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Revision question on audit evidence (NBAA, MAY 2019)

The audit senior in-charge at A u0026amp; S Associates, firm of chartered accountants, currently engaged in the audit of Kilimani hotels for the year ended 31st March 2019. Kilimani runs a chain of boutique hotels. Apart from the overall supervision of the audit, he has been assigned to perform audit procedures over non-current assets, revenue and trade receivables. The following information was gathered during your field work:

Non-current assets Land and buildings :

  • Kilimani accounting policy for land and buildings is to revalue them at the end of each five-year period.
  • As at 31st March 2019, land and buildings of Kilimani were revalued by independent external valuer at a value of TZS.625 million.
  • The value of land and buildings at the previous revaluation in 2014 was TZS.500 million Kitchen equipment
  • An advance of TZS.15 million paid for purchasing new kitchen equipment has been included under plant and machinery. The final installment of TZS.5 million was not paid to the supplier until 15th April 2019 which was the day of delivery of the equipment to the hotel. Kilimani has depreciated this equipment at 20% per annum on a straight line basis. New restaurant

During the year Kilimani built a new restaurant at cost of TZS.85 million. This amount has been included in buildings as at 31st March 2019. The engagement partner is concerned about the large increase in the value of land and buildings since the last valuation, and decided to get help of Haris, the chief valuer of Hekima Associate, to check the reliability and accuracy of valuation. He is aware that ISA 620: Using the work of an Expert could guide him in obtaining assistance from Haris.

Revenue

  • Kilimani revenue consists of hotel rooms revenue, income from food and beverage and banquet sales.
  • Kilimani uses the Hotel Management Services System (HMSS) for front office functions such as processing reservations, guest checking in and out assigning rooms, guest management and billing and the Myacc system as its general ledger application.
  • HMSS and Myacc systems are not integrated.  80% of the hotel revenues are from room revenue.
  • The night shift clerk is responsible for accounting the day’s transactions. He extracts revenue reports (text files-in soft copy form) from the HMS system and uploads them to the Myacc-system and believe they are effective. Trade receivables

During the last two-year period, a number of Companies and travel agents opened corporate accounts with credit facilities. As such, the trade receivables balance has risen significantly and has now become a material balance. The auditor has been asked by the partner to obtain confirmation for all material debtors. He has posted positive confirmation requests to a selected debtor sample. One debtor has called him and provided an oral representation confirming that his balance payable to Kilimani, indicated in the confirmation request is accurate.

REQUIRED:

(a) Discuss any six factors that A u0026amp; S Associates should consider when placing reliance on the work of Haris.

(b) Analyse the acceptability of the accounting treatment adopted by Kilimani for kitchen equipment.

(c) Explain any five appropriate substantive procedures that the auditor could perform in order to verify:

  • (i) Land and buildings and
  • (ii) New restaurant
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