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Case 3 Auditing Essay

887 words - 4 pages

Prefab Sprout Construction Company

You have been approached about auditing Prefab Sprout Construction Company, a family-run general contracting company which is publicly traded on the New York Stock Exchange. The president of Prefab is Jack Warner. His wife, Joan, is the vice president and his son, John, is the treasurer. The Warner family owns about 40 percent of all outstanding shares and no other investor owns more than 1 percent. The company has been previously audited (receiving standard unqualified opinions) by a sole practitioner who closed his practice and is now the controller of Prefab. The company has an audit committee consisting of Joan, John and a local college professor. ...view middle of the document...

Approximately 60 percent of Prefab's sales are to JRW Realty, which organizes limited partnerships (or "syndicates") to fund the acquisitions. That is, investors put up the money and JRW Realty uses it to purchase the developments. JRW Realty is privately owned by Jeff Warner (Jack's younger brother). JRW Realty advertises the developments, obtains funds from investors and serves as the buying agent on behalf of the limited partnerships. JRW Realty is a general partner in these arrangements and collects a fee to serve as consultant to the partnerships.

JRW Realty currently owes Prefab $500,000 for purchases made during the current year. The financial statement of JRW Realty and the limited partnerships are not released to the public and have never been audited.
Once the partnerships take over a development, JRW Realty transfers control
(but not ownership) to a wholly owned subsidiary call JRW Property Management, which is run by Jim Warner (Jeff's son). JRW Property is paid a fee by the partnership to obtain tenants for the units and to server as the property manager. JRW Property collects rents from tenants, deducts its fees and costs and remits the net rental to JRW Realty, which in turn deducts its fees before distributing the net proceeds to the limited partners. The partners have the option of reinvesting their share of these distributions into the limited partnership. Approximately 75 percent of the partners choose this option.

Required:

1. You are part of the audit team for Prefab Construction Company. You are asked to identify the major facts (business risks) and discuss how these facts affect the Risk of Material Misstatement....

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