You are the graduate auditor working on the existing client PostPandemic Air Ltd. The month is January 2022 and you are beginning some of your planning for the 30 June 2022 financial year end audit. You and your colleagues are aware that there has been significant impact on the airline sector due to restrictions on global air travel post covid. With borders reopening this month, there is threat of new and cheaper airlines entering the sector, however due to their long trading history and strong reputation as a family-based airline, the CEO at PostPandemic Air Ltd has assured you "he is not concerned". While watching TV, you notice that many domestic and international airlines have started to heavily discount some flights on some routes and PostPandemic Air Ltd has spent a lot on advertising about it. Seeing this level of media and advertising you find out the company paid $10,000,000 for advertising campaign and you feel pleased and inform your audit manager about it saying to him "the CEO is right and this investment in advertising will definitely payoff in additional sales".

In July 2022, the draft set of accounts indicate net profit is $20,000,000 and you set materiality at 20% of net profit totalling $4,000,000. You conclude that anything 10% of net profit and above (therefore $2,000,000+) will be considered material and anything less than $2,000,000 will be immaterial.

As part of the discussion with accounting staff, you have been informed that the controls surrounding the accounting system are weak. In fact, you remember from the last audit that the system has bugs and it leads to a number of incorrect values being included in the accounting information. In addition, the turnover of staff due to Covid has been extraordinarily high this financial year and there have been five accountants employed over the audit period. You are consulting with the current accountant (a graduate named Christina who started the job this week) and she has assured you she is there to help you with anything you need.

Your audit manager has asked you to audit the accounts payable balance, fixed asset balance (predominantly the fleet of airplanes) and revenue amount.

After discussion with Christina, you complete the following:

1. To verify the existence and valuation of accounts payable, you sent out letters to all of the creditors listed on the AP creditor ledger asking them to verify the balance that PostPandemic Air Ltd owes as at 30 June. You receive all of the letters back except for one with a creditor balance of $1,500,000. Since this one item is less than $2,000,000, you deem it immaterial and conclude that the balance of account payable is correct.

2. You deem the risky assertions relating to the fixed asset balance to be occurrence (has the purchase of the fixed asset occurred?) and accuracy (is the fixed asset balance from the fixed asset register accurately reported?). You complete the necessary audit procedures to verify the occurrence and accuracy of fixed assets and deem the balance to be correct and free from material misstatement.

3. To audit the sales revenue balance, you employ analytical procedures by using the accounting system ledger information. You compare the current sales to the prior period's actual sales by geographical area (state or country visited). You note in the working papers that there was a 75% increase in annual sales from the previous year. Of this 50% was for the first half of the year (01 Jul - 31 Dec 2021) and 25% was for the second half of the year (01 Jan - 30 Jun 2022).

Required

1. Discuss the adequacy and correctness of the stated materiality value (5 marks)
2. List 6 specific audit issues/risks that should be considered by the audit manager when reviewing the audit files. Give reason for why the audit manager should consider them an issue or a risk. (12 marks)
3. Discuss the accuracy of the audit procedures and persuasiveness of the evidence gathered to test the risky assertions relating to account payables, fixed assets and sales revenue (9 marks)
4. Provide an adequate alternate audit procedure (one that addresses any apparent risk at PostPandemicAir Ltd.) and list the assertions that are being tested with that procedure for account payable (4 marks)