You are an auditor on the AUS Limited (AUS) audit engagement for the financial year ending
30 September 2019. AUS 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 AUS audit. You have noted a number of significant risks outlined below.
AUS’s revenue is made up of management fees earned from hotels managed by AUS 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 AUS, the company’s practice is to confirm hotel bookings by taking credit card
details and collecting payment for accommodation and incidentals at the end of a customer’s
stay. You have noted an increasing incidence of corporate clients prepaying for their
employees’ accommodation. 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
included 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 or biannually to take effect at specific dates.
Based on your initial review of the correspondence, it appears that AUS 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.
AUS runs a hotel loyalty program which enables members of the program to earn points for
every dollar spent on an accommodation, food and beverages at AUS branded hotels. These
points may be redeemed at a later date for free accommodation or other benefits. AUS records
a loyalty program future redemption liability on the basis of the number of points expected to
be redeemed prior to their expiry multiplied 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. AUS’s management
subsequently reduced the amount provided in the loyalty program future redemption liability
by $80 million based on their estimate of the revised amount required to meet the liability given
the impact of the change.
AUS 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
AUS’s hardware incurred during a year.
Required
(a) Considering the information provided, determine the four key account balances and
related assertions at risk. Briefly justify your answer. (8 Marks)
(b) Recommend one audit procedure in relation to each of the assertions identified above
(2 Marks)
(Total Marks 10)
(Maximum Word Limit 400)
