APPLICATION CASE WITH SOLUTION & ANALYSIS

Review of an Audit Plan

DISCUSSION CASE

Toward the end of his first year in public practice, Jack is assigned to the audit team for Foyer Properties Inc. (Foyer). Foyer’s main activity is development and leasing of commercial real estate properties, such as shopping malls and office towers. In the past few years, Foyer has developed a niche residential property business: building university residences and nursing homes and leasing them under a head lease with a public sector organization, such as a university or municipal government. The public sector organization handles collection from the individual residents. Foyer is a private company, with the chair holding 60% of the shares and the president and chief operating officer (COO) holding the remaining 40%.

Foyer has been a long-time audit for Jack’s firm. The previous audit manager, Hank, just left the firm after 10 years to be the CFO at a local mining company, and Hilda has taken over from him for the 20X8 audit. Hank had been on the Foyer audit since joining the firm and had managed the audit for the past six years. Looking over the previous audit files, Hilda noted that Hank had not changed the audit approach for years: a substantive approach focusing primarily on verifying existence and valuation of all the major real estate properties and all large transactions, such as the major purchase or sale of a property. Since accounts receivable from the universities and governments were always received by the time the audit was being done, they were verified by vouching subsequent receipts, not by confirmation. Revenues and expenses from the property leasing operations were audited entirely by analytical procedures.

Hilda is confident that the past audits obtained sufficient appropriate evidence to support the audit opinion, which has always been unmodified, but Hank left too many important planning judgments “in his head” rather than documenting them. Hilda feels that the audit planning documentation should be updated to follow the risk-based approach. This may identify areas where a more effective audit approach could be applied. Since Jack has had experience using risk-based audit plans in several of his other audits this year, Hilda thought it would be a good learning experience for Jack to apply the risk-based approach in Foyer’s audit planning.

Hilda has asked Jack to develop a risk-based overall audit strategy and preliminary audit plan for the current-year audit of Foyer. She would then like him to compare this plan with the plan used in previous years to identify and justify any differences.

The first thing Jack does is get out Foyer’s prior-year audit files (for its year ended December 31, 20X7) and study the final financial statements and the planning memorandum that Hank had prepared. Jack notices that Hank’s planning memo has been copied and carried forward for several years, with any new information tacked on at the end. Extracts from Foyer’s prior-year audited financial statements and planning memorandum are provided below. What steps will Jack go through to create a risk-based audit plan?