You are an auditor on the XYZ Limited (XYZ) audit engagement for the financial year ending 30 September 2021. XYZ 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 XYZ audit. You have noted a number of significant risks outlined below.

XYZs revenue is made up of management fees earned from hotels managed by XYZ 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 XYZ, the companys practice is to confirm hotel bookings by taking credit card details and collecting payment for accommodation and incidentals at the end of a customers 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 s 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 hotels 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 XYZ 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.

XYZ 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 XYZ branded hotels. These points may be redeemed at a later date for free accommodation or other benefits. XYZ 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 2019 that points earned under the loyalty program would now expire in two years rather than five years from the time they are earned. XYZs 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.

XYZ 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 XYZs hardware incurred during a year.

Required:

Prepare a memorandum to the audit manager, outlining your risk assessment relating to XYZ Limited. When making your risk assessment:

(a) Identify four (4) key accounts from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the three (4) accounts identified. In your explanation, please mention the key assertion(s) at risk of material misstatement.

(b) Identify how the audit plan will be affected and recommend specific audit procedures to address the risks associated with each account identified