Auditing

Table of Contents

Question 1: Factors:

Question 2: Comparison with previous year

Question 3: Going Concern:

Question 4: Brief plan for auditing.

Ratio Analysis.

Reference.

Question 1: Factors:

  • Nature of Business

The company is engaged in airline industry and Covid 19 pandemic is the most important and biggest factor as the overall business and operational activities of the company has been stopped and the possibilities of early restart are negligible. Moreover, the overall Australian economy might go under recession.

  • Going concern issue

The CEO and CFO looks confident for a strong comeback, but the circumstances are not in their support. The company has presented its current year financial items by averaging figures for 8 months (excluding the pandemic period from March to June). If the operations are not going to initiate soon, the company will start facing problems in relation to the payments of its liabilities which has increased during FY 2020 (Christensen, Neuman and Rice 2019).

Question 2: Comparison with Previous Year

  • The company has presented its current year financial items by averaging figures for 8 months (excluding the pandemic period from March to June). Various items in the financial statements have not been finalized and are mere estimations.
  • Intangible Assets of AA mainly constitute goodwill relating to an international airline business that is operational in South East Asia, China, and Polynesia. The company is continuously impairing the goodwill value. It is requires to reconsider the estimates as operations in these can be started sooner.
  • The company’s Non-current Interest Bearing Liabilities has increased but the PPE have been decreasing YOY. If the operations are not going to initiate soon, the company will start facing problems in relation to the payments of its liabilities which has increased during FY 2020.
  • The prepaid revenues might have to be refunded, on the other hand major expenditure items including Aircraft cost, fuel cost and depreciation expense have been increased.
  • A financial bailout package for the airline industry is much required as the industry is altogether shut down, but the fixed expenses of the companies like loans, aircraft’s maintenance cost, etc are still standing. There are high possibilities that the company will get some relief (Dhaliwal et al. 2020).
  • As per the estimates of the management of the company, if the lockdown continues, then the company has to witness a loss of $ 0.3 million on a monthly basis.
  • Apart from that the company is left with a small cash pool of $ 0.5 million and a credit line of $ 2.5 million. Currently, it has no other sources of liquidity beyond this credit line.

Question 3: Going Concern:

a) The situations created due to Corona Pandemic are not in favor of the business including that of AA. The company has presented its current year financial items by averaging figures for just 8 months and excluded the pandemic period from March to June, that means the company remain non-operational for a full quarter and a month. There are high possibilities that the operations are not going to initiate soon and restrictions can long for 12 months or more. However the company has laid-off 90% of its work force but the wages constituted just 25% of the overall expenditure of the company during FY 2020.

The company is left with only two small liquidity resources including the cash pool of $ 0.5 million and a credit line of $ 2.5 million (which includes costs). The receivables are expected to make payments later rather than sooner. Apart from that the revenue collected in advance might have to be refunded (Feldstein et al. 2017).

b) The company is already in breach of its debt obligations as per the loan agreement; however negotiations with bank are going-on to receive some grace period for repayments of long-term and short term debts. If no deal is reached, this debt becomes due and payable on August 31st 2020. The company will start facing problems in relation to the payments of its liabilities mainly debt obligations which has increased during FY 2020.

AA is seeking for the financial bailout package from the government for the airline industry which is much required as the industry is altogether shut down, but the fixed expenses of the companies like loans, aircraft’s maintenance cost, etc are still standing. There are high possibilities that the company will get some relief but it may take 2 months till that time the company has to face a loss of $ 0.3 million on a monthly basis which is easily manageable for the company.

Question 4: Brief Plan for Auditing

The material accounts that have been selected from AA’s Balance Sheet and from the Income Statement are:-

  1. Balance Sheet: Interest Bearing Liabilities (Noncurrent Liabilities) and
  2. Income Statement: Expenditure account (Expenditures)

a. Assessment of the audit risk for the account

  • The company’s Non-current Interest Bearing Liabilities has increased but the PPE have been decreasing YOY. If the operations are not going to initiate soon, the company will start facing problems in relation to the payments of its liabilities which has increased during FY 2020 (Lu, Simnett and Zhou 2019).
  • The major expenditure account items that include Aircraft cost, fuel cost and depreciation expense have been increased YOY assuming an 8 month operations during the year. But the PPE account records an overall decrease in the value; therefore it appears to be case of material misstatement.

b. Audit assertions for the account

Interest Bearing Liabilities

  • Interest Bearing Liabilities recognized in the balance sheet exist at the period end
  • The company owes this liabilities and is in breach of debt obligations as per the loan agreement
  • The company is negotiating with banks to get some grace period for repayments of long-term and short term debts.

Expenditure account

  • The expenditure related to Aircraft cost, fuel cost and depreciation has been incurred during the period and have been fully accounted for.
  • The expenditure account reflects some material misstatement as expenditure related to PPE is increasing while PPE itself is decreasing.
  • Increment fuel cost might be due to rise in fuel rates, but there is no disclosure made (Saputra and Yusuf 2019).

c. Controls that management should implement for the mentioned account are:-

  1. Detective Controls: The expenditure account has witnessed material misrepresentation or errors in systems or accounting practices have been detected. Employees are purposefully or accidentally practicing illegal or incorrect actions.
  2. Preventive Controls: The Interest Bearing Liabilities is the largest burden that company bears during the pandemic period. The company is taking preventive control measures by negotiating with banks.

d. The substantive testing procedures can be performed to address the relevant or significant assertions are as follows:

  • Examination or Inspection of Evidence
  • Computer Assisted Audit Technique (CAAT)

Ratio Analysis

Ratio Name

Formula

Forecast 2020

2019

Liquidity Ratios

     

Current Ratio

Current Assets / Current Liabilities

0.41

0.50

Quick Ratio

Current Assets - Inventories / Current Liabilities

0.41

0.50

Profitability Ratios

     

Operating Profit Margin

PBIT / Net sales

-16%

8%

Net Profit Margin

NP / Net sales

-18%

5%

Return on Assets

Net income/ Total Assets

-12.21%

4.64%

Return on Equity

Net income/ Shareholder's Equity

-161.54%

25.71%

Activity Analysis Ratios

     

A/R Turnover (days)

Average Accounts Receivable / Net Sales *365

53.23

25.35

A/P Turnover (days)

Average Accounts Payables / Purchases *365

88.21

35.49

Inventory Turnover

Total Sales / Total Inventory

-

-

Capital Structure Analysis Ratios

     

Debt to Equity

Total Debt / Total Equity

6.54

1.49

Reference for Auditing

Christensen, B.E., Neuman, S.S. and Rice, S.C., 2019. The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions. Contemporary Accounting Research, 36(3), pp.1461-1500.

Dhaliwal, D., Michas, P.N., Naiker, V. and Sharma, D., 2020. Greater Reliance on Major Customers and Auditor Going‐Concern Opinions. Contemporary Accounting Research, 37(1), pp.160-188.

Feldstein, M.J., Low, S.L., Chen, A.F., Woodward, L.A. and Hozack, W.J., 2017. A comparison of two dosing regimens of ASA following total hip and knee arthroplasties. The Journal of arthroplasty, 32(9), pp.S157-S161.

Lu, M., Simnett, R. and Zhou, S., 2019. Using the Same Provider for Financial Statement Audit and Assurance of Extended External Reports: Choices and Consequences. Available at SSRN 3361616.

Saputra, I.G. and Yusuf, A., 2019. The Role of Internal Audit in Corporate Governance and Contribution to Determine Audit Fees for External Audits. Journal of Finance, 7(1), pp.1-5.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Auditing Assignment Help

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