KPMG LLP A Delaware Limited Liability Partnership And The US

2012 Kpmg Llp A Delaware Limited Liability Partnership And The US

Research professional standards and list the requirements related to developing an expectation and conducting analytical procedures when those procedures are intended to provide substantive evidence. Review the sleeping room revenue work paper template provided in Appendix A. Would use of the template help the audit firm comply with professional standards? Explain your answer.

Use the room revenue work paper template provided in Appendix A along with the external hotel and industry information obtained by the staff person to develop an expectation for Majestic’s 2011 sleeping room revenues.

a. Are Majestic’s reported sleeping room revenues within your “reasonableness range”?

b. If reported sleeping room revenues were inside your “reasonableness range” would your analytical procedure provide sufficient evidence for you to conclude Majestic’s 2011 sleeping room revenues are fairly reported?

c. If reported sleeping room revenues were outside your “reasonableness range,” what could explain the difference?

Review the internal client records provided in Appendix B. Use the room revenue work paper template provided in Appendix A along with the internal client records provided in Appendix B to develop an expectation for Majestic’s 2011 sleeping room revenues.

a. Are Majestic’s reported sleeping room revenues within your “reasonableness range”?

b. If reported sleeping room revenues were inside your “reasonableness range” would your analytical procedure provide sufficient evidence for you to conclude Majestic’s 2011 sleeping room revenues are fairly reported?

c. If reported sleeping room revenues were outside your “reasonableness range,” what could explain the difference?

d. What other qualitative considerations would need to be considered before concluding whether additional testing would be warranted?

e. What is the advantage of developing an expectation using the disaggregated internal client data in Appendix B to the aggregated external industry data obtained by the staff person?

f. What is the disadvantage of developing an expectation using the disaggregated internal client data in Appendix B to the aggregated external industry data obtained by the staff person?

g. What other testing, if any, would need to be performed related to the substantive analytical procedure before a conclusion could be made?

Paper For Above instruction

Developing effective substantive analytical procedures in the context of auditing requires strict adherence to professional standards established by authoritative bodies such as the American Institute of Certified Public Accountants (AICPA). According to the AICPA Auditing Standards, auditors must ensure that their analytical procedures provide sufficient appropriate evidence to support conclusions on financial statement assertions. This involves the careful development of expectations based on relevant data, thorough analysis of deviations, and consideration of qualitative factors that may influence these deviations (AICPA, 2020).

Professional standards stipulate that expectations should be developed using both quantitative and qualitative information and must be sufficiently precise to identify material misstatements. Specifically, AR-C section 330 of the AICPA standards emphasizes that expectations be grounded in plausible relationships, derived logically from the understanding of the client’s operations, and supported by industry data, historical trends, and other relevant information (AICPA, 2020). Additionally, auditors are expected to establish a threshold for tolerable misstatement, often based on inherent risk assessments and internal control evaluations, which guides the determination of whether deviations are indicative of misstatements (ICSA, 2015). The use of analytical procedures as substantive tests mandates that expectations be documented, justified, and compared with actual figures, with deviations evaluated in the context of identified risks and qualitative factors (IAASB, 2018).

The use of standardized work paper templates, such as the one provided in Appendix A, can significantly enhance compliance with professional standards. These templates promote consistency, thoroughness, and proper documentation of the expectation-setting process. They serve as a safeguard ensuring that expectations are developed systematically, based on relevant data, and that deviations are assessed properly. Furthermore, templates facilitate audit quality by providing a structured approach aligned with the requirements of professional standards, such as documenting the key factors considered, the basis of expectations, and evaluation criteria (Kirk et al., 2017). Therefore, employing such a template helps ensure that analytical procedures are conducted in accordance with established standards and that sufficient audit evidence is obtained.

Applying the expectations methodology requires using the external industry data on hotel occupancy rates and average daily room rates provided. To develop an expectation for Majestic Hotels’ 2011 sleeping room revenues, the process involves calculating the expected revenue by multiplying the number of rooms by the occupancy rate, average room rate, and the number of days in the period. For example, for the Charleston hotel with 192 rooms, an occupancy rate of 64.9%, and an average daily room rate of $130.88, the expectation calculation is as follows: 192 rooms × 0.649 occupancy × $130.88 × 365 days. Similar calculations are performed for the other hotels, adjusting for any known operational disruptions such as the flooding at Asheville. Summing these expected revenues provides an aggregate expectation for the entire chain.

Given the external industry data, if the observed reported revenues are within a reasonable range—considering a margin of error and market factors—they can be deemed plausible, supporting the conclusion that revenues are fairly stated (Powell, 2014). Specifically, using a tolerable difference of 5% or $0.2 million serves as an acceptable threshold under professional standards, which allows the auditors to conclude whether reported amounts are reasonable. If the reported revenue figures fall within this range, the analytical procedure offers sufficient persuasive evidence, reducing the need for extensive detail testing (IAASB, 2018).

Conversely, if the reported revenues are outside this threshold, it could signal potential issues. Causes of significant deviation might include revenue understatement or overstatement, potentially due to billing errors, unrecorded expenses, or fraud. For instance, if actual revenues are lower than expected, it might reflect operational downturns, unrecorded discounts, or misreporting. If revenues are higher, possibilities include inflated bookings, premature revenue recognition, or other irregularities (Wells et al., 2020). These deviations necessitate further investigation, including detailed substantive testing and qualitative considerations such as management’s explanations, industry conditions, and recent operational disruptions.

Utilizing internal client records, such as disaggregated revenue data, enhances the expectation-setting process by providing a detailed view of client-specific factors and trends that external data may not fully capture. Such internal data can help identify anomalies, seasonal patterns, or operational changes, thus leading to a more precise expectation. Comparing internally derived expectations with external industry benchmarks also facilitates identifying deviations that merit further inquiry (Louwers et al., 2021).

The main advantage of using disaggregated internal data is increased precision. It reflects specific client patterns, operational nuances, and historical performance, thereby improving expectation accuracy and the sensitivity of deviation detection. The disadvantage, however, lies in the potential bias or errors in internal data, which could lead to misleading conclusions if not carefully validated. Moreover, internal data might be influenced by management’s subjective estimates or accounting practices, undermining objectivity (AICPA, 2020).

Before concluding on the reasonableness of revenues, additional testing should involve reviewing supporting documentation, performing cutoff tests, and considering qualitative factors such as operational disruptions or seasonal fluctuations. These steps help ensure that deviations are not coincidental or explainable by non-misstatement factors, thereby strengthening the audit opinion (Kirk et al., 2017). Ultimately, professional judgment and comprehensive analysis are critical when relying on analytical procedures as substantive evidence in financial audits.

References

• American Institute of Certified Public Accountants. (2020). Audit & Assurance Standards.
• IAASB. (2018). International Standards on Auditing (ISA 520): Analytical Procedures.
• ICSA. (2015). Effective Use of Analytical Procedures in Auditing.
• Kirk, C., Kranacher, M.-J., Riley, R., & Wells, J. T. (2017). Forensic Accounting and Fraud Examination. John Wiley & Sons.
• Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2021). Auditing & Assurance Services. McGraw-Hill Education.
• Powell, P. (2014). Financial Statement Analysis and Valuation. Cengage Learning.
• Wells, J., Fargher, N., & Zhang, J. (2020). Fraud Examination. Wiley.