Audit Case

BACKGROUND Burlingham Bees, an independent, minor league baseball team, competes in the Northwest Coast League. The team finished in second place in 2008 with an 87-57 record. The Bees' 2008 cumulative season attendance of 434,348 spectators set a new record high for the team, up more than 10% from the prior season's attendance. Bank-loan covenants require the Bees to submit audited financial statements annually to the bank. The accounting firm of Hickman and Snowden, CPAs, has served as the Bees' auditor for the past five years. One of the major audit areas involves testing ticket revenues. Ticket revenues reached nearly $2.2 million in 2007. In 2008 the unaudited ticket revenues are reported to be $2,580,420 with net income before tax of $480,100. In prior years, the audit plan called for extensive detail testing of revenue accounts to gain assurance that reported ticket revenues were fairly stated. Michelle Kramme, a new audit manager, just received the assignment to be the manager on the 2008 audit. Michelle worked previously on the Bees' prior-year audits as a staff auditor When she learned she would be managing the current-year engagement, she immediately thought back to all the hours of detailed testing of ticket sales she performed. On some of her other clients, Michelle has been successful at redesigning audit plans to make better use of analytical procedures as substantive tests. She is beginning to wonder if there is a more efficient way to gather effective substantive evidence related to ticket revenues on the Bees' engagement. In her first meeting with Bees' management for the 2008 audit, Michelle learned that the Bees now use an outside company, Tickets R Us, to operate ticket gates for home games. The terms of the contract require Tickets R Us to collect ticket stubs so that it can later report total tickets collected per game. While Tickets R Us does not break down the total ticket sales into the various price categories, Michelle thinks there may be a way to develop an analytical procedure using the independently generated total ticket numbers and data from prior audits. To investigate this possibility, Michelle asked a staff person to gather some information related to reported sales. Section 8: Analytical Procedures Here is the information the staff person gathered from the records of the client, Tickets R Us, and prior-year audit files: 2008 Park Attendance (all games) Total park attendance 434,348 2008 Number of Games Weekday games Weekend games Information from prior-year audit files indicates a similar number of home games in total, although in the prior year there were 27 weekend games. The audit file indicates that average per-game attendance for weekend games was 25% higher than average per-game attendance for weekday games. 2008 Per-Game Ticket Prices Club seats $ 10 Box seats $ 6 General seats: Adult $ 4 Child (Senior Citizens) $ 2 Comparison of 2007 ticket prices to 2008 ticket prices reveals an average increase of 10% between the two years. Weekday 30% Sales Mix Club seats Box seats General seats: Adult Child (Senior Citizens) Weekend 25% 30% 35% 20% 15% 25% 20% Information from prior-year audit files shows that sales mix has remained fairly constant over the last several years. 2008 Promotions: Number of Games Weekday Weekend Information from prior-year audit files shows that attendance generally increases by 10% when there is a promotion (e.g., free baseball cap, poster, or special entertainment). In the prior year there were only 14 total promotional days. Case 8.3: Burlingham Bees REQUIRED [1] Research professional standards (AU 329) and list the requirements related to developing an expectation and conducting analytical procedures when those procedures are intended to provide substantive evidence. What are the advantages of developing an expectation at a detailed level (i.e., using disaggregated data) rather than at an overall or aggregated level? [2] Using the information provided, please develop a precise expectation (i.e., using the detailed or disaggregated data provided) for ticket revenues for the 2008 fiscal year. [3] (a) How close does the Bees' reported ticket revenue for 2008 have to be to your expectation for you to consider reported ticket revenue reasonable or fairly stated? (b) If reported ticket revenues were outside your "reasonableness range," what could explain the difference? [4] (a) What are the advantages of using analytical procedures as substantive tests? (b) If the engagement team decides to use analytical procedures for the Bees' audit, how will the audit plan differ from prior years? (c) Discuss whether you believe analytical procedures should be used as substantive tests for the Bees 2008 audit? BACKGROUND Burlingham Bees, an independent, minor league baseball team, competes in the Northwest Coast League. The team finished in second place in 2008 with an 87-57 record. The Bees' 2008 cumulative season attendance of 434,348 spectators set a new record high for the team, up more than 10% from the prior season's attendance. Bank-loan covenants require the Bees to submit audited financial statements annually to the bank. The accounting firm of Hickman and Snowden, CPAs, has served as the Bees' auditor for the past five years. One of the major audit areas involves testing ticket revenues. Ticket revenues reached nearly $2.2 million in 2007. In 2008 the unaudited ticket revenues are reported to be $2,580,420 with net income before tax of $480,100. In prior years, the audit plan called for extensive detail testing of revenue accounts to gain assurance that reported ticket revenues were fairly stated. Michelle Kramme, a new audit manager, just received the assignment to be the manager on the 2008 audit. Michelle worked previously on the Bees' prior-year audits as a staff auditor When she learned she would be managing the current-year engagement, she immediately thought back to all the hours of detailed testing of ticket sales she performed. On some of her other clients, Michelle has been successful at redesigning audit plans to make better use of analytical procedures as substantive tests. She is beginning to wonder if there is a more efficient way to gather effective substantive evidence related to ticket revenues on the Bees' engagement. In her first meeting with Bees' management for the 2008 audit, Michelle learned that the Bees now use an outside company, Tickets R Us, to operate ticket gates for home games. The terms of the contract require Tickets R Us to collect ticket stubs so that it can later report total tickets collected per game. While Tickets R Us does not break down the total ticket sales into the various price categories, Michelle thinks there may be a way to develop an analytical procedure using the independently generated total ticket numbers and data from prior audits. To investigate this possibility, Michelle asked a staff person to gather some information related to reported sales. Section 8: Analytical Procedures Here is the information the staff person gathered from the records of the client, Tickets R Us, and prior-year audit files: 2008 Park Attendance (all games) Total park attendance 434,348 2008 Number of Games Weekday games Weekend games Information from prior-year audit files indicates a similar number of home games in total, although in the prior year there were 27 weekend games. The audit file indicates that average per-game attendance for weekend games was 25% higher than average per-game attendance for weekday games. 2008 Per-Game Ticket Prices Club seats $ 10 Box seats $ 6 General seats: Adult $ 4 Child (Senior Citizens) $ 2 Comparison of 2007 ticket prices to 2008 ticket prices reveals an average increase of 10% between the two years. Weekday 30% Sales Mix Club seats Box seats General seats: Adult Child (Senior Citizens) Weekend 25% 30% 35% 20% 15% 25% 20% Information from prior-year audit files shows that sales mix has remained fairly constant over the last several years. 2008 Promotions: Number of Games Weekday Weekend Information from prior-year audit files shows that attendance generally increases by 10% when there is a promotion (e.g., free baseball cap, poster, or special entertainment). In the prior year there were only 14 total promotional days. Case 8.3: Burlingham Bees REQUIRED [1] Research professional standards (AU 329) and list the requirements related to developing an expectation and conducting analytical procedures when those procedures are intended to provide substantive evidence. What are the advantages of developing an expectation at a detailed level (i.e., using disaggregated data) rather than at an overall or aggregated level? [2] Using the information provided, please develop a precise expectation (i.e., using the detailed or disaggregated data provided) for ticket revenues for the 2008 fiscal year. [3] (a) How close does the Bees' reported ticket revenue for 2008 have to be to your expectation for you to consider reported ticket revenue reasonable or fairly stated? (b) If reported ticket revenues were outside your "reasonableness range," what could explain the difference? [4] (a) What are the advantages of using analytical procedures as substantive tests? (b) If the engagement team decides to use analytical procedures for the Bees' audit, how will the audit plan differ from prior years? (c) Discuss whether you believe analytical procedures should be used as substantive tests for the Bees 2008 audit