Analyzing Materiality In Auditing And Financial Statements Of Air New Zealand (AIZ) In 2017, An Essay.

Section 1

Determine the level of materiality to be used for the audit of the group accounts for the year ending in 2017. Your answer should include a discussion of the nature of materiality, and a
description of what materiality represents in terms of the audit of a set of financial statements, and should discuss the different bases and considerations employed in arriving at materiality.
Explain the rationale behind your choice of a certain level of materiality. Provide a quantitative estimate of materiality for your company.

Review the various draft notes and disclosures accompanying the draft annual report. Highlight those that may have significance to the audit, eg. Contingencies, and outline the audit procedures that you will need to perform.

Section 2

The partner has requested you to prepare a preliminary analytical review on the information provided by your company. The partner suggests that as a minimum you address key balance
sheet and profit and loss ratios over the period 2014 to 2017. Based on these results and the nature of your company’s business and its markets, outline the apparent trends and changes in these ratios, the key risk areas for the audit and the matters that will have to be addressed in the audit plan. Give examples of relevant assertions and at
least one audit procedure for each assertion.

Section 3

Review the statement of cash flows. Which category of cash flows provided the majority of cash inflows? Which category had the greatest outflows?
Identify the primary cash receipts and cash payments during the year.
What were the main non-cash financial and investing activities?
Using the results of questions 2 and 4, evaluate the going concern risk of this company.
What audit procedures would you recommend to address this risk.
 

Air New Zealand (AIZ) is an airline company based on Auckland, New Zealand. It operates flights in New Zealand and other international countries. The purpose of this paper was to develop analytical analysis on materiality auditing, analytical review, audit procedures and form an opinion based on auditing by reviewing the annual auditor report for AIZ Limited for the year 2017. 

Materiality in auditing relates to the misstatements or omissions that are considered material only if they impact the economic decisions of users based on financial statements either independently or in total. Here, the auditor explains a judgment on whether the financial statements are prepared in all material facets to gain assurance of the users. The nature of materiality includes both quantitative and qualitative. The quantitative aspects include setting a judgment of the materiality during the planning stage and the set a percentage of the net income. Then consider the performance materiality on the amounts receivables or inventory (“AccountingScholar.com”). Also, estimate the misstatements and the total aggregate in a cycle and determine the overall materiality to determine whether they were misstated. Qualitative aspects include factors like the company not disclosing acceptable dependent liabilities and its transactions, incorrect description of accounting policy which are material. Similarly, minor mistakes in financial statements lead to materiality violations. Different bases of materiality are planning, performance and overall materiality. Planning materiality is the opening one where the maximum amount believed by the auditors to be misstated by an error or fraud and still not affect the decisions of the users. Performance materiality is the amount less than the overall materiality set by the auditor to reduce the low level and the probability of the misstatements will exceed the overall materiality. Also, it is set to reduce the risks that the total undetected misstatements could be material to the financial statements of a company. Overall materiality refers to that base of materiality that is the highest amount of information not disclosed, omitted or misstated that affects the economic decisions of the financial users or the accountability of the management as a whole. The level of materiality is that of planning and overall materiality. The audit materiality says that they primarily consider of the misstatements of consolidated financial statements of the Group that economic decisions of an individual will be changed. This means that this is a planning materiality which is done at the commencement of the business. Similarly, the planning materiality is based on the quantitative considerations nature of materiality concept. In addition, they consider whether other matters brought during materiality auditing affects their decisions or judgment which is a qualitative aspect. The overall materiality is done through the evaluation of the whole work for consolidated financial statements which was $30 million affected by some factors of the airline industry. In this overall materiality, there was a profit tax of 6%, total equity of 2% and an operating revenue of 1%. 

Section 2

Income statement of AIZ Company preliminarily analytical review 2014-2017 in million terms.

A company’s revenue is the income that a company earns through its activities from the sale of goods to their customers. The AIZ Company revenue increased from the year 2014-2016 and decreased in the year 2017. In 2014-2015 it increased from 4663 to 4925. In the year 2016, it increased from 4925 in 2015 to 5231 (Carter, & Dawson, 2017). The revenue decreased to 5109 in the year 2017compared to the year 2016.

Operating expenses of a company are the costs that a company accrues through its activities recorded in the income statement. These expenses of AIZ Company have been increasing over time from 2014-2017. From the 2014-2015 the total operating expenses increased from 3184-3413. Similarly, there was an increase in 2015-2016 from 3141-3711. Finally, the aggregate expenses increased slightly from the year 2016-2017 from 3711-3781.

Operating income of a company is a measure of the amount of profit a firm gains after carrying out its operations and deducting the operating expenses. The AIZ Company operating income have been increasing since the year 2014-2016 but decreased in 2017. In 2014-2015 there was an increment from 358-423. In the year 2015-2016, 423-674 (Carter, & Dawson, 2017). However, the operating income decreased from 674-501 which was not good for the business as the number of profit reduced.

Net income of a firm is that final profit or loss realized by a business after all expenses have been deducted.  AIZ Corporation has only earned net income profits over the years but a decrease in 2017. In the year 2014-2015, the net profit moved from 262-327. While in the year 2015-2016 it increased from 327-463. However, there was a reduction in the net profit from 463- 382 in years 2016-2017.

Balance sheet analytical review in millions.

Cash of a firm is the liquid asset owned by a business either cash at hand, cash at the bank or either in investments which can be converted to ready money. In AIZ, their total cash has increased tremendously over 2014-2016 and decreased badly in 2017. The amount of total cash in 2014-2015 was 1234-1321. Consequently, a significant increase from 1321-1616 in the years 2015-2016. Nevertheless, there was a decline in the total cash from 1616-1369 in 2016-2017.

Current assets are the value of all assets in a firm that can be converted into cash within a year. Total current assets of AIZ increased from 1827-1982, 2014-2015. 2015-2016 increased from1982-2339 and reduced to 1887 in 2017.

Section 3

Non- current assets are those long-term investments a company does not expect to realize in an accounting year. In this firm, non-current assets have increased over the years (Carter, & Dawson, 2017). In 2014-2015 amount from 4023-4793, in 2015-2016 with an amount between 4793-4912 and 4912- 5284 in 2016-2017.

Non-current liabilities are the long-term firm's responsibilities that are not due for payment in a year. AIZ has non-current liabilities to settle from the year 2014-2015 from 2106-2682, 2682-2672 in 2015-2016 and 2672-2780 in 2016-2017. 

Trend and risk areas for audit

The trend in revenue from 2014-2016 is increment and a decrease in 2017. The decrease in revenue this means that either there were changes in demand and supply or tastes and preferences of the consumers or economy fluctuations which reduced the number of customers traveling. Operating expenses should not be so high and operating income should not decrease at any year to avoid failure of the business. Net profit should not decline as well as it was cash in 2017 for the smooth running of the firm. Current asset reduced in 2017 meaning that the amount to convert to cash in short-term lowered in 2017. The company should check on its non- current liabilities to reduce its obligations for the better profitability of the business. Management assertions are those claims made by members of a company regarding certain aspects. Therefore, the auditors have to validate the financial statements to rely on them on matters of the business. Some of the relevant management assertions revenue recognition and segmental information, expenses, cash and cash equivalents, investment in other entities, property, plant and equipment, trade and other receivables, earnings per share, inventories, taxation (Carter, & Dawson, 2017). Audit procedure for revenues includes reviewing a contract with customers to ensure that all revenues and expenses are recorded in accuracy using analytical procedures. Also, for cash and cash equivalents you use bank reconciliation and bank confirmations, type of bank accounts for entries. Audit procedures for trade and other receivables you confirm the receivables in the general ledger, calculate the total, investigate reconciling items. For inventories include test the inventory count, observe physical inventory count and reconcile inventory count in the general ledger. For the audit investments then develop audit objectives and procedures for investment then design to appropriate investment assertions. 

Cash flows review

Statement of cash flows refers to a financial statement that reveals information of cash in-flows a firm receives from its operations and outside investments cash out-flows it pays for its activities and investments in a cycle. There are three categories of cash flows statement which include operating activities, investment activities, and financing activities. Operating activities include incomes from credit customers, cash sales, adjustments of income receivables, divided received, investments, tax refund, similarly, operating activities wages and salaries, payment to the supplier, operating expenses, investment expenditure, and taxes. Investment activities include proceeds of sale from property, plant, and equipment and those of debts, equity securities, loan repayments of employees and directors and purchase of intangibles and property, plant and equipment. Financing activities comprise of borrowed money, proceeds from the sale of common stock, repayment of loans and rates and repurchase of company and dividend payments. Operating activities category has the majority inflows in the cash flow statement of 904,000 in the year ending 2017. Inflows are those receipts a firm receives from its operations activities and investments. Investing activities category has the greatest outflows of a negative of 6161,000. Outflows are those payments which the company makes for its operations and its activities. Cash receipts in a cash flows statement refer to the cash a firm takes in during an accounting period which includes cash sales, money received from creditors, loans and credit. The primary cash receipts are the depreciation in the operating activities category. It has the highest cash receipts of 461,000. The primary cash payments are the capital expenditures which include a negative value of 853,000. Non- cash financial and investing activities are those that do not affect cash directly. Non-cash financial and investing activities comprises of longstanding assets and liabilities and stockholders’ equity which appears at the bottom of cash flows, for instance, issuance of common stock in enduring debts and to acquire land and purchase of equipment with a payable note.  There were no non-cash a financial and investing activities for AIZ the year ended 2017. A going concern risk of a company is the concept to evaluate whether the business risks will either reduce firm’s profit or cash inflows and this would indicate that the company has a doubt to be a going concern. According to this AIZ Company, the evaluation between question 2 and 4 implies that this company has a great cash outflow and no non-cash financial and investing activities (“ACCAthink head.com”). This indicates that it has many risks and the going concern is in doubt that the company may cease to be a going concern in the future. The auditing procedure to address the problem of going concern of AIZ is that the auditors to carry outgoing concern risk assessment.   

The type of opinion in the audit report of the 2017 financial report is that type of unqualified opinion (Carter, & Dawson, 2017). Unqualified opinion in auditing means that the judgment of the auditor that the financial records and the statements are presented fairly and appropriately. Similarly, it also means that the financial statement goes along with the set accounting principles set. The auditor opinion says that the financial statements include statements of comprehensive income, statements of financial position, statement of cash flows, statements of performance and statement of changes in equity. All these financial statements ended as at June 30, 2017. They are fairly presented in the New Zealand financial recording standards and international reporting standards set by the accounting systems. In addition, the auditor based the financial statements according to auditing standards and ethical standards set by the international auditing standards (Carter, & Dawson, 2017). The responsibilities of the auditors were also based on the auditor- general auditing standards of the audit of the financial statements. This means that the auditor's opinion was the unqualified type of auditor's opinion which is believed to be sufficient and appropriate. There is an additional paragraph indicating key audit matters on which they based their opinion on. The key audit matters were those they considered in their own judgment to give them the significance of their auditing. Similarly, they were of no difference to those other audit opinions of the consolidated financial statements so they did not provide any separate opinion.

Conclusion

It is evident that the annual report of AIZ limited for the year 2017 was a fair view of the company's consolidated financial statements for the year 2017. The auditor used the annual report to present the opinion of these financial statements which were in accordance with the auditing of financial recording and international reporting. 

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