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Hello Sir,
Thank you for your reply to the last threat and it’s really helpful and useful.The below question is extracted from PYQ SEP/DEC 2017
Q17 Prancer Contruction Co ,part (b)audit risk and responses sectionsExaminer answer:
“Prancer Construction Co is likely to have a material level of work in progress at the year end, being construction work
in progress as well as ongoing maintenance services, as
Prancer Construction Co has annual contracts for many of
the buildings constructed.”Why the answer for auditor’s response is related to the process undertake to assess the percentage completion For WIP at the year-end rather than the overvaluation of inventory as the maintenance service included? Or is it I have misunderstood the question?
as question mentioned: “The prior year financial statements recognise work in progress of $1.8m, which was comprised of property construction in progress as well as ongoing maintenance services for finished properties”
Thank you.
I don’t have the Q to hand but I believe what it is saying is that there are two separate components of WIP:
(1) There is WIP relating to the construction of buildings – these will cost a lot (much more than WIP in a car factory, say). The completion of these buildings is not going to coincide with the year end – so at the end of year, measuring the % completion of each building will be significant to determining the value of this “inventory”.(2) WIP also includes maintenance costs incurred under service contracts – this is not inventory like manufactured goods inventory – the biggest component of maintenance cost is most likely to be labour cost (as well as parts/consumables used in building maintenance).
To the extent that maintenance services have NOT been invoiced, there is an asset – WIP. It is really no different to a law or audit firm undertaking services for a client – a record will be kept of all the hours the legal/audit team work on the job, plus any incidental expenses (travel, etc). At the FIRM’s year end there will be WIP for all the jobs that have not yet been completed/billed to clients.
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