QUESTION

1. Based on the results of the analytical review below and with reference to the case study context and additional information:

   1. explain the factors that indicate the company may not be a going concern and;

   2. explain what matters you might investigate further (and the audit work required) to establish whether AA can mitigate these factors so that it can prepare its financial statements as a going concern.

Context

1. Aussie Airlines (AA) is a large listed Australian airline and has been operating for more than fifty years.

2. In recent years, under pressure to improve profitability as fuel costs rose, the airline successfully undertook a comprehensive cost cutting and business efficiency drive, which returned it to profit three years ago. According to the CEO and Chairperson, Andrew Norris, the operations of AA are now as lean as they could be; we have squeezed the fruit dry.

3. In March 2020, the World Health Organisation declared a pandemic, people and governments have responded, and the volume of global business-related and leisure-related air travel has fallen by 95%.

4. It is not known how long the pandemic will last, how long restrictions on air travel will lastmost guesses range from two to twelve months, a small minority fear it will be worseand the Australian government has not yet announced how its economic response to the pandemic will specifically help the airline industry.

5. AA has temporarily laid off 90% of its workforce, including cabin staff, pilots, and 95% of its airport ground crew. There are murmurs about a class action by employees if they do not receive adequate payments while they are laid off. Some fear the change may be permanent.

6. The company is not taking bookings from customers; the AA website says for the foreseeable future.

7. The CEO has told the press that while the current situation represents an existential crisis, he is absolutely confident that AA will get through it and come out stronger the other side.

8. The Chief Financial Officer, Clara Major, stopped you in the corridor to say hello and offered you these words: Look, everything might seem dire but we have it in hand. We will be here this time next year, so keep that in mind.

9. As expected, you have been offered access to any records and to people inside and outside the AA organisation that you feel will be necessary to complete your risk assessment and interim work.

10. You are also confident that AAs internal controls remain very strong, although you do not know if or how they have been changed/enhanced to respond to the effects of the global pandemic on AA.

Additional Info

You have received additional information from AAs Chief Financial Officer and from your initial review of AA Board minutes:

1. Not all 2020 forecast Income Statements line items and Balance Sheet balances have been finalised at this point, though they are best guesses.

2. Intangible Assets constitute goodwill relating to an international airline business AA acquired five years ago. This business mainly services South East Asia, China, and Polynesia destinations.

3. Property, Plant & Equipment consists primarily of aircraft, aircraft engines, and aircraft parts.

4. Revenue Received in Advance relates to customers prepaid flights.

5. Aircraft are leased from third parties. A reduction in monthly payments and a restructuring of the lease terms are under negotiation but, so far, nothing has been agreed with the aircraft makers/lessors.

6. AA is currently negotiating with its bank to receive a grace period for repayment of short term and long-term debt as the company is currently in breach of its debt covenants per the loan agreement. If no deal is reached, this debt becomes due and payable on August 31st 2020.

7. AA is seeking a financial bail-out package from the government of $7million to fund its ongoing operating costs for 12 months while its fleet of aircraft is grounded. The Federal government has made positive noises about the request but has not yet committed to support the request and has told AA that it will take at least two months to reach a decision.

8. Under the current conditions, the CFOs papers to the AA Board estimate that cash coming in from operations will, on average, be $0.5million per month while unavoidable operating costs are estimated to be $0.8million per month.

9. AA has an unused line of credit of $2.5million provided by its banking syndicate. It can access this money to fund its cash requirements. Currently, there are no other sources of cash beyond this line of credit.

- Horizontal Analysis Income Statement Year ended 30th June (AUD Millions Forecast 2020 Actual 2019 Actual 2018 Ammount Revenue $ 12,00 $ 18.00 $ 18.00 $ 16.00 33% -34% OX Expenditure Wages Aircraft Costs Fuel Depreciation Other 3.30 4.00 2.50 1.60 2.50 $ $ $ $ $ 5.00 4.00 3.00 1.40 3.10 $ $ $ $ $ 5.00 3.70 3.00 1.40 3.40 $ $ $ $ $ (1.70) - (0.50) 0.20 (0.60) -17% 14% -19% PBIT Finance Costs $ $ (1.90) $ (0.20) $ 1.50 $ (0.20) $ 1.50 $ (0.20) $ 3.40) - -227% OXI Income Tax Statutory Profit for the Year - (2.10) $ $ (0.40) $ 0.90 $ (0.40) $ 0.90 $ 0.40 3.00) -100 -333% $ Ratio analysis (AUD Millions) Profitabillity Ratios Forecast 2020 2019 Ammount Gross Profit Margin Gross Profit/Net Sales No gross profit as it service being sold and not a good therefore, no inventory to calculate COGS Net Profit Margin (Net Profit After Tax / Sales) "100 -17.500 5.000 $ (22.500) -450% Return On Assets (Net Profit After Tax / Average Total Assets) 100 -11 475 4.724 $ (16.200) -343% Return On Equity (Net Profit After Tax / Average Ordinary Share Capital) '10 -87.500 24.000 $ (111500) -465% 0.405 0.500 $ 10.095) -19% Liquidity Ratios Current Ratio Current Assets / Current Liabilties Quick Ratio Current Assets - Inventories / Current Liabilites Debt To Equity Ratio Total Liabilties/Total Equity Trades Receivable Turnover (Average Trades Receivable/Sales) "365 No quick ratio as it is a service being sold and no inventory was provided. 12.231 4.543 $ 7.688 169% 53.229 25.347 $ 27.882 110% Balance Sheet as at 30th June (AUD Millions) Forecast 2020 Actual 2019 Actual 2018 Ammount Current Assets Total Current Assets Non Current Assets |Farmy Pally Isle Act 0.703 (1.30) 1.00 (1.10 0201 Total Non Current Assets Total Assets Current Labels Pwybos Revue R ival in Advance 2.20 (4.00) 122 -30421 29 Provisions 00.101 1014 Total Current U s Non Current Lates Revue Rewal Advice De Tu Libia Total Liables Equity Total Equity