You are any auditor working at a CPA firm. One of your firm's clients is a dance, recital, and theater company in Sacramento. You've been asked to audit revenue from theater productions for the year.
You've decided to try and use an analytical procedure to obtain some evidence. You use information from a typical production to estimate revenues for the entire season.
There were seven productions during the year under audit. One of them was a first run Broadway production that got rave reviews. Another production was commissioned by the theater. The rest were touring Off-Broadway shows. All of the shows were evening performances except one of the Off-Broadway shows which was a Sunday matinee.
The theater has three types of seats: box seats, upper tier, and orchestra. The theater has a maximum capacity of 3,000 seats.
You decide to base your initial estimate on one of the evening Off-Broadway shows (Dancing Numbers). For that show total attendance was 2,000: 60% were orchestra seats, 30% were upper tier seats. and 10% were box seats. The attendance figure (the 2,000) includes 50 free seats.
Ticket prices for Dancing Numbers were:
Box seats - $80 per ticket
Orchestra - $60 per ticket
Upper Tier -$40 per ticket
Additional assumptions were made based on information obtained from prior year audits.
Attendance for the Broadway show was expected to 50% higher than normal attendance for an off-Broadway show (Dancing Numbers). Mix of seats expected to be the same. Tickets are priced 50% higher.
Attendance at the commissioned production was expected to be 20% higher than an average show (2,400 tickets total). Mix of the extra seats at the commissioned production was expected to be 75% Orchestra and 25% Upper Tier. The mix of the remaining 2,000 tickets was expected to be the same as a regular off-Broadway show (Dancing Numbers). Ticket prices were expected to be the same as the prices for Dancing Numbers.
Ticket prices were decreased by 10% for the off-Broadway matinee performance. Attendance was estimated to be 5% lower. Mix of seats expected to be the same as an average off-Broadway show (Dancing Numbers).
At every show, 50 box seats are given away free to theater employees' family and friends.
What would the auditors expect ticket revenue to be for the current year?
The actual reported revenue was $1,020,000. Do you think the difference, if any, is material? If so, come up with a plausible explanation for the difference. What evidence could you gather to verify your explanation?