FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

Accountancy and Internal Auditing Department
ACT1202 – Auditing and Assurance Principles
Case Study No. 1 – Preliminary Engagement Activities

Requirements:
1. Read the background information about the real estate industry and conduct
additional research on the internet to obtain the latest news and information on
the industry, specially the effects of the Covid-19 pandemic. Brainstorm relevant
industry, regulatory, and other external factors including the applicable financial
reporting framework. Relevant industry factors include industry conditions such
as the competitive environment, supplier and customer relationships, and
technological developments. Examples of matters the auditor may consider
include

a. The market and competition, including demand, and price competition

i. Demand may flunk once again if covid cases rise
- The demand has an inherent risk of flunking once again should the
government take the country back to total lockdown. People will most
likely not avail condominiums, much less stay in the ones that they are
renting out.

ii. Competitive market prices

- Since the real estate industry is slowly recovering from the slump that
they had encountered from the covid lockdowns, the prices and the
demand for property is slowly increasing, especially since the President
recently announced the implementation of limited face-to-face classes for
some courses. This may challenge real estate agents and developers to
offer the best prices to their clients.

b. Cyclical or seasonal activity

i. Seasonal businesses may find it hard to sustain high peak

c. Product technology relating to the entity’s products

i. Losing data
- According to Jim Berry, a US real estate leader from Deloitte, the
pandemic created a few challenges for people in real estate, especially
since they are not able to conduct one-on-one meetings with potential
clients. This has allowed them to develop methods that align with their
end-users and occupiers. Most of the trends that have been developed
are heavily influenced by data processing and data storing, one even
allows the maturity of automated decision making, which is nice until the
database crashes and the data collected is erased or corrupted.

d. Energy supply and cost

 FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Accountancy and Internal Auditing Department
ACT1202 – Auditing and Assurance Principles
Case Study No. 1 – Preliminary Engagement Activities

i. continuous price hike on electricity

- Meralco, the energy supplier for Manila, alongside most energy suppliers
in the country has been continuously increasing the prices of its rates,
which is an added cost for clients should they acquire property. According
to Rappler, Meralco increased the generation charges again which makes
up 55% of a consumer's electricity bill. If this continues, it could contribute
to an inherent risk, which will make it harder to attract clients.

e. Regulatory factors
i. Torrens System and the registration of land
- The registration of ownership of any property, be it real or personal, is a
tricky process especially since there is usually unresolved conflict
surrounding the ownership of the land to be transferred, which could
closely be mistaken as fraud especially by clients that do not know much
about regulatory risks.

2. For each of the business risk factors identified in question 1 above, indicate how each
risk factor might impact the risk of material misstatements in specific financial statement
accounts or disclosures.

a. Demand may flunk once again if covid cases rise might affect the company’s cost of
sale, inventory, revenue, and going-concern disclosure
b. Competitive Market Prices might affect company’s revenues, inventory, and sales
c. Seasonal businesses may find it hard to sustain high peak might affect company’s
revenues, sales, and inventory
d. Losing data -
e. Continuous price hike on electricity -
f. Torrens System and the registration of land -

3. PSA 315 (Redrafted), Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and Its Environment provides guidance on the
auditor’s consideration of an entity’s business environment and associated risks.
Answer the following questions:

a. What is the auditor’s objective for understanding an entity’s business

environment?
 FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Accountancy and Internal Auditing Department
ACT1202 – Auditing and Assurance Principles
Case Study No. 1 – Preliminary Engagement Activities

The auditor's goal is to identify and assess the risks of material misstatement
providing a foundation for designing and implementing responses. The auditor
investigates with professional skepticism, the management's honesty, experience, and
skill, as well as the nature and volatility of the business because the business
environment might have an impact on the preparation of the financial statement. It is
also necessary to identify the accounts that may result in misstatement and are
vulnerable to misappropriation. Finally, determine whether it is reliable in reducing
material errors to work on.

b. Why does an auditor not have responsibility to identify or assess all business
risks?

The Auditor doesn’t need to identify or assess all the business risks due to time
consuming and not all business risks can potentially result in material misstatement on
the financial statements. The goal of the Auditor is only to assess the accounts or
evidence that could result in material misstatement.

c. Provide some examples of business risks associated with an entity that an auditor
should consider when performing an audit.

Fraud
- Businesses are vulnerable to fraud performed by management, staff, or anyone
outside the organization. The falsification in financial statements will result in Fraud
and have a significant impact on business finance. Fraud can be defined as any
dishonest behavior against a business. Some of these cases are complex and highly
guarded. It will be a huge scandal with significant consequences for many
stakeholders.
Competition
- Due to fierce rivalry, a company may struggle to stay in business. There will be a risk
that the company will fail to survive and the financial statements will be materially
misstated as a result. In business, competition is a contest or rivalry between
companies providing identical items and/or targeting the same target audience in
order to earn more sales, revenue, and market share than others.
Laws and Regulations
- Laws and regulations are beyond the control of a firm. All Businesses are vulnerable
to rising taxes, regulations, and the possibility of being unaware of breaking the law
because of the changing legislation and a volatile political environment that could
result in a variety of misstatements in the financial statements.
 FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Accountancy and Internal Auditing Department
ACT1202 – Auditing and Assurance Principles
Case Study No. 1 – Preliminary Engagement Activities

d. Provide some additional examples of business risks that might not lead to a risk
of material misstatements in the financial statements.

There are few business risks that might not lead to material misstatements such as:
● Personal use of employees of the petty cash fund of the business, it might
not affect material misstatement on financial statements because petty cash
funds are only used for expenditure on small items.
● Use of office supplies and facilities for personal use of the employees.
● Use of Utilities such as telephone, internet, appliance of the business for
personal use of employees.

Sources:

https://business.inquirer.net/328268/postpandemic-path-for-ph-real-estate

https://www2.deloitte.com/nl/nl/pages/tax/articles/bps-four-technology-trends-impacting-the-
2021-commercial-real-estate-market.html

https://www.rappler.com/business/meralco-electricity-rates-september-2021

https://thelawreviews.co.uk/title/the-real-estate-law-review/philippines