Kpmg Case Study

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Using Analytical Procedures as Substantive Tests By Frank A. Buckless and D. Scott Showalter, NC State University

Case Study: Majestic Hotels, Inc.

Case Study: Majestic Hotels, Inc.
Using Analytical Procedures as Substantive Tests
By Frank A. Buckless and D. Scott Showalter, NC State University

BACKGROUND
Majestic Hotels, Inc., a privately-held company, has four hotels located in Charleston, South Carolina; Asheville, North Carolina; Savannah, Georgia; and West Palm Beach, Florida that cater to high-end business and vacation travelers. Bank-loan covenants require that Majestic Hotels, Inc. submit audited financial statements annually to the bank. Specifically, the bank covenants contain revenue and occupancy measures that Majestic must maintain to not be in technical default. The accounting firm of Brickman & Joyner, CPAs, has served as the Majestic auditor for the past six years. One of the major audit areas involves testing sleeping room revenues. Sleeping room revenues reached nearly $20.3 million in 2010. In 2011 the unaudited sleeping room revenues are reported to be $21,171,531 with net income before tax of $4,006,627. In prior years, the audit plan called for extensive detail testing of revenue transactions to gain assurance that reported sleeping room revenues were fairly stated. Amanda Thacker, a new audit manager, recently received the manager assignment on the 2011 audit of Majestic Hotels, Inc. On some of her other engagements, Amanda has successfully redesigned audit plans to use analytical procedures as substantive tests. She believes there is the potential to be more efficient and effective with the use of substantive analytical evidence related to sleeping room revenues. To investigate this possibility, Amanda asked a staff person to gather some information related to hotel sleeping room and occupancy rates for the market areas Majestic’s four hotels are located. The information obtained by the staff person from external industry...
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