Question 1

You are an auditor on the OZ Limited (OZ) audit engagement for the financial year ending 30 September 2019. OZ 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 OZ audit. You have noted a number of significant risks outlined below.

OZ’s revenue is made up of management fees earned from hotels managed by OZ 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 OZ, 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 OZ 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.

OZ 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 OZ branded hotels. These points may be redeemed at a later date for free accommodation or other benefits. OZ 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.  OZ’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.

OZ  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 OZ’s hardware incurred during a year.

Required:

(a) Identify the four key accounts and related assertions at risk. Briefly justify your answer (12 Marks)

(b)  Perform one substantive test of detail for each of the identified assertions at risk. (8 Marks) (Total Marks 20)