Planning the Audit of Air New Zealand Limited - Risks, Materiality, and Assertions

Professional and Ethical Standard, (PES) 1, requires that professional accountants have the competence to undertake an audit. ISA (NZ) 315 outlines procedures that auditors must follow in gaining an understanding of a business. Assume that you are a manager in an auditing firm in New Zealand and your firm has been approached by the Auditor General’s Office to carry out their audit of Air New Zealand for the years ended 30 June 2019 and 2020. You have been asked by one of the audit partners in your firm, who is considering whether to propose for the audit engagement, to gather some information about the company. There are several sources that you can access for research in preparing information for the audit partners. For example, the Air New Zealand website would be a good place to start your research. Questions to be addressed by those presenting and for those not presenting, in your bullet- point summaries, are:a)What are the business activities of Air New Zealand Limited that you will need to understand to carry out a successful audit? Using information, you obtain about the company, and the industry it is in, come to an informed view as to the ‘business’ and ‘industry’ risk for this prospective client. Be sure to set out the basis (reasons) for your decision. b)Evaluate specific ethical issues that could potentially arise from performing a statutory audit on these financial statements. How should those issues be addressed? Refer to the Professional Code of Ethics as appropriate. Keep in mind the ownership of Air New Zealand, the role of the Financial Markets Authority (FMA), legislation, XRB Auditing Standards and the Auditing Standards and Statements of the Auditor General. c)What are the key accounting issues from your review of other sections in the annual reports and financial statements, including the accounting policies? Based on your understanding of the business and the accounting issues, what specialist skills and competencies will you need to carry out the audit? d)Identify “specific parties” who may rely on the work of the auditor and the audit firm. Also identify what remedies are available to those “specific parties” should they be dissatisfied with the standard of the audit work. Describe some conditions (with reference to existing legal precedent) in which they might be successful in any action taken.

MMPA 510 Tri 2 2020- Auditing Workshops4|PageWorkshop 2: What are the risks, what is material and what assertions will have impact?Background informationAssume that your firm is successful in gaining the audit of Air New Zealand Limited. You are asked by the audit engagement partner to plan the audit, in particular determine areas of risk, materiality and assertions to be examined. As always you wish to keep your detection risk to a minimum. NOTE: You are not expected to assess control risks as this would require having access to this entity, which is not permitted for the purposes of this presentation workshop. Questions to be addressed by those presenting (and for those not presenting, in bullet-point summaries) are: a)Carry out a preliminary analytical procedure to review the Air New Zealand annual financial statements as these are appropriate for the client. Explain the reason for choosing selected ratios, what you found and, how the results will influence your planning of the audit. b)Based on the ‘business risk’ and ‘industry risk’ identified (in workshop 1) for Air New Zealand, what assertions over account balances and other disclosures in the financial statements will these risks impact and how? Identify key assertions that you think need to be tested and explain the audit objective behind these tests. c)Using your judgement, identify a ‘base’ and select a materiality level for Air New Zealand’s (Group) balance sheet. Justify y o u r decision. Allocate that amount to the balance sheet accounts in proportion to their $ size and assess the results. Consider what would have occurred if you had chosen a larger or a smaller ‘materiality’ amount, or if you had allocated them differently. d)The audit partner in charge of the audit of Air New Zealand plans to obtain evidence of its revenue recognition by relying on internal controls and use of analytical procedures. Air New Zealand’s revenue recognition policy relating to money received in advance, is to initially hold them in a deferred revenue account and later transfer the appropriate amount to sales revenue when goods are transported. However, suppose that, during subsequent testing of internal controls a significant number of instances occurred where revenue was incorrectly recognised immediately upon customers’ payment in advance, rather than when passengers are transported. (Note that this scenario is a theoretical ‘thought experiment’ and does not relate to any real circumstances pertaining to Air New Zealand’s internal control systems or financial statements.) Analyse the implication of the above issues in planning the audit of Air New Zealand and prepare a draft audit strategy for the audit of Air New Zealand. Hints: ISAs and AG ISAs 300, 315, 320 and 330 in particular provide useful information in identifying issues concerning planning, industry and entity risk, materiality and responses to assessed risks. NB: Do NOT include any extensive consideration of going concern, related parties or client fraud in your risk analysis at this stage. MMPA 510 Tri 2 2020- Auditing Workshops5|PageWorkshop 3: Designing Substantive TestingBackground informationAssume that your audit partner asks you to design detailed substantive testing programs for accounts receivable and sales; inventory; purchases and accounts payable; and payroll systems of Air New Zealand. Your partner also asks you to incorporate specific analytical procedures and tests of detail (i.e. direct tests on balances and tests of transactions of a balance). Note that- identified weaknesses and other issues, as described in each of the following subsystem (a - d), are created for teaching purposes and bears no relationship to events relating to Air New Zealand, nor does it apply to any other organization. Required: Design/develop a substantive audit tests program and explain & justify your audit program in terms of audit objectives (also called ‘audit assertions’)