Wednesday, January 15, 2014

Audit of Fixed Assets: Construction-in-Progress 2

In previous post we discussed on certain matters to take note for the audit of construction-in-progress. We will continue to discuss on the following matters:

c) Billing status and capitalisation status
e) Intended use of construction-in-progress
f) Impairment assessment of construction-in-progress
g) Useful life of this asset upon completion

Explanation of (c) billing status and capitalisation status: it is important to request management to ensure that the amount capitalised per book represents the actual completion status. To illustrate, management may capitalise the construction in progress based on the billing received to date. However, the billing received may not be updated near year-end or supplier may raised the billing earlier than the actual completion status. As a result, it is important for auditor to obtain the budget for the entire project and compare the budget completion status % against the amount capitalised as at year-end for reasonableness.

Explanation on (e) - it is definitely important to understand the intended usage of construction-in-progress for documentation and understand company's strategy

Explanation on (f) - for long standing construction-in-progress that takes prolonged period/ longer than budgeted time to complete is a indication that the company may be experiencing some liquidity issue or the project is abandaoned due to commercial reason.

Explanation of (g) - it is always good to start discussing with client on the useful life of the project upon the completion of construction-in-progress such that there is no surprises at year-end or in the next financial year.

 

Sunday, January 12, 2014

Audit of Fixed Assets - Construction-in-Progress

At the end of the financial year, our audit client may have certain construction-in-progress that has not been completed as of year-end. For instance, audit client may be expanding its warehouse, and the construction is still in progress at year-end. What are the items or elements we need to take note relating to the audit of construction-in-progress?

We have summarized a number of factors that we will discuss in-depth:

a) Nature of the Construction-in-Progress
b) Completion status of the Construction-in-Progress
c) Billing status and capitalisation status
d) Commencement date of the construction and expected completion date
e) Intended use of construction-in-progress
f) Impairment assessment of construction-in-progress
g) Useful life of this asset upon completion

Explanation on (a): It is important to under that the nature of the construction in progress and its intended purpose. An understanding of such construction will assist the auditor to understand the Company's strategy, operational decision etc. It is also important for the auditor to know the budgeted amonut of such asset.

Explanation on (b) : Understanding of the completion status of construction-in-progress allows the auditor to form an expectation on the amont to be capitalised at year-end. It is also fundamental for the auditor to sight the physical construction-in-progress to test that the physical progress is not materially different from management's representation, if applicable. Nevertheless, the status of construction-in-progress can be certified by external party. For instance, a quantity survevor may certify the status of completion of a physical warehouse expansion.

Explanation on (d) : Commencement date of the constrution-in-progress indicates if the project is on-track. Focus need to be given for those long standing constrution-in-progress. For instance, if a project expected to be completed 6 months remain in the Construction-in-progress list warrant auditor's investigation.

We will discuss note (c) , (e) , (f) , (g)  in our subsequent post. Please feel free to contact us at myauditing@gmail.com.

Saturday, January 11, 2014

Financial audit of a hotel - key indicators of performance

Audit of a hotel is unique and the audit procedures carried out can be different from the audit of trading and manufacturing entities, which are more common in the economy. Of course, audit of each industry is unique.

Understanding how management measure the financial performance of the hotel helps the auditor to understand what is the key performance indicator measured / monitored by management closely. Auditor should consider the risk of management's manipulating the key performance indicator for their own interest (e.g. remuneration).

Generally, the following are the key indicators watched by hotel management closely:

a) Occupancy Rate:
Occupied Room / Total Avaiable Room

b) Average Room Rate

c) Revenue Per Available Room (i.e. Occupancy Rate x Average Room Rate)

d) Headcount to Room Ratio

Occupancy rate measures the volume of the business (i.e. number of rooms occupied by the hotel guests or other gueses). The occupancy rate fluctuates from time to time depending on the seasonality factor. For instance, a hotel may target on corporate customers as its marketing strategy. Based on general expectation, the occupancy rate is expected to be relatively lower as the volume for corporate customer is typically slower due to vacation.

Average room rate measures the room rate secured from the customer. A number of factors can affect the average room rate: pricing strategy of the Hotel, demand and supply for the room, volume secured etc. Every single dollar may have a significant impact on the bottom line.

Revenue per available room considers both the occupancy rate and average room rate.

Headcount to Room ratio measures the number of headcount employed divided by rooms available and/or rooms occuppied. This ratio measures the headcount efficiency as well as the proper planning of headcount based on volume.

It is important to analyse the above key indicators from month to month and compared the key indicators above to indsutry average. Significant discrepancies should be investigated.