case study 1 - requirements - travel agency, all abroad

5/28/2018 Case Study 1 - Requirements - Travel Agency, All Abroad

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ALL ABROAD PTY LIMITED

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BackgroundAll Abroad Pty Limited (All Abroad) was formed 10 years ago as a retailsuburban travel agency. The company does not specialise in any one area of travel

but has attempted to develop a strategy of quality service for quality travelarrangements. A substantial amount of business comes from tour groupstravelling abroad to New Zealand, Fiji and the United States. It also arranges localtours for inbound tourists who arrive from all over the world.

The company has expanded rapidly in the last three years, establishing six new

outlets in suburban shopping centres, and employing 20 staff. This expansion hassignificantly increased sales; however, margins have suffered significantly.

In 2012, in order to fund the expansion, the company needed to borrow money.The bank it applied to for the loan required an audited financial report. An audit isalso required by the Travel Compensation Fund (TCF) in order to maintainmembership of the Fund and the International Air Transport Association(IATA), the travel industry peak body, responsible for licensing travel agents.The audit has been a continuing engagement since the company was formed. Over

the years the company has received an unqualified audit report; however, anumber of minor compliance breaches of TCF regulations have been reported.The audit report is required to be lodged within 90 days of the year end in order toavoid significant penalties.

Organisational structureThe company is owned by two directors, Tim Addisonand Jim Badcock. TimAddison is entirely involved in the day-to-day running of the business. JimBadcockworks one day per week and is involved entirely in the financial aspects

of the company. Each of the six outlets has at least one senior consultant/managerand a junior. The head office has four consultants, an office administrator, and anaccounts clerk. All employees report directly to Tim Addison who is alsoinvolved actively in selling and is the company's top salesperson.

Accounting systems and internal controlsEach agent is responsible for his or her own booking files. On the back of eachfile are the accounting records, which form the input of the month end trustaccount reconciliation. All manual trust cheques are approved and signed by TimAddisonor Jim Badcock, for all locations.


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This year EFT was introduced which allows all agents to directly pay wholesalersand airlines for travel arrangements. Each payment is entered directly into the file

by the agent. No hard copies of the EFT transactions are made.

Receipts are issued for all money received, although they are not pre-numbered oraccounted for. Banking is done daily with all cheques and cash being brought tothe main agency at the end of each day. At the end of each month a trial balanceof the files is taken out and reconciled by Jim Badcockto the bank account. All

payments that are not client-related are made by Jim Badcockthrough a 'general'

bank account. Only Tim Addisonand Jim Badcockhave access to the generalbank account. Financial statements are produced annually. For the remainder ofthe year the company manages its 'cash flow' through the trust account. Whentravel by a client has commenced, the balance on the file is transferred as 'profit'to the general account.

Industry data A receiver was appointed on 28 June 2013 to Eurodream, a large

wholesaler specialising in quality European tours. All Abroadpaid largesums to the wholesaler for a group of 10 travellers in 2011.

The industry is in a state of change, with most agencies finding that in orderto maintain margins they have to align with a large group. This has resultedin three major travel companies dominating the market. All Abroadhas yetto join one of these large groups.

Technology in the industry is advancing rapidly with a number of the largegroups adopting the 'Internet' with preferred customers. This will enablecustomers to complete their own bookings and ticketing, a feature common

with most airlines.

In the United States a number of airlines have introduced a flat dollarcommission level of $20 per domestic booking, rather than pay percentagecommissions.

One Australian airline has introduced a policy of nil commission ondomestic bookings.


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The following industry data is generally available in the trade press:

AGENTS' Billing & Settlement Plan TURNOVER

($VALUES GIVEN IN THOUSANDS)

June2013 June 2012 Year to date 2012$ 000 % $ 000 %

Gross sales 437,658 +16.72 2,186,917 +18.2

Refunds 14,176 +19.2 70,474 +15.7

Net sales 384,058 +13.1 1,940,283 +15.4

Commission 53,598 +52.1 194,028 +15.4Transactions 580,916 2,989,887

OUTBOUNDMARKETMONTH OF JUNE onlyNUMBER OF PASSENGERS

INBOUND MARKETMONTH OF JUNE onlyNUMBER OF PASSENGERS

2012 2013 % change 2012 2013 % change

Africa 2,800 4,600 +64.0 Africa 2,300 3,100 +35.0

Canada 6,300 3,700 -41.0 NorthAmerica

24,900 28,900 +116.0

UnitedStates

30,700 25,000 -18.0 OtherAmerica

700 900 +28.0

Other

America900 1,200 +33.0 Japan 51,900 56,500 +8.8

Asia 2 69,500 75,200 +8. OtherAsia

67,400 79,400 +18.0

UnitedKingdom/

Europe

69,300 71,600 +3.3 UnitedKingdom

15,000 15,300 +2.0

MiddleEast

5,300 4,700 11.0 Europe 18,200 20,000 +9.0

Fiji 8,400 7,200 14.0 MiddleEast

2,000 2,100 +5.0

NewZealand

24,400 23,600 -3.3 NewZealand

40,700 47,000 +15.0

OtherOceania

11,000 12,000 +9.0 Other

Oceania8,000 8,100 +1.2

TOTAL 228,600 228,800 +0.1 TOTAL 231,100 261,300 +13.0


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OUTBOUNDMARKETJULY TO JUNE (YEAR TO DATE)NUMBER OF PASSENGERS

INBOUND MARKETJULY TO JUNE (YEAR TO DATENUMBER OF PASSENGERS

2012 2013 %change

2012 2013 %change

Africa 30,000 35,500 +18.0 Africa 41,100 42,000 +2.1

Canada 36,000 38,600 +7.2 NorthAmerica

342,600 354,800 +3.6

UnitedStates

291,100 293,900 +0.9 OtherAmerica

11,700 14,200 +21.0

Other

America

17,700 20,800 +17.0 Japan 690,000 742,300 +7.5

Asia 826,000 890,800 +7.8 OtherAsia

789,100 999,200 +26.0

UnitedKingdom/

Europe

498,600 530,400 +6.4 UnitedKingdom

317,200 354,500 +11.0

MiddleEast

47,100 52,900 +12.0 Europe 359,300 392,900 +9.3

Fiji 79,700 78,500 -1.5 MiddleEast

22,200 25,700 +16.0

NewZealand

350,700 361,200 +3.0 NewZealand

487,400 501,800 +2.9

OtherOceania

118,400 111,400 -5.9 OtherOceania

102,800 106,800 +3.9

TOTAL 2,295,300 2.414,000 +5.1 TOTAL 3,163,400 3,534,200 +11.7


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The draft financial report of All Abroad Pty Ltd is as follows:

UNAUDITED AUDITED

NOTES 2013 2012

REVENUE $ $

Gross sales revenue 1 16,565,171 14,324,400

Commission earned 2 1,142,912 1,284,798

Interest received 6,958 6,059

Sundry income 4,753 12,195

TOTAL REVENUE 1,154,623 1,303,052

EXPENSES

Amortisation - leasehold improvements 8,837 8,837

Accounting and audit fees 11,600 10,638

Advertising and promotions 3,799 14,719

Bank charge and merchant fees 15,397 17,963

Bad debts 0 14,203

Courier expenses 5,017 4,025

Depreciation 53,931 45,416

IT expenses 44,915 36,133

General expenses 15,370 14,203Insurance 4,933 4,255

Interest paid 96,554 93,802

IATA Licence and qualification fees 7,517 7,457

Light and power 3,974 3,892

Motor vehicle expenses 8,369 4,245

Postage 10,941 9,308

Printing and stationery 31,842 39,567

Rent 86,130 85,813

Refurbishment cost 4,134 14,088

Repairs, replacements and renewals 5,249 7,948

Salaries and wages 868,856 775,271

Staff amenities 1,457 2,712

Educational and staff training 56,062 30,418

Subscriptions and fees 3,852 2,737

Superannuation 78,197 69,774

Telephone 58,255 46,805

TOTAL EXPENSES 1,485,189 1,364,225

PROFIT/(LOSS) (330,566) (61,172)


FOR THE YEAR ENDING 30 JUNE 2013

DETAILED INCOME STATEMENT


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NOTES UNAUDITED AUDITED

2013 2012

$ $

ASSETS

CURRENT ASSETS

Cash 9,705 52,497

Accounts Receivable 28,268

Investments 139,150 120,000

TOTAL CURRENT ASSETS 177,123 172,497

NON-CURRENT ASSETS

Eurodream business 212,142

Property, plant and equipment 3 2,092,289 2,138,781

TOTAL NON-CURRENT ASSETS 2,304,431 2,138,781

TOTAL ASSETS 2,481,554 2,311,278

LIABILITIES

CURRENT LIABILITIES

Accounts payable 6,105 5,263

Current portion of long-term borrowings 10,000

TOTAL CURRENT LIABILITIES 16,105 5,263

NON-CURRENT LIABILITIES

Loans from directors 4 1,500,000 1,000,000

Long term borrowings - secured 5 870,000 880,000

TOTAL NON-CURRENT LIABILITIES 2,370,000 1,880,000

TOTAL LIABILITIES 2,386,105 1,885,263

NET ASSETS 95,449 426,015

EQUITY

Share Capital 10,000 10,000

Accumulated profits 85,449 416,015

Retained Income at the beginning of the 416,015 477,187

Retained Income (loss) for the year (330,566) (61,172)

Retained Income at the beginning of the 85,449 416,015

NET EQUITY 95,449 426,015

BALANCE SHEETAS AT 30 JUNE 2013



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NOTES TO THE FINANCIAL STATEMENTS UNAUDITED AUDITED

2013 2012

NOTE 1 - GROSS SALES REVENUE

NOTE 2 - COMMISSION EARNED

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT (NON-CURRENT) $ $

Leasehold improvements at cost 88,370 88,370

Provision for amortisation (17,674) (8,837)

70,696 79,533

Land and Buildings on freehold land at cost 1,953,830 1,953,830

Provision for depreciation (110,902) (104,984)1,842,928 1,848,846

Plant and equipment at cost 827,110 810,834

Provision for depreciation (648,445) (600,432)

178,665 210,402

Total written down value of property, plant and equipment 2,092,289 2,138,781

NOTE 4 - LOANS FROM DIRECTORS $ $

Loans payable 1,500,000 1,000,000

The loans from directors are unsecured and carry no interest

NOTE 5 - LONG TERM BORROWINGS $ $

Long term borrowings - secured 870,000 880,000

The bank loans are secured against the Property, Plant and

Equipment assets in Note 3

Revenue is recognised and measured at the fair value of the consideration received or receivable for

tour arrangements and tickets issued to customers consistent with an agency arrangement. Amounts

disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of

third parties.

Commissions from the arrangement of tours and travel are recognised when tickets, itineraries or travel

documents are issued, consistent with an agency relationship. Commission earned is recognised as the

net amount of commission received or receivable.


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Financial viability testsAll licensed travel agents in Australia are required to have both their financialstatements and trust account audited and submit a report to the TravelCompensation Fund (TCF). TCF monitors the financial security of all licensedtravel agents and any persons, companies, etc., wishing to carry on business as alicensed travel agent in Australia are required to be participants in the TCF. To

become a participant in the TCF, applicants must be able to demonstrate theyhave sufficient financial resources to carry on the business of a travel agent.

In order to meet TCF financial requirements, the travel agent's financialstatements should pass the following tests:

Test The company must have a minimum of 10 out of 20 points: Points

1 A Trust Account subject to certain specific rules 4

2 Net Tangible Assets should be at least 1.5% of the turnover 8

3 Working Capital should be at least equal to one month'soverhead expenses.

8

and 20

4 Sufficient amount of Net Capital and Reserves to meet theminimum amount of Capital and Reserves

Seebelow

Additional information

Test 1: Trust Account for clients

All Abroadhas already satisfied all the rules applicable for this test.

Test 2: Net tangible asset to turnover ratio (expressed as %)

This ratio equates the net tangible assets of an agency with its turnover andrecognises that the greater the turnover of an organisation the greater should be itstangible net worth. Turnover is defined as gross annual sales, not commissionincome.

This test recognises that a ratio of 1.5% is adequateand allocates the majority ofthe available points (5 out of 8) for this ratio. However, in recognition of thegreater margin of safety afforded by a higher ratio, maximumpoints are allocatedfor a ratio of 3%. All tangible assets of the applicant together with long-term and

current liabilities are considered in assessing net worth.


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Net tangible asset to turnover ratio PointsGreater than 3% 8

1.5% to 3% 5

Less than 1.5% 2

No Tangible Assets - 3

Test 3: Working capital available to meet overheadsThis test is the ratio of working capital to average monthly overheads. Working

capital is the surplus of current assets over current liabilities. An agency shouldhave sufficient working capital to meet at least one month's overhead expenditureto ensure adequate working capital commensurate with the size of its operations.Intangible assets, loans to,or investments in related parties and any assets used assecurity for loans which do not appear on the balance sheet or for guarantees on

behalf of third parties are excluded from the test. Agencies with a deficiency in

working capital will score -3points.

Monthly coverage Points

Greater than 2 months 81 to 2 months 5

Less than 1 month 2

Less than 1 month 2

No working capital -3

Test 4: Minimum Capital and reserves

Agents must maintain a minimum level of capital and reserves (as defined below)dependent upon the scale of operations of each enterprise measured by the annualturnover (both travel and non-travel). Turnover is defined as gross sales, notcommission.

Turnover Minimum capital

and reservesLess than $750,000 $15,000$750,000 to $1.5 million 25,000

Greater than $1.5 million to $4 million 40,000

Greater than $4 million to $50 million 80,000Note: Minimum capital levels may increase from time to time


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Definition of capital and reserves

A company having contributed capital calculates its capital and reserves as:The sum of:

Paid-up share capital Paid-up redeemable shares are only allowed if Articles of Association

prohibit redemption without the written approval of Trustees of the TCF Minimum of $10,000 paid-up share capital (forming part of the

minimum share capital and reserves) regardless of existence of otherreserves (for example, issued share capital of $5,000 and capital profitsreserve of $5,000 would not be acceptable). If less than $10,000 a bankguarantee for the shortfall would be required

Realised capital profits reserve Asset revaluation reserve (only if supported by a written valuation from

an independent licensed valuer - that is, a directors' valuation will notbe accepted)

Share premium reserve Accumulated profits Bank guarantee provided to TCF

Less: Accumulated losses Intangibles including goodwill, deferred tax assets, etc

Related party loans and related party investmentsA related party is an individual or corporation defined as an associate in terms ofthe Income Tax Assessment Act and includes shareholders, directors, trustees,

partners, proprietors or their immediate family.

a LiabilitiesLoans from directors (and other related parties) are included in liabilities inthe annual financial review calculations unless it can be adequatelydemonstrated that the loans are a long-term commitment to the agency.Any loans will be excluded only if the auditor confirms that a loan of asubstantially similar amount has existed throughout the whole audit periodand does not represent balance date 'window dressing'.


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b AssetsLoans to or investments in related parties are excluded as assets in theannual financial review calculations.

Audit requirementsThe financial report must be audited in accordance with Australian AuditingStandards (ASAs) by a registered company auditor. Audit reports for corporations

must be in the form required under the Corporations Act 2001. Reports for non-

corporate entities must comply with the ASAs issued by the Institute of CharteredAccountants in Australia and the Australian Society of CPAs and guidelinesissued by the TCF.

A signed report on the financial report of the agency is required in addition to the'Statement of Auditor' forming part of the annual financial review.

The audit should embrace financial transactions relating to moneys received fromor on behalf of intending travellers including those transacted through a trust or

client's account. Any deficiency in such an account not otherwise recorded on thebalance sheet is to be recorded as a current liability of the agency with acorresponding reduction in equity and reserves.

Audit staffingA total of 85 hours audit time has been allocated to this audit. The audit has thefollowing staff and charge out rates:

John White Partner $500 per hourMary Black Manager $300George Green Senior $200Julie Brown Graduate $100


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REQUIRED

1. Develop a time budget and realistic fee estimate for this audit.

2. Conduct planning analytical procedures.

3. Determine planning audit materiality. Justify the base utilised and thepercentage applied to the base.

4. Detail an assessment of key business risks associated with All Abroad PtyLtd. For the risks detailed determine the account balance/s affected and thekey audit assertions (as per ASA 315, A111). You may use a tabular matrixas follows:

FACTORS affecting ALLABROAD (may haveheadings with multiple pointsunderneath)

RISK ACCOUNT ASSERTION

5. Make an assessment of the control environment and consider the effect onbusiness risks.

6. Briefly outline an audit approach (where you would concentrate yourefforts) for the account balances for which risks exist. Indicate for eachaccount the key assertion at risk.

MARK ALLOCATION

MAXIMUM LENGTH 5 PAGES (NO MORE THAN 1,500 WORDS)

RUBRIC CRITERIA See SEPARATE files

Part Marks

1 Time Budget and fee estimate 5

2 Planning Analytical procedures 35

3 Materiality 104 Key risks 10

Table 25

5 Control environment 10

6 Audit approach 5

100

case study 1 - requirements - travel agency, all abroad

Documents

requirements travel

travel arrangements

retailsuburban travel

abroad pty limitedpage

licensing travel agents

travel compensation

year end

jim badcockthrough