l lS. You are an assistant auditor with Zaird 3:. Associates, CPAs. Universal Air {UA}, your fifth audit client in your eight months with Zaird, is a national airline based in your hometown. LIA has continued to grow while remaining healthy nancially over the eight years of its exis tence. Indeed, as you start the audit, you notice that (unaudited) sales are up 3t] percent this year (EilKI), with earnings up 411} percent. Your rm, Zaird 3r. Associates, has been UA's only auditor. During the audit you noticed that LIA records sales when tickets are solddebit receivable [or cash), credit sales. In performing substantive procedures relating to receivables, you also found that some of the \"sales" are for EDXE ightsgenerally in January and early February. You brought up this matter to your incharge senior and she indicated that she also wondered about this last year when she worked on the audit. She suggested that she concluded that this isn't likely to be a problem for at least three reasons (any one of which would be sufcient to allow the cun'ent method}: I. The company has been using this approach since its inception eight years ago. Thus, any overstatement of this year's sales at yearend is likely to be \"averaged out" by an under statement at the beginning of the year because the company followed the same policy last year {and the years before]. 2. 1iwralid reasons exist for including the sales when \"booked." The small airline's earnings [JI'DCE is probably best considered about complete when the sale is made because this is the toughest part of the revenue generation process. The planes are scheduled to y for the first six months of next year, and will fly, regardless of whether these relatively few pas- sengers who paid before yearend for next year's flights are on them; there are virtually no variable costs incun'ed for these passengers, except for a few very small bags of peanuts and a few cans of soda. 3. Imagine what a nightmare it would be to have to record an entry when a passenger buys a ticket, and then another one when the ight occurs. She says she is willing to discuss this with you if you disagree, but at this point she thinks it isn't a problem. a. Discuss whether you agree or disagree with each of her reasons. Now assume that you potentially agree with her rst justification. You think that maybe a journal entry could be made at yearend to estimate the liability for nextyear ights. Yet this wouldn't be necessary if everything does \"average out" and any yearend liability is immaterial. h. Given this situation, would you expect the procedure to \"average out" over the year? c. How might one determine whether it does \"average out\" over the year? '1- 1 I 1 -.-.i .- . 1 n . . . Hr... I'- .1
