Revenue Cycle-Substantive Analytical Procedures
Introduction
Substantive analytical procedures (SAPs) are a type of substantive procedure that uses plausible
relationships among financial and non-financial data to obtain audit evidence. Auditors
performing audits should be able to design SAPs that are appropriate to the assessed risks of
material misstatement and understand how they are used as part of an audit strategy.
At the end of this example, you will be able to respond to assessed risks of material
misstatement, in accordance with:
• SSA 520 Analytical Procedures (ISA 520).
• SSA 330 The Auditor’s Responses to Assessed Risks (ISA 330).
• SSA 500 Audit Evidence (ISA 500).
Scenario
Bens & Hilary Chartered Accountants (BHCA) is the auditor of SinStay, a listed company
operating budget motels. You are an audit senior on the team for the audit of SinStay for the
year ending 30 June 2015. It is March 2015 and the audit team is at SinStay’s offices
performing the audit planning. The team has identified the following facts regarding SinStay’s
revenue.
Accommodation revenue
SinStay’s business strategy is to offer value for money, and clean, no-frills rooms at standard
low rates every day of the year. Discounting is not part of the strategy. SinStay’s motels have
the following room categories:
• Superior double.
• Standard double.
• Single.
Room rates are set for each season, which are based around the school holidays. SinStay uses
a standard hotel management software package that is integrated with its accounting system.
The audit team has decided that controls over accommodation revenue, including occupancy
data, are appropriately designed and are expected to have operated effectively throughout the
financial year. Therefore, BHCA will perform tests of controls (TOCs). Based on the
expectation that the controls have operated effectively, the audit strategy is to then perform
detailed substantive analytical procedures (SAPs).
Payroll
The motels each operate with a full-time manager and a full-time deputy manager. Managers
and deputy managers are paid fixed annual salaries under standard terms across SinStay. Each
motel also employs room attendants on a casual basis. Room attendants are paid on an hourly
basis and are employed as needed.
SinStay budgets for one full-time equivalent room attendant for every 10 rooms occupied,
which is consistent with BHCA’s observations and industry statistics. All room attendants are
paid at the lowest award rate for the hospitality industry.
Among the risks of material misstatement identified by BHCA are the following two risks:
Account and key assertions
Risk of material misstatement
Accommodation revenue
– occurrence and accuracy
There is a risk that accommodation revenue is overstated
or not accurately recorded.
Payroll expense
– completeness and accuracy
There is a risk that payroll expenses are not recorded or are
inaccurate
Questions
The audit partner has requested you design SAPs for the key accounts and assertions above,
stating clearly what information you will need to conduct your analyses. She has asked that
you design SAPs that have a sufficient degree of predictability and disaggregation to allow
BHCA to obtain assurance from the SAPs and TOCs alone.