Key Controls

Some of the key controls the company has are:

C01- The Management team CEO/CFO- meet with the managers of both properties on a weekly basis using Skype and discuss both operations (vacancy rates, customer satisfaction, staff hiring/firing).

C02- The Outsourcing Company sends supervisors to check on the performance of the staff monthly. Any performance issues are resolved and updates provided to the Company monthly.

C03- The CFO- performs a Bank Reconciliation on a weekly basis. (WEEKLY CONTROL)

C04- The CFO prepares financial records on a monthly basis to share with the CEO/ Investors and the management team. (MONTHLY CONTROL)

C05- A staff accountant prepares cash flow projections that The CFO monitors/reviews, and makes sure there is sufficient cash to pay the loan and staff salaries, etc. (MONTHLY CONTROL)

C06- A staff accountant and the CFO prepare the Financial Statements which are reviewed by the CEO, and shared with the banks, Investors, and the management team. (ANNUAL CONTROL)

C07- A Staff Accountant handles all vendor invoice payments, writing checks, depositing cash, recording journal entries in the Sales Force software. (DAILY CONTROL)

C08: The Company receives a SOC 1 report from Sales force that shows testing of the IT system by a third party auditor. This helps the company get comfortable that the Salesforce IT system is operating as expected. (ANNUAL CONTROL)

Recent Default on Loan

As of June 30, 2019, Lux Hotel Co. had $43.2 million in uncollateralized term loans outstanding with two lenders, Bank A ($12.96 million) and Bank B ($30.24 million). As a result of lower than expected travel during the holiday season, the company was not be able to meet the short-term 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 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.

REQUIRED

1. Were the financial statements materially misstated because of the control deficiency? ((a)Yes or (b)No) Briefly explain why.
2. What is the auditors responsibility with respect to the error discussed above (Incorrect cash flow projection and the control C05 not working)?
3. Would you report this to the (a) board of directors/Management? (b)The SEC? (c)The PCAOB? (d)The police? Explain why briefly.
4. Should the CFO be fired? Why or why not?