Question
1. FINANCIAL STATEMENT ASSERTIONS You are the in-charge auditor for the audit of Jetlag-free Airlines Limited (JAL), established to provide commuter flights between Rangiora and
1. FINANCIAL STATEMENT ASSERTIONS
You are the in-charge auditor for the audit of Jetlag-free Airlines Limited (JAL), established to provide commuter flights between Rangiora and Christchurch. The airline commenced operations with a second-hand Piper aircraft three years ago. Due to high demand, the airline has ordered a new, larger Cessna aircraft to increase capacity and comfort. The Cessna aircraft will replace the Piper aircraft, which will be scrapped.
JAL has a 31 March 2018 balance date, and prepares its financial statements in terms of IFRS.
While undertaking the audit, you identify the following matters.
i. Due to a processing error, sales relating to passenger bookings for 1 and 2 April 2018 have been included in the sales total for the year.
ii. JAL has a fixed commitment to purchase the new Cessna aircraft at a total cost of US$1.2 million. A deposit of US$200,000 is reported as an asset on the balance sheet, but no further disclosure has been made of the outstanding balance. Delivery of the new aircraft is expected in June 2018.
iii. Spare parts for the Piper aircraft which JAL is currently flying are recorded at cost in the balance sheet. This aircraft will be replaced by the new Cessna aircraft. Based on management's estimates, a substantial portion of this inventory will remain on hand after the Piper aircraft has been retired from service, and the remaining parts will only have scrap value. Despite this, management continues to carry all of the Piper's parts at cost.
iv. The draft financial statements include a total for 'Cash and Bank' of $150,000. This total comprises five separate bank accounts. However, the audit confirmation certificate received from the bank only discloses four of those bank accounts. The missing bank account has a general ledger balance of $6,000, but the bank account itself was closed two years ago.
v. JAL has a banking covenant that requires certain financial ratios to be met at all times. During the past year, JAL breached this requirement on three occasions. After some frank discussions with the bank, the bank agreed to take no action, but has advised JAL in writing that any future breach of these covenants will result in the bank taking action to protect its interests, which may include appointing a receiver. None of this has been disclosed in JAL's draft financial statements.
ACCT346-18S1 TEST 7 REQUIRED:
a) What do you understand by the phrase, "management's financial statement assertions", and how do they relate to the role of the auditor? (6 Marks)
b) For each of the matters listed above (i.e., i. to v.), identify the specific financial statement assertion involved. Then briefly describe the action that you, as auditor, would recommend that JAL should take.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started