Balotelli Beach Hotel Co (Balotelli) operates a number of hotels providing accommodation, leisure facilities and restaurants.
You are an audit senior of Mario & Co and are currently conducting the audit of Balotelli for the year ended 31 December 20X4. During the course of the audit a number of events and issues have been brought to your attention:
Non-current assets and depreciation
Balotelli incurred significant capital expenditure during the year updating the leisure facilities at several of the company’s hotels. Depreciation is charged monthly on all assets 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.
Balotelli’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 has stated that based on discussions with their lawyers, the claim is unlikely to be successful.
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?
A. Request a written representation from management supporting their assertion that the claim will not be successful
B. Send an enquiry letter to the lawyers of Balotelli to obtain their view as to the probability of the claim being successful
C. Review the correspondence from the customers claiming food poisoning to assess whether Balotelli has a present obligation as a result of a past event
D. Review board minutes to understand why the directors believe that the claim will not be successful