LS is a C-corporation based in  California. With approximately 460,000 storage units of various sizes throughout the United States, LS owns approximately 10% of the U.S. self-storage market and reported 2028 rent revenue of $118,187,453. Because lease rates vary significantly by geographic location due to land constraints and market demand for self-storage services, LS has divided its operations into five segments based on geographic location.

These segments are labeled the West, Midwest, Southwest, South, and Northeast divisions.

In each location, LS offers three types of storage units for lease: small units, large units, and commercial units. The small units are each 10' x 10' (100 square feet) and are commonly used by renters for storage of extra belongings that do not fit in their apartments or homes. These units are also frequently leased for short-term storage of small items between moves. The large units are 10' wide by 30' deep (300 square feet) and are commonly used for vehicle or boat storage or for storage of most household belongings between moves. The company's largest units are commercial units, which are 30' x 30' (900 square feet). One corner of each commercial unit contains a 12' x 12' (144 square feet) office space, leaving an L-shaped storage area of 756 square feet. These commercial units are frequently leased by small businesses in need of space for inventory and supplies, vehicle storage, manufacturing or assembly, and administration. While LS competes directly with many competitors on the small and large units, it is a first-mover in offering commercial units and currently has relatively few competitors.

 

Rent revenue per square foot for each of these units varies significantly by geographic region and size of the unit. Despite the combination of office space and storage space, rental prices for commercial space are calculated on the total square footage and, as a result, per-square-foot prices are significantly higher for the commercial units.

 

 Requirements

You have been asked to perform a substantive analytical procedure to obtain assurance regarding the reasonableness of the total rent revenue for LS for the 20X8 fiscal year. Your audit team has determined that $1 million is the materiality threshold (i.e., tolerable misstatement) to be used for this substantive analytical procedure for this client. To assist you in completing your analytical procedure, two first-year staff members on your audit team compiled the following information for you:

Total number of storage units  460,000

Weight average rev per sq foot $1.10

Weighted average occupancy 90%weighted average sq foot per unit 226.09

 

1.Using the information provided, develop your own expectation of the total rent revenue for LS for the 2028 fiscal year.  (Why is rounding amounts not appropriate when performing substantive analytical procedures?)

 

2.Based on the estimate you calculated for Requirement 1, does the reported rent revenue appear to be fairly stated in all material respects? Why or why not?

 

3.Research AS 2305. What factors influence the effectiveness and efficiency of substantive analytical procedures? What is meant by the term "precision" of the expectation?

 

4.What additional information would you like to have when developing your expectation of the total rent revenue for 2028?