Advanced Audit and
Tuesday 2 December 2008
Section A – BOTH questions are compulsory and MUST be attempted
1 Bluebell Co operates a chain of 95 luxury hotels. This year’s results show a return to profitability for the company,
following several years of losses. Hotel trade journals show that on average, revenue in the industry has increased by
around 20% this year. Despite improved profitability, Bluebell Co has poor liquidity, and is currently trying to secure
further long-term finance.
You have been the manager responsible for the audit of Bluebell Co for the last four years. Extracts from the draft
financial statements for the year ended 30 November 2008 are shown below:
Extracts from the Statement of Comprehensive Income 2008 2007
Revenue (note 1) 890 713
Operating expenses (note 2) (835) (690)
Other operating income (note 3) 135 10
Operating profit 190 33
Finance charges (45) (43)
Profit/(loss) before tax 145 (10)
Note 1: Revenue recognition
Revenue comprises sales of hotel rooms, conference and meeting rooms. Revenue is recognised when a room is
occupied. A 20% deposit is taken when the room is booked.
Note 2: Significant items included in operating expenses: 2008 2007
Share-based payment expense (i) 138 –
Damaged property repair expenses (ii) 100 –
(i) In June 2008 Bluebell Co granted 50 million share options to executives and employees of the company. The
cost of the share option scheme is being recognised over the three year vesting period of the scheme. It is
currently assumed that all of the options will vest and the expense is calculated on that basis. Bluebell Co
operates in a tax jurisdiction in which no deferred tax consequences arise from share-based payment schemes.
(ii) In September 2008, three hotels situated near a major river were severely damaged by a flood. All of the hotels,
which were constructed by Bluebell Co only two years ago, need extensive repairs and refurbishment at an
estimated cost of $100 million, which has been provided in full. All of the buildings are insured for damage
caused by flooding.
Note 3: Other operating income includes: 2008 2007
Profit on property disposal (iii) 125 10
(iii) Eight properties were sold in March 2008 to Daffodil Fund Enterprises (DFE). Bluebell Co entered into a
management contract with DFE and is continuing to operate the eight hotels under a 15 year agreement. Under
the terms of the management contract, Bluebell Co receives an annual financial return based on the profit made
by the eight hotels. At the end of the contract, Bluebell Co has the option to repurchase the hotels, and it is likely
that the option will be exercised.