Background
You are a junior auditor working for Forrest Gump & Co. (theFirm), an international chartered
accounting firm.
Your client, Wellness Pty Ltd (Wellness) operates the world-famousWellness Health Resort,
located in the Whitsunday Islands of northern Queensland.
While revenue from accommodation is an important factor in thefinancial success of Wellness
Health Resort, its profits are predominantly driven by the uptakeof additional services and
facilities by guests during their stay (e.g. use of the spa andwholistic health facilities, patronage
of the five restaurants and bars within the resort, and partakingin other fee-paying activities).
Wellness maintains its own website which allows guests to bookaccommodation at the resort
directly. This online booking system is monitored by thereservations team at Wellness which
consists of two full-time and three casual staff.
When a booking is made over the internet, an email is sent to thereservations team informing
them that a booking has been made. The resortâs booking system isautomatically updated at this
time. The reservations team is responsible for manually confirmingthe availability of the
accommodation, verifying the guestâs credit card details, issuingthe guest with an invoice, and
passing on the payment receipts to the accounts department. Theaccounts department then
processes the sale into the general ledger.
On a weekly basis, the junior accounts clerk in the accountsdepartment reconciles the payment
receipts, sent by the reservations team, to Wellnessâs bankstatements. The bank statements are
emailed to Wellness in PDF form each week.
Any cancellations received by the reservations team are referred tothe accounts department
which organises for the guestâs payment to be refunded in full (or50% for cancellations made
within seven days of the guestâs anticipated arrival date).
Since the internet booking system is not technically up to date,Wellness intends to engage an IT
specialist to completely upgrade the system and eliminate the needfor manual checking of
details by the reservations staff.
Based on its discussions with the previous auditors, Wellnesschanged its revenue-recognition
policy prior to the current year audit. Previously, all revenuesearned were brought to account
when bookings were made (including internet bookings). Now,Wellness recognises:
ï 50% of the accommodation at the time of booking (put to theâDeferred revenue:
accommodationâ account)
ï 50% of the accommodation seven days prior to the guest arriving(in accordance with
Wellnessâs cancellation policy) which is immediately recognised asâRevenue:
accommodationâ since this portion of the revenue is no longerrefundable to the guest.
You are currently in the planning stage of the 2014 audit.
Based on the review of the previous yearâs audit files and theinformation gathered by the
Forrest Gump & Co. audit team during the planning stage, thehead of the audit team tells you
that he intends to adopt a combined audit approach for the 2014Wellness audit.
His expectation is that all controls at Wellness are operatingeffectively. He tells you that he
intends to place a high level of reliance on the controls atWellness as he does not expect there
will be any deviations.
He has now asked you to assist with the review of the internetbooking system at Wellness.
Required:
(a) Identify and explain two (2) key risks to the financial reportassociated with the internet booking system that may lead tomaterial misstatements being undetected and/or uncorrected. Note:For the
purpose of this question, disregard any risks arising from theinterface between the internet booking system and the generalledger system.
(b) For each risk identified in (a) above, identify whether it isan inherent risk or a control risk. Explain your answer.
(c) For each risk identified in (a) above, identify one (1) keyaccount balance at risk of material misstatement as a result of therisk (i.e. two (2) account balances in all).
(d) For each account balance identified in (c) above, identify andexplain one (1) key assertion that may be affected by the risk youidentified in (a) above.
(e) Based on your understanding of the control environmentsurrounding the internet booking system, describe one (1) keycontrol that you would seek to rely on in the conduct of the 2014audit of Wellness.
(f) For the control you identified in (e) above, design anappropriate procedure to test that control.
(g) For the procedure you described in (f) above, outline theresult you would expect if you determined that the control was notreliable.
Background
You are a junior auditor working for Forrest Gump & Co. (theFirm), an international chartered
accounting firm.
Your client, Wellness Pty Ltd (Wellness) operates the world-famousWellness Health Resort,
located in the Whitsunday Islands of northern Queensland.
While revenue from accommodation is an important factor in thefinancial success of Wellness
Health Resort, its profits are predominantly driven by the uptakeof additional services and
facilities by guests during their stay (e.g. use of the spa andwholistic health facilities, patronage
of the five restaurants and bars within the resort, and partakingin other fee-paying activities).
Wellness maintains its own website which allows guests to bookaccommodation at the resort
directly. This online booking system is monitored by thereservations team at Wellness which
consists of two full-time and three casual staff.
When a booking is made over the internet, an email is sent to thereservations team informing
them that a booking has been made. The resortâs booking system isautomatically updated at this
time. The reservations team is responsible for manually confirmingthe availability of the
accommodation, verifying the guestâs credit card details, issuingthe guest with an invoice, and
passing on the payment receipts to the accounts department. Theaccounts department then
processes the sale into the general ledger.
On a weekly basis, the junior accounts clerk in the accountsdepartment reconciles the payment
receipts, sent by the reservations team, to Wellnessâs bankstatements. The bank statements are
emailed to Wellness in PDF form each week.
Any cancellations received by the reservations team are referred tothe accounts department
which organises for the guestâs payment to be refunded in full (or50% for cancellations made
within seven days of the guestâs anticipated arrival date).
Since the internet booking system is not technically up to date,Wellness intends to engage an IT
specialist to completely upgrade the system and eliminate the needfor manual checking of
details by the reservations staff.
Based on its discussions with the previous auditors, Wellnesschanged its revenue-recognition
policy prior to the current year audit. Previously, all revenuesearned were brought to account
when bookings were made (including internet bookings). Now,Wellness recognises:
ï 50% of the accommodation at the time of booking (put to theâDeferred revenue:
accommodationâ account)
ï 50% of the accommodation seven days prior to the guest arriving(in accordance with
Wellnessâs cancellation policy) which is immediately recognised asâRevenue:
accommodationâ since this portion of the revenue is no longerrefundable to the guest.
You are currently in the planning stage of the 2014 audit.
Based on the review of the previous yearâs audit files and theinformation gathered by the
Forrest Gump & Co. audit team during the planning stage, thehead of the audit team tells you
that he intends to adopt a combined audit approach for the 2014Wellness audit.
His expectation is that all controls at Wellness are operatingeffectively. He tells you that he
intends to place a high level of reliance on the controls atWellness as he does not expect there
will be any deviations.
He has now asked you to assist with the review of the internetbooking system at Wellness.
Required:
(a) Identify and explain two (2) key risks to the financial reportassociated with the internet booking system that may lead tomaterial misstatements being undetected and/or uncorrected. Note:For the
purpose of this question, disregard any risks arising from theinterface between the internet booking system and the generalledger system.
(b) For each risk identified in (a) above, identify whether it isan inherent risk or a control risk. Explain your answer.
(c) For each risk identified in (a) above, identify one (1) keyaccount balance at risk of material misstatement as a result of therisk (i.e. two (2) account balances in all).
(d) For each account balance identified in (c) above, identify andexplain one (1) key assertion that may be affected by the risk youidentified in (a) above.
(e) Based on your understanding of the control environmentsurrounding the internet booking system, describe one (1) keycontrol that you would seek to rely on in the conduct of the 2014audit of Wellness.
(f) For the control you identified in (e) above, design anappropriate procedure to test that control.
(g) For the procedure you described in (f) above, outline theresult you would expect if you determined that the control was notreliable.
