AUDIT QUESTION:

Background information

Assume that you are at the completion and review stage of the audit. Your partner has asked you to perform some audit procedures for after balance date activities of Air New Zealand to allow for adequate review and evaluation of the audit working papers and the final report before the audit opinion is signed. More specifically, your partner has asked you to review the risk relating to the contingent liability, subsequent event, related party and going concern assumptions.

NOTE: The risk situations below are no relationship to events in Air New Zealand or any other known organization.

Required: Please answer and explain clearly all questions below.

a. Contingent Liability Risk: Evaluate the situations for which a Contingent Liability situation could arise in Air New Zealand and produce an audit procedure, with an emphasis on subsequent procedures, to specifically identify risks.

b. Subsequent Events: Design a detailed subsequent audit testing program appropriate for the Trade Receivables and Sales system of Air New Zealand (do not include Contingent Liabilities). Assume that one of your procedures revealed material and unrecorded revenue which was the result of the absence of a control to prevent this situation. The clients management agreed to change the entry so that the balances are in compliance with GAAP. Evaluate implications for the audit process and for any other communication with the client (Air New Zealand).

c. Related Party Risk: Evaluate the related party situation for Air New Zealand. You should incorporate the information they disclose, but you should also conduct a reasonable search for potential related parties that may not be disclosed (incompleteness). Come to an evaluation of the situations in conformance with Accounting Standards and expectations of Auditing Standards, and make a recommendation to your managing partner with respect to the Related Party Risk issue.

d. Going Concern Risk: Prepare a list of additional procedures that you would follow to identify Air New Zealands risk relating to going concern. Evaluate the going concern situation for Air New Zealand and prepare an evaluation of those situations. Support your analysis with specific information about Air New Zealand and with knowledge of going concern risk. Assume that a going concern problem has been identified and that, without a future loan approval from their bank, that the business may not continue for another year. Discuss what should be communicated to the governing board.

e. Audit Report: Produce four draft audit reports, one for each of the situations described below. Assume that no other situations affecting the audit opinion have arisen. You should be ready to explain and justify each element of your reports.

i. Assume that your analysis of situations relating to contingences expose a high risk relating to contingent liability. You have communicated to the Governing Board but this particular board fails to take the situation seriously. Evaluate the implications of this on the audit report and opinion.

ii. Considering the situation mentioned in (b) Subsequent Events above, evaluate implications of the situation in forming audit opinion.

iii. Considering the situation mentioned in (c) Related Parties above, evaluate implications of the situation for the audit report and opinion.

iv. Considering the situation mentioned in (d) Going Concern Risk above, assume that no changes are made to the accounts, evaluate implications for the audit report and opinion.