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2012 KPMG LLP, a Delaware limited liability partnership and the U.S.

member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved.
2012 Frank A. Buckless and D. Scott Showalter
Case Study: Majestic Hotels, Inc.
Using Analytical Procedures as Substantive Tests
By Frank A. Buckless and D. Scott Showalter, NC State University
Case Study: Majestic Hotels, Inc.
Using Analytical Procedures as Substantive Tests
By Frank A. Buckless and D. Scott Showalter, NC State University
BACKGROUND
Majestic Hotels, Inc., a privately-held company, has four hotels located in Charleston, South Carolina;
Asheville, North Carolina; Savannah, Georgia; and West Palm Beach, Florida that cater to high-end
business and vacation travelers. Bank-loan covenants require that Majestic Hotels, Inc. submit audited
financial statements annually to the bank. Specifically, the bank covenants contain revenue and
occupancy measures that Majestic must maintain to not be in technical default. The accounting firm of
Brickman & Joyner, CPAs, has served as the Majestic auditor for the past six years.
One of the major audit areas involves testing sleeping room revenues. Sleeping room revenues reached
nearly $20.3 million in 2010. In 2011 the unaudited sleeping room revenues are reported to be
$21,171,531 with net income before tax of $4,006,627. In prior years, the audit plan called for extensive
detail testing of revenue transactions to gain assurance that reported sleeping room revenues were fairly
stated.
Amanda Thacker, a new audit manager, recently received the manager assignment on the 2011 audit of
Majestic Hotels, Inc. On some of her other engagements, Amanda has successfully redesigned audit
plans to use analytical procedures as substantive tests. She believes there is the potential to be more
efficient and effective with the use of substantive analytical evidence related to sleeping room revenues.
To investigate this possibility, Amanda asked a staff person to gather some information related to hotel
sleeping room and occupancy rates for the market areas Majestics four hotels are located.
The information obtained by the staff person from external industry reports for the four regions where
Majestic hotels are located (Asheville, Charleston, Savannah, and West Palm Beach) is as follows:

Average Annual Average Annual
Region Occupancy Rate Daily Room Rate
Asheville, NC 61.1% $121.76
Charleston, SC 63.8% $130.88
Savannah, GA 62.7% $129.14
West Palm Beach, FL 64.5% $141.63

Prior year work papers indicate that the Charleston hotel has 192 rooms, Asheville hotel has 244 rooms,
Savannah hotel has 110 rooms and West Palm Beach hotel has 168 rooms. While obtaining background
information about the client, the staff person learned from the Asheville hotel manager that the Asheville
hotel was closed for one week in October because of flooding.
Amanda has assessed inherent risk as high and control risk as low for the existence, completeness, and
accuracy of sleeping room revenues based on challenging but improving regional and national economic
conditions and favorable control procedures associated with sleeping room revenues. Further, after

2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved.
2012 Frank A. Buckless and D. Scott Showalter
Case Study: Majestic Hotels, Inc.
Using Analytical Procedures as Substantive Tests
By Frank A. Buckless and D. Scott Showalter, NC State University
considering the degree of precision required and both quantitative and qualitative factors, Amanda
believes that a difference between the expected amount developed by the auditor and the actual amount
reported by the client of the lower of +/-5% or tolerable misstatement of $0.2 million would be acceptable.
REQUIRED
1. Research professional standards and list the requirements related to developing an expectation and
conducting analytical procedures when those procedures are intended to provide substantive
evidence. Review the sleeping room revenue work paper template provided in Appendix A. Would
use of the template help the audit firm comply with professional standards? Explain your answer.
2. Use the room revenue work paper template provided in Appendix A along with the external hotel and
industry information obtained by the staff person to develop an expectation for Majestics 2011
sleeping room revenues.
a. Are Majestics reported sleeping room revenues within your reasonableness range?
b. If reported sleeping room revenues were inside your reasonableness range would your
analytical procedure provide sufficient evidence for you to conclude Majestics 2011 sleeping
room revenues are fairly reported?
c. If reported sleeping room revenues were outside your reasonableness range, what could explain
the difference?
3. Review the internal client records provided in Appendix B. Use the room revenue work paper template
provided in Appendix A along with the internal client records provided in Appendix B to develop an
expectation for Majestics 2011 sleeping room revenues.
a. Are Majestics reported sleeping room revenues within your reasonableness range?
b. If reported sleeping room revenues were inside your reasonableness range would your
analytical procedure provide sufficient evidence for you to conclude Majestics 2011 sleeping
room revenues are fairly reported?
c. If reported sleeping room revenues were outside your reasonableness range, what could explain
the difference?
d. What other qualitative considerations would need to be considered before concluding whether
additional testing would be warranted?
e. What is the advantage of developing an expectation using the disaggregated internal client data in
Appendix B to the aggregated external industry data obtained by the staff person?
f. What is the disadvantage of developing an expectation using the disaggregated internal client
data in Appendix B to the aggregated external industry data obtained by the staff person?
What other testing, if any, would need to be performed related to the substantive analytical
procedure before a conclusion could be made?