AAF8

Section A: Q8

Specimen exam

Q8 Section A

2 marks

Balotelli Co operates a number of hotels providing accommodation, leisure facilities and restaurants. You are an audit senior of Mario & Co and you are currently conducting the audit of Balotelli Co for the year ended 31 December 20X4.

During the course of the audit the following events and issues have been brought to your attention.

Depreciation
Balotelli Co incurred significant capital expenditure during the year updating the leisure facilities at several of the company's hotels.

Depreciation is charged on all assets monthly on a straight-line basis (SL) and it is company policy to charge a full month's depreciation in the month of acquisition and none in the month of disposal.

Food poisoning
Balotelli Co’s directors received correspondence in November 20X4 from a group of customers who attended a wedding at one of the company's hotels.

They have alleged that they suffered severe food poisoning from food eaten at the hotel and are claiming substantial damages. Management have stated that based on discussions with their lawyers the claim is unlikely to be successful.

Trade receivables
Balotelli Co's trade receivables have historically been low as most customers are required to pay in advance or at the time of visiting the hotel.

However during the year a number of companies opened corporate accounts which are payable monthly in arrears. As such the trade receivables balance has risen significantly and is now a material balance.

In relation to the claim regarding the alleged food poisoning, which of the following audit procedures would provide the auditor with the MOST reliable audit evidence regarding the likely outcome of the litigation?

Pick 1 option