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 resorts booking system is automatically updated at this time. The reservations team is responsible for manually confirming the availability of the accommodation, verifying the guests 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 Wellnesss 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 guests payment to be refunded in full (or 50% for cancellations made within seven days of the guests 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 Wellnesss 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 years 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.