest in all ABC’s houses decreased after the programme aired.
On another development site, initial construction work was stopped when the remains of a rare type of Roman villa were uncovered. Early investigations suggest that the historic remains cover 90% of the site and that archaeological investigations will take at least two years to complete.
ABC’s directors are convinced that ABC is a going concern and assure you that exciting alternative uses will be found for the town centre properties recently acquired though they are unable to provide you with any definite plans.
a) By undertaking a risk analysis, identify and explain your main concerns regarding the audit of ABC?
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