You are the graduate auditor working on the existing client PostPandemic Air Ltd. The month is January 2021 and you are beginning some of your planning for the 30 June 2021 financial year-end audit. You and your colleagues are aware that there has been a 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 PostPademic 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 this. Seeing this level of media and advertising you find out the company paid $10,000,000 for this 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 2021 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 accounts payable creditor ledger asking them to verify the balance that PostPandemic Air Ltd owes 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 year’s sales to the prior period‘s actual sales by geographical area (state or country visited). You refer to page 331 of your 4^th edition Auditing textbook and deem this procedure relevant to audit the accuracy of the revenue account. 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 (1 July – 31 December 2020) and 25% was for the second half of the year (1 January – 30 June 2021).

REQUIRED 

Discuss the accuracy of the audit procedures and persuasiveness of the evidence gathered to test the risky assertions relating to:

i) accounts payable (5 marks)

ii) fixed assets (3 marks)

iii) sales revenue (3 marks)