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    Drotos Theater Auditing

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    Your CPA firm has just been engaged as the independent auditors for Drotos Theaters. The theater chain is opening a new theater in one month. Because of recent attention on the Sarbanes-Oxley Act, the main investment banking firm for Drotos' corporate operations has expressed concerns about internal control. Because of this, your firm has been asked to immediately review the internal policies and procedures to be established at the new theater.
    Drotos Theaters has been in business over 75 years. It was a family-run business until the late 1980s, when it was sold to another chain. There are no family members still involved in the day-to-day operations. The industry has historically been profitable in both good times and in recessions. The new theater is located in a booming part of the Southwest. The labor pool is highly skilled and the unemployment rate is low in this area. The monthly lease was negotiated for a 20-year period at a favorable rate, and the lease payment is not dependent on monthly revenues. A major bookstore chain has signed a lease for space next to the theater.
    Each Drotos Theater operates as a separate organization/cost center under the Drotos corporate umbrella. The Drotos home office requires that procedures be established before the opening of a new theater. A Controller from another Drotos theater operation has been transferred to this new theater, and is planning on following the same procedures used previously. Under these procedures, the Controller is responsible for both depositing cash and recording transactions by posting journal entries into the computerized financial accounting system. Because of the prime location of the new theater, first year revenues are expected to hit $100 million, with more than 50% of revenues collected in cash.
    The cashiers at the front box office receive payments from theater customers and provide customers with a serially numbered, perforated ticket. To gain admittance to the theater, customers must present the ticket to the ticket-taker located 100 feet from the box office and entrance at the front lobby. The ticket-taker rips the ticket at the perforation, deposits one half in a box, and hands the ticket stub to the customer. The box office and lobby areas have been designed with state-of-the art equipment, including upscale furniture and fixtures. The theater has signed a 5-year contract with the ticketing system vendor.
    The previous auditing firm resigned, resulting in your firm acquiring Drotos as a client. There had been heated discussions between the previous auditors and Drotos' management regarding the number of accounting personnel needed to adequately staff theater operations. Use bullet points:
    a. Evaluate the manual and computerized control activities.
    b. Discuss internal controls that are and aren't present in the above scenario.
    c. Assess internal control limitations and risks.
    d. Discuss your concerns given your knowledge that the previous audit firm resigned from the engagement.
    e. Recommend controls to prevent and detect financial misstatements.
    f. Discuss what controls you would put into place to assure the separation of duties for back office accounting staff.
    g. Recommend procedures for detecting employee fraud concerning cash.
    h. Explain how the cashier and ticket-taker might steal cash and describe the controls you would put into place to keep this from occurring.

    Word limit 500 words.

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    https://brainmass.com/business/external-auditing/drotos-theater-auditing-144051

    Solution Preview

    a. Evaluate the manual and computerized control activities.
    The controller is responsible for both recording and depositing cash. This increases the control risk. It is possible for the controller to make a misstatement in recording the transaction and there will be a difference between the amount recorded and the amount actually deposited in to the bank. This control risk is especially large when in the first year revenues of $100 million are expected with more than 50% of the revenues in cash.
    The cashiers at the front office receive payments from the theater and issue tickets to the customers. This is a serious control risk. There can be a misstatement of the payment received and this would remain undetected.
    There is a 100 feet distance between the ticket cashier and the ticket-taker. There is a control risk in this procedure. It is possible that ticket less persons may enter the theater.
    The theater has signed a 5-year contract with the ticketing system vendor. This is matter of serious control risk. If the vendor directly sells tickets outside the premises of the theater there can be a severe fraud.
    b. Discuss internal controls that are and aren't present in the above scenario.
    The internal controls that are present include:
    The cashier receives the tickets and issues the tickets to the customers.
    The ticket-taker tears the perforated ticket into two and then allows the customer into the hall.
    The internal control measures that are missing are:
    There should be a different person who will aggregate the cash received from the cashiers and record it. Another person should deposit the cash into the bank.
    The tickets issues should bear unique seat numbers in the theaters and the customer should only be allowed to seat on their allocated ...

    Solution Summary

    This posting gives you a solution of the auditing problem of Drotos Theaters... It also discusses the internal controls that should be put in place. .

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