You are an Audit Senior at the KGMP, and part of the engagement team to audit a new client, Honest Constructions Ltd (Honest) for the year ending 30 April 2021. The engagement Partner had a pre-audit meeting with the Finance Director of Honest to obtain more information about Honest and its operations. You were in attendance and took minutes.
Minutes of Meeting
• Honest is in the construction sector and operates on low margins on complex, high-value, multi-year contracts involving building construction and other major structures. The major contracts are done predominantly, but not exclusively, for the Government. Honest’s operations are organised into six divisions across England with a Head Office at Manchester.
• As is the usual practice in the construction industry, Honest has received significant sums of money up front to get its long-term major capital contracts moving.
• Activity in the construction industry has slowed down in recent times due to economic uncertainty arising from the Brexit and more recently the Pandemic. Honest has been bidding lower prices for some contracts in order to keep winning work and keep its sub-contractors and employees occupied.
• Honest is a family-owned private company. The company is headed by a seven-member board, chaired by Jackie Honest and includes three other Honest family members (who are all Executive Directors), two former university mates of Jackie Honest and a former CEO of the company.
• The staff turnover of the construction employees is very high with most of them being casuals or temps. Construction employees are recruited directly at the work site and details of hours worked are sent by site managers every fortnight to the payroll department at the Head Office.
• During the year ended 31 January 2021, Honest spent a total of £1.2 million on integrating the financial accounting, management accounting and human resource (including payroll) system.
• As a result of the specialised nature of its contracts, Honest uses Sarah Bright, a management expert, to value its long-term contracts including work-in-progress at the end of its accounting period.
REQUIRED:
Discuss the Audit Risks associated with accepting and undertaking this new Audit Engagement.
