You are an auditor on the Aussiental Limited (Aussiental) audit engagement for the financial year ending 30 September 2017. Aussiental is a large hotel company with more than 800 hotels in Australia and Asia under a range of hotel brands. You are in the process of undertaking audit planning procedures for the Aussiental Audit. You have noted a number of significant risks outlined below.
Aussietal runs a hotel loyalty program which enables members of the program to earn points for every dollar spent on accomodation, food and beverages at Aussiental branded hotels. These points may be redeemed at a later date for free accomodation or other benefits. Aussiental records a loyalty future redemption liability on the basis of the number of points expected to be redeemed prior to their expiry multipled by redemption cost per point.
An announcement was made on 30 May 2017 that points earned under the loyalty program would now expire in two years rather than five years from the time they are earned. Aussiental’s management subsequently reduced the amount provided in the loyalty program future redemption liability by $80million based on their estimate of the revised amount required to meet the liability given the impact of the change.
Aussiental’s revenue is made up of management fees earned from hotels managed by Aussiental under long term contracts with hotel owners, and from the rental of rooms, and food and beverage sales from hotels owned and leased by the company directly.
In hotels owned and leased directly by Aussiental, the company’s practice is to confirm hotel bookings by taking credit card details and collecting payment for accomodation and incidentals at the end of a customer’s stay. You have noted an increasing incidence of corporate clients prepaying for their employees’ accomodation. These have been recorded as revenue when payment has been received.
It has also come to your attention that there have been a growing number of disputes with hotel owners in relation to the amount of management fees being charged. Management fees include a base fee, a percentage of hotel revenue, and an incentive fee based on the hotel’s profitability. Individual contracts negotiated with hotel owners include provisions for percentage increases of the base fee either annually/biannually to take effect at specific dates. Based on your initial review of the correspondence, it appears that Aussiental has been applying percentage increases to the base fee charged to hotel owners prior to their effective date as contained in the contracts with individual hotel owners.
Aussiental has embarked on a large scale software development project in the current year to internally develop improved guest reservation and hotel management systems. An amount of $37 million for the year has been capitalised as software development during the year.. Your initial review has revealed that this amount includes repairs and maintenance of a range of Aussiental’s hardware incurred during the year.
In relation to the risks described above for the accounts listed below, complete the following audit table by:
(i) providing the key assertion at risk in relation to each account listed
(ii) a specific, practical preventative internal control that would directly address the risk in relation to the assertion identified in (i)
(iii) a specific, practical detective internal control that Aussiental could implement for the risk in relation to the assertion identified in (i) and;
(iv) specific, practical tests of controls you would use to gather evidence to support reliance on each of the controls provided in (ii) and (iii) above
Account( 1) Key( is ) preventative( iv ) test of( iii ) detective( iv ) test ofassertioninternal controlcontrol for ( ii )internal controlcontrol for ( iii )Managementfee revenueIntangible*asset .Software