- 20 Marks
Question
You are the senior responsible for planning the audit of Hometown Football Club Limited (HFC) for the year ended May 31, 2008.
HFC runs a football club which was promoted to the top division in the league this season. The football season starts on September 1 and ends on May 31 so that the players get a break over the summer months.
HFC owns their football stadium, which now has the capacity to seat 25,000 people. Of the 25,000 seats, 19,000 are allocated to HFC supporters (home supporters) and are sold to season ticket holders only. The remaining 6,000 tickets are for away supporters and cannot be sold to HFC supporters.
Season tickets cost GHS175 for children. Following their recent promotion, all the season tickets have been sold this year with 70% of season tickets sold to adults and the remaining 30% to children. Tickets for away supporters are always sold at GHS20 per ticket, regardless of whether the ticket is sold to an adult or a child. On average, 50% of away supporter tickets have been sold for each of the 14 home games played at HFC’s stadium during the football season.
HFC’s other revenue streams include the sale of football kits and other memorabilia from the club shop, and food and drink sales from the club snack bars.
Following promotion to the top division, the club added an extra stand to the stadium to increase the seating capacity to the current level of 25,000. Other existing areas of the stadium also underwent maintenance in order to restore them to their original condition. The work was carried out during June and July 2007 and cost a total of GHS3,360,000. To finance this, HFC took out a GHS2,900,000 loan on June 1, 2007. The loan carries an interest rate of 7% and is repayable over the next five years. The loan is secured on the stadium.
The directors feel that the club’s greatest assets (other than the stadium) are the football players themselves. The players have performed so well this year that some of the other football clubs in the same division have made preliminary offers to buy three of HFC’s players. HFC is particularly pleased about this as these players joined the club through their youth academy programme. Consequently, the directors would like to value these three players as intangible non-current assets in HFC’s financial statements. The players will be valued at the offer price received from the other clubs. The directors feel this is a prudent valuation because they are confident that the eventual selling price would be much higher than the preliminary offer.
One of the major drawbacks of the club’s promotion has been that the club has had to increase the level of players’ salaries. The total salary expense for the year is estimated to be in the region of GHS2,800,000. This is a particularly surprising figure as it is higher than the other operating costs for the year, which are estimated at GHS2,400,000.
HFC has just appointed a team of internal auditors. They have not been in position long enough to help you with your audit work, but the directors are keen for the internal auditors to improve the company’s internal controls in relation to the club shop and snack bars.
Required:
a) Using the information provided, describe FIVE (5) audit risks and explain the auditor’s response to each risk.
(10 marks)
b) Describe how the auditor could perform a proof in total calculation to confirm each of HFC’s revenue from ticket sales, loan interest, and payroll expense for players’ salaries.
(4 marks)
c) Explain THREE (3) internal controls the internal auditors of HFC should implement relating to the club shop or snack bars, and state the objective of each of the three controls.
(6 marks)
Answer
a) Audit risks and auditor’s response:
| Audit risk | Auditor’s response |
|---|---|
| Risk of misclassification of stadium expenditure: HFC has spent GHS3,360,000 on both capital additions (new stand) and expenses (maintenance). There is a risk of incorrect classification under IAS 16. | The auditor should obtain a breakdown of the GHS3,360,000 spent on the stadium and establish which costs relate to the new stand and which relate to maintenance. These amounts should be traced through to the nominal ledger to ensure proper classification. |
| Loan repayment disclosure: The loan must be appropriately disclosed with a breakdown of current and non-current liabilities. HFC’s stadium is secured against the loan, which must be disclosed. | The auditor should determine from management how they calculated the portion of the loan repayable within the next 12 months and ensure this is classified as a current liability, with the remainder as non-current. Review disclosure notes to ensure accuracy. |
| Valuation of players as intangible assets: The directors want to capitalize three home-grown players, which is not permitted under IAS 38 for internally generated assets. | The auditor should explain to management that capitalizing these players is not allowed under IAS 38, as they are internally generated assets. |
| Going concern risk due to high operating costs: The football club has high payroll costs (GHS2.8m) compared to its revenues. This could lead to liquidity and going concern issues. | The auditor should perform a detailed going concern review, discussing forecast performance and assessing whether the club will have sufficient resources to continue operations. |
| Risk from loan interest expense: Misstatement risk due to incorrect calculation of loan interest. | The auditor should perform a recalculation of the loan interest expense (2,900,000 x 7%) and compare it to the amount reported to ensure correct reporting of loan interest expense. |
b) Proof in total calculation:
- Ticket sales:
- Adults: 19,000 x 70% x GHS260 = GHS3,458,000
- Children: 19,000 x 30% x GHS175 = GHS997,500
- Away supporters: 6,000 seats x 50% capacity x GHS20 x 14 games = GHS840,000
- Total expected revenue = GHS5,295,500
The auditor should compare the expected revenue of GHS5,295,500 with the actual revenue from ticket sales and investigate any significant differences.
- Loan interest:
- Loan value: GHS2,900,000
- Interest rate: 7%
- Expected loan interest expense = GHS203,000
The auditor should compare the expected loan interest expense of GHS203,000 to the actual interest expense charged and investigate any significant differences.
- Payroll expense for players’ salaries:
- The auditor should obtain the previous year’s payroll information and determine the average salary increase. Then multiply the average salary by the number of players to obtain the expected payroll expense. This should be compared to the actual payroll charge, and any differences should be investigated.
c) Internal controls for the club shop or snack bars:
| Internal control | Objective |
|---|---|
| Tender process for suppliers: HFC should invite suppliers to tender for contracts to supply goods for the shop and snack bars. | Ensure goods are purchased at competitive prices and represent the best value for money. |
| Sales recording and forecasting: After each game, the snack bar manager should record sales for each product, and management should use this information to forecast demand for future games. | Minimize food wastage and maximize profitability by projecting demand accurately. |
| Reconciliation of sales and cash: At the end of each game, the money in the tills should be counted and reconciled with the till receipts. Any differences should be investigated, and excess cash should be banked promptly. | Prevent fraud and misappropriation of cash by ensuring that the cash in the tills matches recorded sales, and any discrepancies are addressed. |
- Tags: Audit Risk, Football Club, Internal Control, Loans, Payroll, Revenue Verification
- Level: Level 2
- Topic: Audit and Assurance Risk Environment
- Series: NOV 2015
- Uploader: Dotse