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ACCT5015
AU
Curtin University
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.
(a) Considering the information provided, determine the four key account balances and related assertions at risk. Briefly justify your answer.
(b) Recommend one audit procedure in relation to each of the assertions identified above
You are an auditor on the Curasafe (CS) Limited engagement for the financial year ending 30 June 2017. CS is a large Australian private health insurer that also provides a range of complementary health management services and life, travel and pet insurance products. During the year, CS transitioned from a government business enterprise to a listed company by way of an initial public offering and listed on the ASX in November 2016. You are currently planning the CS audit and have noted the following information:
v CS maintains an investment portfolio (consisting of mortgage asset-backed securities, hybrid investments and direct property) to meet insurance claims. During the year, it has recorded significant investment income from its portfolio of investment assets in the face of substantial economic and market volatility (interest rates, exchange rate and equity market volatility).
v CS has experienced a spike in the number of improper (fraudulent or erroneous) health benefit claims. Management has launched a payment integrity program during the year to identify, prevent and recover improper claims.
v You have noticed a significant increase in the number of health insurance policies being taken out around the June/July period. Health insurance premium revenue is recognised in the income statement over the life of the policy, starting from the commencement date of the current period of insurance cover, in accordance with the pattern of the incidence of risk expected to match the seasonality of claims over the term of the insurance cover. Premium revenue relating to future financial periods is classified as an unearned premium liability.
v CS maintains a claim liability provision for the estimated cost of claims incurred but not settled at balance date. This is estimate based on the assumption that past claims settlements are an appropriate predictor of expected future claims settlement patterns.
v One of the CS main subsidiaries, NHA, has engaged in acquiring and retaining policyholders in the new-to-industry segments of the market by focusing on affordability and flexibility of its policies. Due to the nature of the industry and value of individual policies, NHA, regularly monitors its premiums in arrears and prompt recovery action is undertaken when accounts in arrears are identified. Where accounts remain in arrears past a grace period of 70 days as specified in the standard contract extended to customers, NHA’s practice is to terminate these policies. NHA engages debt collection agencies to obtain settlement of accounts in arrears where all other efforts prove futile.
(a) Identify any four key accounts and related assertions at risk. Briefly justify your answer
(b) Perform one substantive test of detail for each of the identified assertions at risk.
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