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Question 2b

Balotelli Beach Hotel Co (Balotelli) operates a hotel providing accommodation, leisure facilities and restaurants.

Its year end was 31 October 2014. You are the audit senior of Mario & Co and are currently preparing the audit programmes for the year end audit of Balotelli. You are reviewing the notes of last week’s meeting between the audit manager and finance director where two material issues were discussed.

Depreciation
Balotelli incurred significant capital expenditure during the year on updating the leisure facilities for the hotel. The finance director has proposed that the new leisure equipment should be depreciated over 10 years using the straight-line method.

Food poisoning
Balotelli’s directors received correspondence in September from a group of customers who attended a wedding at the hotel. They have alleged that they suffered severe food poisoning from food eaten at the hotel and are claiming substantial damages. Balotelli’s lawyers have received the claim and believe that the lawsuit against the company is unlikely to be successful.

Required:
Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to the above two issues.

Note: The total marks will be split equally between each issue. (8 marks)

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