Question

Golden Years Inc. owns and operates 20 rental retirement properties. It has a total of 9000 one-bedroom and 3000 two-bedroom rental units. Tenants pay rent monthly by giving a cheque to the property manager. The manager deposits the cheques at the nearest branch of Golden Years’ bank and sends the deposit information and tenant listing to Golden Years’ head office, where the accounting manager enters the information into the sales journal and general ledger. The Accounting Manager reconciles the bank statements monthly.
You are in charge of auditing Golden Years’ revenues and receivables for its 20X3 year-end. Golden Years’s draft financial statements report rental revenues of $102.6 million, tenant receivables of $400,000, and net income is $5.9 million.

Required:
a. Indicate whether you would use a substantive or combined approach to audit Golden Years’s revenues, giving your reasons.
b. Develop an audit program (list of audit procedures) to provide sufficient appropriate evidence that the rental revenues reported in the company’s 20X3 financial statements
  are not materially misstated.

 

Answer 1

Information given in case regarding planning factors such as: materiality and risk assessment, controls, nature of transactions, volume, use of analysis and non-financial information [e.g., rooms x occupancy rate] can be applied to making a decision on which audit approach to use.

 

 

Since it appears there is easily obtainable substantive evidence regarding the revenues and are receivable, a substantive approach could be supported for this case. Note that different auditors might make a different choice, by identifying some controls to test and rely on.

 

 

An audit program should be developed listing procedures that can give sufficient, appropriate evidence. The procedures should be clearly described in terms of the evidence gathering techniques to be applied along with the relevant assertion(s) linked to each procedure. The procedures selected should be consistent with the substantive audit approach selected in the case, and cover all the assertions. Information relating to reasonable timing and extents should also be considered.

 

 

An Audit Program of relevant procedures includes: