You are the supervisor on the audit of Platinum Pokie Club, a large suburban club in Western Australia. As well as the usual club facilities such as poker machines, bars and a bistro, the club also operates a large gymnasium, an indoor heated pool and a restaurant.
The subsequent dates are relevant to the current audit engagement:
You are aware that the subsequent independent and material events have occurred:
Problem 1. On 5 August 2012, the financial controller informed you that the board has recently received a letter from the assistant general manager, Mr. Tan. The letter contains a confession: Mr. Tan has been lodging fraudulent expense claims over the past 5 years, amounting to some $40,000. The financial controller’s preliminary estimates indicate that this figure is materially correct; thus he believes it will take at least another 2 months before the exact figure is known. The police had been informed of the fraud and are searching for Mr. Tan, who appears to have left the country.
Problem 2. On 17 August 2012, the financial controller informed you that on the last day a participant on one of the club’s aerobics classes, Ms. Peters, injured herself after slipping on the gym floor. Ms. Peters is the spouse of one of the state’s leading barristers. A preliminary letter has already been received from Mr. Peters, stating that Ms. Peters intends to take legal action to recover the costs of medical treatment, plus damages, from the club.
Problem 3. On 18 August 2012, the financial controller informed you that a serious fire occurred at one of the club’s kitchens during football celebrations. Although covered by insurance, the fire caused extensive damage to the bistro area and the adjacent bar. Both the bar and bistro are expected to remain unserviceable until at least mid-September, resulting in an expected fall in revenue of around 7%.
Problem 4. On 23 August 2012, the general manager informed you that on 18 August 2012 the board decided to sell land it was holding as a long term investment. It seemed that a generous offer was made by an overseas buyer. The contract is due to be signed on 25 August 2012.
Problem 5. On 11 August 2012, the board signed a contract for the upgrade of the club’s air-conditioning system. The upgrade is required to ensure compliance with workers compensation regulations. The first payment of $100,000 is due on 1 September 2012. Work will be completed (and the final contract payment made) by 30 June 2012.
Required
(a) Illustrate what further evidence you could seek in relation to each of these matters.
(b) Explain the action, if any, you would recommend to management in relation to the accounting treatment of every items.