Audit question

Auditing 322 Lux Hotel Co. (the "Company") is a private company that operates luxury hotel properties. It was noted that the company is head quartered in Dubai, and its main hotel is operated on the Palm Island in Dubai. The company seeks tourists from around the world to visit but primarily relies upon tourism from Western Europe (UK, France, Germany), and USA/Canada. The company has only been around for three years and was launched by Abdullah Mohammad, a former graduate of Queens College. Abdullah worked at PwC after he graduated and eventually became partner at the big 4. He used to audit clients in the hotel and entertainment industry. After 20 years with the firm including eight years as partner he was able to use his own savings for a down payment of his n to run a resort hotel. Lux Hotel Co. was founded in 2015 by Abdullah and a few friends. They obtained a $43.5 million dollar loan and had just enough for the down payment and collateral. Since 2015 in addition to the main resort property in Dubai the Company also purchased a smaller resort in Miami, Florida in 2017 .In December 2018 the com NASDAQ stock exchange under a special provision that allowed small companies to list without having to have an audit over internal controls performed (ICFR), and without all the compliance and expense of a large corporation. The Company is still run like a start up with a small team of employees. Abdullah serves as the CEO. The CFO as Mikael Yahyah who graduated from Baruch with an MBA and had 1 year of work experience at Deloitte & Touche as an associate before starting with the Company. Mikael is Abdullah's cousin. The Company does not have a formal Board of Directors or Audit Committee, but plans to have one in the future. The rest of the management team consists of five-ten employees from various backgrounds and countries. Many have some other Hotel chains like Marriott or Hilton. The firm has 10 bullet points written by Abdullah on a single piece of paper that is posted in the breakroom that serves as the Code of Ethics. The employee turnover rate has historically been low but Management team is in Miami (2 people, but the rest of the team is based in Dubai). The Manager of the Miami property quit three months ago and a replacement has not been found yet. Note the company outsources hiring of maids/janitors/front desk staff to an outsourcing company from the Phillipines. Those workers are considered freelancers and are paid an hourly wage. These employees focus on their respective tasks but do not participate in the management team. The outsourcing handles payroll to workers and receives a pro-rated fixed monthly payment for providing staff. The Company partners with various travel websites like AirBnB, Hotels.com, Travelocity.com, and various travel agencies to attract customers. The company uses a Salesforce cloud based accounting & operating system to record all journal entries, and operations such as booking hotel reservations, cancelling reservations, sending reminder e-mails to guests, generating invoices for guests, etc. The system was launched in January of 2019 and the employees are still getting used to it. The system before this was QuickBooks and excel spreadsheets and required a much more manual process. Key Controls Some of the key controls the company has are:C01- The Management team CEO/CFO-meet with the managers of both Home Search Library Profile requirements of the Debt and ended up in delauit. However upon futher investigation it was noted the shortfall was primarily caused by the Company projected a short-term cash flow shortage for Q2 but because the staff person entered a typo into the cash flow spreadsheet ($900,000 instead of $90K of revenue from the Miami Resort) and the CFO did not review the cash projections on a timely basis (within 5 business days) because he was on vacation, for three weeks, (he also missed the error when he reviewed it upon his return). It was determined that Control C05 was not executed correctly. After the fiscal year end on June 20, 2019 the Lux Hotel Co. restructured and amended the Original Debt (the "Restructuring") with Bank A. As part of the terms of amending the Original Debt: The Company sold its 50 percent investment in the Miami Res $25.0 million, which was used to pay down the loan balance. This reduced the balance from $43.2 million to $18.2 million: The Company agreed to new interest terms, which included raising the interest rate from 5 percent to 6 percent. The Original Debt required annual payments consisting of principal and interest of $1.68 million and $3.92 million to Bank A and Bank B, respectively. The Company performed a quantitative analysis of the Modified Debt and determined that the effective interest rate was approximately 6.45 percent and 8.78 percent for the Modified Debt held by Bank A and Bank B, respectively.Industry Outlook The Fed has been raising interest rates and it might be difficult to raise additional funds at a low interest rate if funding is needed in the future. The economy in Dubai has been declining in the last 12 months based on a drop in tourism. Prices of oil have made it more expensive for tourists to take a flight around the world. Tourism around the world is dropping based on the China-US trade war, a popping of the real estate bubble that almost doubled prices around the world in the last 15 years: The President of the US has recently threatened Dubai with sanctions if they do not approve his new hotel there.Financial Statements (Excerpt) Account July 1, 2019*** June 30, 2019 June 30, 2018 June 30, 2017 Assets $25m*** $48.5m $50m $50.9m Liabilities** $18.7m $43.9m $43.7m $43.8m Equity $6.3m $3.6m $6.3m $7.1m Revenue TBD $2.95m^ $3.0m $3.1m Expenses TBD $2.80m $2.7m $2.6m Net Income/ (Loss) TBD $150K $300K $500K *Assets consist primarily of cash, land/buildings, other assets. Liabilities consist primarily of the Long Term Debt discussed above and accounts payable.*** Projected 12 month figures based on the partial Sale of the Miami property to pay down the loan. Error of $810K from cash flow projection still not corrected in this number.1. Determine the following risks "AR = IR * CR *DR": (Use the 2 tables to help you determine what risk settings are appropriate. Table 1 gives you RMM-plug that vale into table 2) - (HINT 1: Determine RMM first, then AR and then back into DR)-(HINT 2: Use the facts above to determine IR & CR, Use your auditor judgement to determine AR & DR, remember auditors don't want to take too much risk, but also don't want to be in efficient.)a. Inherent Risk: _b. Control Risk: LC. RMM (Risk of Material Misstatement): - _d. Audit Risk: e. Detection Risk: -_ For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive Home Search U Library Profile requirements of the Debt and ended up in default. However upon futher investigation it was noted the shortfall was primarily caused by the Company projected a short-term cash flow shortage for Q2 but because the staff person entered a typo into the cash flow spreadsheet ($900,000 instead of $90K of revenue from the Miami Resort) and the CFO did not review the cash projections on a timely basis (within 5 business days) because he was on vacation, for three weeks, (he also missed the error when he reviewed it upon his return). It was determined that Control C05 was not executed correctly. After the fiscal year end on June 20, 2019 the Lux Hotel Co. restructured and amended the Original Debt (the "Restructuring) with Bank A. As part of the terms of amending the Original Debt: The Company sold its 50 percent investment in the Miami Resort in exchange for $25.0 million, which was used to pay down the loan balance. This reduced the Original Debt balance from $43.2 million to $18.2 million. The Company agreed to new interest terms, which included raising the interest rate from 5 percent to 6 percent. The Original Debt required rincipal and interest of $1.68 million and $3.92 million to Bank A and ompany performed a quantitative analysis of the Modified Debt and determined that the effective interest rate was approximately 6.45 percent and 8.78 percent for the Modified Debt held by Bank A and Bank B, respectively.Industry Outlook The Fed has been raising interest rates and it might be difficult to raise additional funds at a low interest rate if funding is needed in the future. The economy in Dubai has been declining in the last 12 months based on a drop in tourism. Prices of oil have made it more expensive for tourists to take a flight around the world. Tourism around the world is dropping based on the China-US trade war, a popping of the real estate bubble that almost doubled prices around the world in the last 15 years. The President of the US has recently threatened Dubai with sanctions if they do not approve his new hotel there.Financial Statements (Excerpt) Account July 1, 2019*** June 30, 2019 June 30, 2018 June 30, 2017 Assets* $25m*** $48.5m $50m $50.9m Liabilities** $18.7m $43.9m $43.7m $43.8m Equity $6.3m $3.6m $6.3m $7.1m Revenue TBD $2.95m $3.Om $3.1m Expenses TBD $2.80m $2.7m $2.6m Net Income/ (Loss) TBD $150K $300K $500K "Assets consist primarily of cash, land/buildings, other assets." Liabilities consist primarily of the Long Term Debt discussed above and accounts payable. *** Projected 12 month figures based on the partial Sale of the Miami property to pay down the loan. Error of $810K from cash flow projection still not corrected in this number.1. Determine the following risks "AR = IR CRDR":(Use the 2 tables to help you determine what risk settings are appropriate. Table 1 gives you RMM-plug that vale into table 2) - (HINT 1: Determine RMM first, then AR and then back into DR)- (HINT 2: Use the facts above to determine IR &: CR. Use vour auditor judgement to determine AR & DR. remember auditors don't want to take too much risk, but also don't want to be in efficient.)a. Inherent Risk: b. Control Risk: - _C. RMM (Risk of Material Misstatement): - d. Audit Risk:__ e. Detection Risk:__ _2. For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive Home Search Library 8 Profile Auditing 322 Lux Hotel Co. (the "Company") is a private company that operates luxury hotel properties. It was noted that the company is head quartered in Dubai, and its main hotel is operated on the Palm Island in Dubai. The company seeks tourists from around the world to visit but primarily relies upon tourism from Western Europe (UK, France, Germany), and USA/Canada. The company has only been around for three years and was launched by Abdullah Mohammad, a former graduate of Queens College. Abdullah worked at PwC after he graduated and eventually became partner at the big 4. He used to audit clients in the hotel and entertainment industry. After 20 years with the firm including eight years as partner he was able to use his own savings for a down payment of his n to run a resort hotel. Lux Hotel Co. was founded in 2015 by Abdullah and a few friends. They obtained a $43.5 million dollar loan and had just enough for the down payment and collateral. Since 2015 in addition to the main resort property in Dubai the Company also purchased a smaller resort in Miami, Florida in 2017 .In December 2018 the com NASDAQ stock exchange under a special provision that allowed small companies to list without having to have an audit over internal controls performed (ICFR), and without all the compliance and expense of a large corporation. The Company is still run like a start up with a small team of employees. Abdullah serves as the CEO. The CFO as Mikael Yahyah who graduated from Baruch with an MBA and had 1 year of work experience at Deloitte & Touche as an associate before starting with the Company. Mikael is Abdullah's cousin. The Company does not have a formal Board of Directors or Audit Committee, but plans to have one in the future. The rest of the management team consists of five-ten employees from various backgrounds and countries. Many have some other Hotel chains like Marriott or Hilton. The firm has 10 bullet points written by Abdullah on a single piece of paper that is posted in the breakroom that serves as the Code of Ethics. The employee turnover rate has historically been low but Management team is in Miami (2 people, but the rest of the team is based in Dubai). The Manager of the Miami property quit three months ago and a replacement has not been found yet. Note the company outsources hiring of maids/janitors/front desk staff to an outsourcing company from the Phillipines. Those workers are considered freelancers and are paid an hourly wage. These employees focus on their respective tasks but do not participate in the management team. The outsourcing handles payroll to workers and receives a pro-rated fixed monthly payment for providing staff. The Company partners with various travel websites like AirBnB, Hotels.com, Travelocity.com, and various travel agencies to attract customers. The company uses a Salesforce cloud based accounting & operating system to record all journal entries, and operations such as booking hotel reservations, cancelling reservations, sending reminder e-mails to guests, generating invoices for guests, etc. The system was launched in January of 2019 and the employees are still getting used to it. The system before this was QuickBooks and excel spreadsheets and required a much more manual process. Key Controls Some of the key controls the company has are:C01- The Management team CEO/CFO-meet with the managers of both Home Search Library Profile requirements of the Debt and ended up in delauit. However upon futher investigation it was noted the shortfall was primarily caused by the Company projected a short-term cash flow shortage for Q2 but because the staff person entered a typo into the cash flow spreadsheet ($900,000 instead of $90K of revenue from the Miami Resort) and the CFO did not review the cash projections on a timely basis (within 5 business days) because he was on vacation, for three weeks, (he also missed the error when he reviewed it upon his return). It was determined that Control C05 was not executed correctly. After the fiscal year end on June 20, 2019 the Lux Hotel Co. restructured and amended the Original Debt (the "Restructuring") with Bank A. As part of the terms of amending the Original Debt: The Company sold its 50 percent investment in the Miami Res $25.0 million, which was used to pay down the loan balance. This reduced the balance from $43.2 million to $18.2 million: The Company agreed to new interest terms, which included raising the interest rate from 5 percent to 6 percent. The Original Debt required annual payments consisting of principal and interest of $1.68 million and $3.92 million to Bank A and Bank B, respectively. The Company performed a quantitative analysis of the Modified Debt and determined that the effective interest rate was approximately 6.45 percent and 8.78 percent for the Modified Debt held by Bank A and Bank B, respectively.Industry Outlook The Fed has been raising interest rates and it might be difficult to raise additional funds at a low interest rate if funding is needed in the future. The economy in Dubai has been declining in the last 12 months based on a drop in tourism. Prices of oil have made it more expensive for tourists to take a flight around the world. Tourism around the world is dropping based on the China-US trade war, a popping of the real estate bubble that almost doubled prices around the world in the last 15 years: The President of the US has recently threatened Dubai with sanctions if they do not approve his new hotel there.Financial Statements (Excerpt) Account July 1, 2019*** June 30, 2019 June 30, 2018 June 30, 2017 Assets $25m*** $48.5m $50m $50.9m Liabilities** $18.7m $43.9m $43.7m $43.8m Equity $6.3m $3.6m $6.3m $7.1m Revenue TBD $2.95m^ $3.0m $3.1m Expenses TBD $2.80m $2.7m $2.6m Net Income/ (Loss) TBD $150K $300K $500K *Assets consist primarily of cash, land/buildings, other assets. Liabilities consist primarily of the Long Term Debt discussed above and accounts payable.*** Projected 12 month figures based on the partial Sale of the Miami property to pay down the loan. Error of $810K from cash flow projection still not corrected in this number.1. Determine the following risks "AR = IR * CR *DR": (Use the 2 tables to help you determine what risk settings are appropriate. Table 1 gives you RMM-plug that vale into table 2) - (HINT 1: Determine RMM first, then AR and then back into DR)-(HINT 2: Use the facts above to determine IR & CR, Use your auditor judgement to determine AR & DR, remember auditors don't want to take too much risk, but also don't want to be in efficient.)a. Inherent Risk: _b. Control Risk: LC. RMM (Risk of Material Misstatement): - _d. Audit Risk: e. Detection Risk: -_ For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive Home Search U Library Profile requirements of the Debt and ended up in default. However upon futher investigation it was noted the shortfall was primarily caused by the Company projected a short-term cash flow shortage for Q2 but because the staff person entered a typo into the cash flow spreadsheet ($900,000 instead of $90K of revenue from the Miami Resort) and the CFO did not review the cash projections on a timely basis (within 5 business days) because he was on vacation, for three weeks, (he also missed the error when he reviewed it upon his return). It was determined that Control C05 was not executed correctly. After the fiscal year end on June 20, 2019 the Lux Hotel Co. restructured and amended the Original Debt (the "Restructuring) with Bank A. As part of the terms of amending the Original Debt: The Company sold its 50 percent investment in the Miami Resort in exchange for $25.0 million, which was used to pay down the loan balance. This reduced the Original Debt balance from $43.2 million to $18.2 million. The Company agreed to new interest terms, which included raising the interest rate from 5 percent to 6 percent. The Original Debt required rincipal and interest of $1.68 million and $3.92 million to Bank A and ompany performed a quantitative analysis of the Modified Debt and determined that the effective interest rate was approximately 6.45 percent and 8.78 percent for the Modified Debt held by Bank A and Bank B, respectively.Industry Outlook The Fed has been raising interest rates and it might be difficult to raise additional funds at a low interest rate if funding is needed in the future. The economy in Dubai has been declining in the last 12 months based on a drop in tourism. Prices of oil have made it more expensive for tourists to take a flight around the world. Tourism around the world is dropping based on the China-US trade war, a popping of the real estate bubble that almost doubled prices around the world in the last 15 years. The President of the US has recently threatened Dubai with sanctions if they do not approve his new hotel there.Financial Statements (Excerpt) Account July 1, 2019*** June 30, 2019 June 30, 2018 June 30, 2017 Assets* $25m*** $48.5m $50m $50.9m Liabilities** $18.7m $43.9m $43.7m $43.8m Equity $6.3m $3.6m $6.3m $7.1m Revenue TBD $2.95m $3.Om $3.1m Expenses TBD $2.80m $2.7m $2.6m Net Income/ (Loss) TBD $150K $300K $500K "Assets consist primarily of cash, land/buildings, other assets." Liabilities consist primarily of the Long Term Debt discussed above and accounts payable. *** Projected 12 month figures based on the partial Sale of the Miami property to pay down the loan. Error of $810K from cash flow projection still not corrected in this number.1. Determine the following risks "AR = IR CRDR":(Use the 2 tables to help you determine what risk settings are appropriate. Table 1 gives you RMM-plug that vale into table 2) - (HINT 1: Determine RMM first, then AR and then back into DR)- (HINT 2: Use the facts above to determine IR &: CR. Use vour auditor judgement to determine AR & DR. remember auditors don't want to take too much risk, but also don't want to be in efficient.)a. Inherent Risk: b. Control Risk: - _C. RMM (Risk of Material Misstatement): - d. Audit Risk:__ e. Detection Risk:__ _2. For your audit approach would you choose to test controls or primarily perform substantive procedures based on your risk assessment in Q1 above, what would your mix of control testing to substantive Home Search Library 8 Profile