Reference no: EM133266857

Case Study: Logan Self Storage

Part 1

Substantive Analytical Procedures

Company Background

Logan Self Storage, Inc. (LSS) is a C-corporation based in San Diego, California. With approximately 460,000 storage units of various sizes throughout the United States, LSS owns approximately 10% of the U.S. self-storage market and reported 20X8 rent revenue of $118,187,453. Because lease rates vary significantly by geographic location due to land constraints and market demand for self-storage services, LSS has divided its operations into five segments based on geographic location. These segments are labeled the West, Midwest, Southwest, South, and Northeast divisions.

In each location, LSS offers three types of storage units for lease: small units, large units, and commercial units. The small units are each 10' x 10' (100 square feet) and are commonly used by renters for storage of extra belongings that do not fit in their apartments or homes. These units are also frequently leased for short-term storage of small items between moves. The large units are 10' wide by 30' deep (300 square feet) and are commonly used for vehicle or boat storage or for storage of most household belongings between moves. The company's largest units are commercial units, which are 30' x 30' (900 square feet). One corner of each commercial unit contains a 12' x 12' (144 square feet) office space, leaving an L-shaped storage area of 756 square feet. These commercial units are frequently leased by small businesses in need of space for inventory and supplies, vehicle storage, manufacturing or assembly, and administration. While LSS competes directly with many competitors on the small and large units, it is a first-mover in offering commercial units and currently has relatively few competitors.

Rent revenue per square foot for each of these units varies significantly by geographic region and size of the unit. Despite the combination of office space and storage space, rental prices for commercial space are calculated on the total square footage and, as a result, per-square-foot prices are significantly higher for the commercial units.

Case Requirements

You have been asked to perform a substantive analytical procedure to obtain assurance regarding the reasonableness of the total rent revenue for LSS for the 20X8 fiscal year. Your audit team has determined that $1 million is the materiality threshold (i.e., tolerable misstatement) to be used for this substantive analytical procedure for this client. To assist you in completing your analytical procedure, two first-year staff members on your audit team compiled the following information for you:

1. Using the information provided, develop your own expectation of the total rent revenue for Logan Self Storage (LSS) for the 20X8 fiscal year.  (Why is rounding amounts not appropriate when performing substantive analytical procedures?)