Background You are a junior auditor working for Forrest Gump & Co. (the Firm), a

Question

Background
You are a junior auditor working for Forrest Gump & Co. (the Firm), an international chartered
accounting firm.
Your client, Wellness Pty Ltd (Wellness) operates the world-famous Wellness Health Resort,
located in the Whitsunday Islands of northern Queensland.
While revenue from accommodation is an important factor in the financial success of Wellness
Health Resort, its profits are predominantly driven by the uptake of additional services and
facilities by guests during their stay (e.g. use of the spa and wholistic health facilities, patronage
of the five restaurants and bars within the resort, and partaking in other fee-paying activities).
Wellness maintains its own website which allows guests to book accommodation at the resort
directly. This online booking system is monitored by the reservations 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 the reservations team informing
them that a booking has been made. The resort’s booking system is automatically updated at this
time. The reservations team is responsible for manually confirming the availability of the
accommodation, verifying the guest’s credit card details, issuing the guest with an invoice, and
passing on the payment receipts to the accounts department. The accounts department then
processes the sale into the general ledger.
On a weekly basis, the junior accounts clerk in the accounts department reconciles the payment
receipts, sent by the reservations team, to Wellness’s bank statements. The bank statements are
emailed to Wellness in PDF form each week.
Any cancellations received by the reservations team are referred to the accounts department
which organises for the guest’s payment to be refunded in full (or 50% for cancellations made
within seven days of the guest’s 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 need for manual checking of
details by the reservations staff.
Based on its discussions with the previous auditors, Wellness changed its revenue-recognition
policy prior to the current year audit. Previously, all revenues earned were brought to account
when bookings were made (including internet bookings). Now, Wellness recognises:
50% of the accommodation at the time of booking (put to the ‘Deferred revenue:
accommodation’ account)
50% of the accommodation seven days prior to the guest arriving (in accordance with
Wellness’s cancellation policy) which is immediately recognised as ‘Revenue:
accommodation’ since this portion of the revenue is no longer refundable to the guest.
You are currently in the planning stage of the 2014 audit.
Based on the review of the previous year’s audit files and the information gathered by the
Forrest Gump & Co. audit team during the planning stage, the head of the audit team tells you
that he intends to adopt a combined audit approach for the 2014 Wellness audit.
His expectation is that all controls at Wellness are operating effectively. He tells you that he
intends to place a high level of reliance on the controls at Wellness as he does not expect there
will be any deviations.
He has now asked you to assist with the review of the internet booking system at Wellness.

Required:
(a) Identify and explain two (2) key risks to the financial report associated with the internet booking system that may lead to material misstatements being undetected and/or uncorrected. Note: For the
purpose of this question, disregard any risks arising from the interface between the internet booking system and the general ledger system.

(b) For each risk identified in (a) above, identify whether it is an inherent risk or a control risk. Explain your answer.

(c) For each risk identified in (a) above, identify one (1) key account balance at risk of material misstatement as a result of the risk (i.e. two (2) account balances in all).

(d) For each account balance identified in (c) above, identify and explain one (1) key assertion that may be affected by the risk you identified in (a) above.

(e) Based on your understanding of the control environment surrounding the internet booking system, describe one (1) key control that you would seek to rely on in the conduct of the 2014 audit of Wellness.

(f) For the control you identified in (e) above, design an appropriate procedure to test that control.

(g) For the procedure you described in (f) above, outline the result you would expect if you determined that the control was not reliable.

Explanation / Answer

a)

The major risks in recording revenue from online booking are:

b)

Inherent risk is the revenue has to be accounted only on completion of service.

Control is to verify regularly the deferred revenue register to see whether the transactions are accounted for.

c)

The revenue booking accounted is risk aversed.

Because; the actual revenue is considered on transferring it from deferred revenue to regular account on occurrence of actual transaction.

d)

Deferred revenue is the key assertion.

e)

Bank statements are the reliable source of revenue recording.

f)

Verify the bank statement for revenue recording and refund details.

g)

It is vulnerable if we do not rely on bank statement also.

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