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Which represent a risk in the audit of razzo

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Reference no: EM132690815

You are the auditor of Razzo Pty Limited (Razzo), a large manufacturing company, for the financial year ending 30 June 2019. Razzo has a loan secured on one of its manufacturing facilities that was extended based on a revaluation of the facility carried out in January 2018. A loan covenant specifies that the maximum loan to value ratio (LVR) on balance date should not exceed 60% of the net book value of the facility as reported in the audited financial report. The loan is currently 50% of the facility's net book value. Your research indicates that that comparable manufacturing facilities have declined by 15% in value on average over the last year. Razzo continues to record the carrying value of the property based on last year's revaluation.

  • It is your opinion that a new valuation of the facility should be undertaken in line with requirements under AASB 136, although this may result in a breach of the LVR loan covenant, which would trigger a significant portion of the loan becoming immediately repayable to the lender. Razzo's directors have notified you that they will not be undertaking a revaluation of the facility this year.

Problem 1: Which of the following accounts and assertions is MOST likely to represent a risk in the audit of Razzo?

a) Property, plant and equipment: Rights and obligations
b) Provision for revaluation: Occurrence
c) Loan payable: Existence
d) Impairment loss: Completeness

Reference no: EM132690815

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