1.

B – Cyclical or seasonal activities

The real estate industry is both cyclical and seasonal in nature. It is heavily reliant on many
factors, including interest rate movement and trust in the Philippine economy. Ethan Properties
Philippines, Inc.'s sales are affected by this, particularly in its residential properties. It is said that
the real estate market in the Philippines has grown exceptionally since 2010, but during the
pandemic, several factors affect the business cycle of a real estate industry, as well as its
profitability. With the COVID-19 pandemic, as neighborhood lockdowns continued to be
imposed around the country, particularly in the Luzon area, where enterprises and the country's
capital, Manila, economists predict a declining demand for property and a halt to new projects.

Given the circumstances, the business risk related to the cyclical and seasonal nature of a real
estate industry may include:

 Decline in demand, especially during peak seasons – The seasonality of the market
varies from location to location. Weather is one thing that can contribute to the
seasonal trends in real estate, but there are some nationwide factors to consider.
According to phrealestate.com, the months of October to February is the right time to
buy houses in the Philippines because of lower prices, perfect weather and there are
more sellers than buyers. But, because of the pandemic, there are some challenges
that both the supplier in the real estate industry and buyer experience, such as strict
lockdowns, unemployment, travel restrictions, and others. That is why during the
second quarter of 2020, the demand for office space and high-end residential
developments is weakened by mobility restrictions. In addition, consumers spending
shifted to essential goods and healthcare. 
 Decrease profitability - Businesses throughout the world have been hit hard by the
pandemic. Unsurprisingly, the cyclical real estate business was one of the hardest hits
by the medical crisis. Due to the shift in consumer spending and overall consumer
decisions affecting the demand for residential developments such as condominiums,
the Company's revenue from residential projects is likely to fall. Moreover, prices of
various types of new housing units in the Philippines have declined for the second
consecutive quarter in April to June period due to the lingering COVID-19 pandemic.
 The Bangko Sentral ng Pilipinas (BSP) said its Residential Real Estate Price Index
for the second quarter of 2021 revealed that nationwide house prices contracted by
9.4 percent due to the continued effects of the COVID-19 crisis on the residential
property demand.
 Overall changes of operations due to recession – A real estate cycle has four
phases, phase 1 which is recovery, phase 2 which is expansion, phase 3 which is
hyper supply, and phase 4 which is the recession. Because of the pandemic, the
Philippines has sunk into recession, therefore affecting the cyclical nature of the real
estate industry. During the recession phase, the supply of properties overshadows
demand, and real estate prices fall dramatically. Most property owners will suffer
from high vacancy rates and lower rents, and rental income will plummet. The
economic downtown will also cause unemployment rates to rise and tenants may
demand rent concessions or reductions to stay. The number of new construction
projects plunges and investment activity slumps. The real estate cycle will ultimately
reach the lowest point in this phase before any signs of recovery start to show.
Because of this, those who are in the real estate industry should rethink its objectives
and strategies for them not to fall into the recession phase, or to get through the
recession phase.  

2. B – Cyclical or Seasonal Activity

 The pandemic has resulted in a slow realization of returns, particularly in the real
estate sector, where demand has slowed and price appreciation has stalled, have
an impact on the company's profitability, liquidity, and even solvency, raising the
risk of material misstatements in the valuation of company assets and liabilities,
and, at worst, a high risk of continuing as a going-concern business entity.
 Risk in the profitability of a firm exposes the revenue accounts of the company to
an increased inherent risk. By its very nature, revenue is particularly vulnerable to
substantial misstatements. During a recession, such susceptibility to dishonest
financial reporting grows. In this industrial and economic condition, perpetrators
 are very likely to feel compelled to perpetrate fraud, have the chance to do so, and
be able to rationalize their actions.
 General economic conditions may have a significant effect on the risks of material
misstatement of the entity’s financial statements. Uncertain economic conditions
may make the entity’s financial statements more susceptible to material
misstatement because there have been changes to management’s risk assessment
processes, and control and monitoring activities, there are going concern and
liquidity issues including the loss of significant customers, there are events or
transactions give rise to significant measurement uncertainty and any other
reasons. Moreover, an important overall consideration in an uncertain economic
environment is the increased risk of material misstatement resulting from
management bias. With or without fraudulent intent, there may be a natural
temptation for management to bias judgments underlying estimates and
disclosures toward the most favorable end of what may be a wide spectrum of
possible decisions.
References:
Boykin, R. (2021, April 06). Seasons Impact Real Estate More Than You Think. Retrieved from
Investopedia: https://www.investopedia.com/articles/investing/010717/seasons-impact-
real-estate-more-you-think.asp
Lucas, D. (2021, September 27). Pandemic hammered PH housing prices in Q2. Retrieved from
Inquirer.net: https://business.inquirer.net/331471/pandemic-hammered-ph-housing-
prices-in-q2
Ng, C. (2012). Auditing Considerations in an Uncertain Economic Condition. Auditing and
Assurance Bulletin.
Suarez, A., & Roa, A. (2020, August 22). Highs and lows of PH real estate. Retrieved from
Inquirer.net: https://business.inquirer.net/305782/highs-and-lows-of-ph-real-estate
The Real Estate Cycle (And How To Find The Next Investment) . (2021, February 08 ). Retrieved
from RealVantage: https://www.realvantage.co/insights/the-real-estate-cycle/
When is the Best Time to Buy a House in the Philippines? And Why? (2018). Retrieved from PH
Real Estate: https://www.phrealestate.com/articles/40-when-is-the-best-time-to-buy-a-
house-in-the-philippines--and-why-.php
Yu, B., & Laguda, F. (2021, May 10). Impact of COVID-19 Pandemic in the Real Estate Prices
in China and Philippines. Retrieved from Change Magazine: http://www.changemag-
diinsider.com/blog/impact-of-covid-19-pandemic-in-the-real-estate-prices-in-china-and-
philippines