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You are an auditor on the Bobby Limited (Bobby) engagement for the financial year ending 31 December 2017. Bobby is a NSW-based industrial materials company engaged in the production, distribution and sale of construction materials and aggregates including sand, gravel, crushed stone and geosynthetic aggregates. You are in the process of planning the Bobby audit and have noted the following information:
For most of the past decade, Bobby has experienced strong growth as a result of high demand for housing accompanied by relatively low housing stock as well as large government investments in infrastructure projects. Over the past two years, however, changes in legislation around foreign land and property ownership and more stringent prudential regulatory requirements have seen a gradual downturn in the demand for housing and construction. The change of the government in the recent state elections have also cast several planned infrastructure projects into doubt.
Bobby’s management has actively pursued a strategy of building and holding substantial reserves of aggregates in the belief that there will be strong ongoing future construction demand. However, you note significant decline in this year’s turnover of certain aggregates and are of the view that this is attributable to the changing economic conditions as well as the shift in preferences towards more environmentally friendly recycled aggregates.
Bobby has significant land holdings of (potential) quarry sites at various stages of their lifecycle. During the year, Bobby has sold various plots of land across NSW as the initial exploratory work undertaken on these sites indicated that they were not feasible for quarrying. Significant losses were incurred on the sale of the land. More land has been designated for divestment in the coming months and correctly reclassified as held for sale.
Bobby was granted a 10 year licence by the Northern Beaches Council to quarry gravel at a remote location in Duffys Forest in April 2017. The licence was provided to Bobby at no cost, although at the end of the 10 year period, Bobby is required to remediate the site and transform it into a nature reserve and recreational area for the local community. Bobby’s management has capitalised the quarrying licence at fair value of $8 million, estimated to be the discounted present value of revenues from materials to be mined from the site over the next 10 years. To date, no amount has been recorded in respect of the required restoration works at the expiration of the licence
Based on the information above, describe three (3) significant audit risks which might result in material misstatements in Bobby’s financial report for the period ending 31 December 2017. For each risk, indicate the key account and primary assertion at risk, and provide a specific and practical substantive test of detail to gather audit evidence in respect of the identified risk.
For each of the three (3) risks, identify:
(iv) Substantive test of detail
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