[Solved] auditing assignment qantas

This has meant that Santa is now considered to have a divisional organizational trucker, being formed by five business segments: Santa Domestic, Santa International, Santa Freight, Starters and Santa Loyalty. Conduct of Operations The management function of the Santa Group is to separate its international and domestic arms, each with its own CEO heading up operational and commercial functions, in order to ensure that they can independently run each business based on its specific priorities and market conditions (Flynn AAA).

Domestic operations Santa (AAA) says its group domestic operations generated BIT profit of $30 million for the FYI 2014. The company adopts a dual-brand strategy of two only refutable domestic airlines, Santa domestic (including Sanitation) and Jester. Whilst Santa domestic is focused on offering their passengers the highest frequency of flights and a variety of routes to retain a yield premium, Jester is working to sustain its low-cost case over its competition and serve price- sensitive consumers.

Santa continues to invest in products and services with the refresh of Airbus AWAY and Boeing 737-800 fleets (Flynn Bibb), in order to continue to leverage its flexibility in the domestic market. Moreover, they ‘establish relationships with manufactures to adjust capital expenditure in line tit financial performance and right-size its fleet and network’ (Santa AAA). Overall, the domestic division is trying to maintain its leading network and frequency advantage in the market, further increase their fleet utilization and reduce their costs.

International operations The Santa international adopts a ‘gateway’ strategy to connect Santa customers to key global cities in alliance with their partner airlines, which benefits customers through code sharing (Santa AAA). Also, its integrated network connects international flights with domestic and regional services via he main gateway points and assists in distributing inbound tourists throughout Australia. The continued development of Santa’ joint business agreement with Emirates airlines has strengthened its network of an additional 65 destinations.

In recent times, as an enhanced presence in Asia, which is the world’s fastest- growing region for air travel, Santa has also formed icosahedra agreements with China Southern and Bangkok Airways and offered direct flights from Australian to seven of the major Asian cities. The investments in lounges and on-board product improvements are continued to ensure that the Santa customer experience meets the global standards. After posting huge losses of $497 million in FYI 2014, Santa has made the decision to shut unprofitable routes and fleet reconfiguration and sell assets in order to save costs (Sawyer 2014). (b).

Market conditions Sources of revenue Santa’ primary source of revenue is through the sale of flight tickets. The earnings from offering other airline-related services such as freight revenue, on- board sales and other services like booking hotels and holiday tours also form parts of Santa’ revenue. In addition, Santa earns money by leasing some of its aircrafts, as well as generating net foreign exchange gains. Domestic market conditions Firstly, the domestic travel market is facing the challenges of weaker consumer confidence and the shift in the mining boom from construction to production (Santa AAA).

The resource sector slowdown, cautious business environment, and most recently by subdued consumer spending has resulted in a significantly slow demand growth. Santa (AAA) also points out that the capacity growth in the domestic market has exceeded demand growth for two consecutive years. Secondly, the Australian domestic market has been distorted by current Australian aviation policy, which allows ‘Virgin Australia to be majority-owned by three foreign government-backed airlines-yet retain access to Australian bilateral flying rights’ (The Daily Telegraph 2014).

As competition is increasing rapidly, the decline in sales of Santa and Virgin Australia to respond to the combination of these challenging market conditions in Australian aviation puts domestic airlines at risk of becoming less profitable (The New Daily 2014). International market condition In addition to the deteriorating aviation industry and weak consumer spending, Santa International also suffered the continuation of market capacity oversupply due to the intensive competition with foreign airlines.

Despite subdued global macroeconomic conditions since the Global Financial Crisis, foreign airlines capacity have been continually increasing into Australia by 44 per cent between FYI 2009 and FYI 2014, led by stated-own airlines in Asia and Middle East. They are mostly attracted by the country relative economic strength and the high Australian dollar. For Santa’ outlook, capacity expansion is getting slower with expectations for competitor growth of 2. Per cent in the first half of FYI 2015. Santa (AAA) further presents that Santa international will face the challenge of unfavorable fuel price from foreign exchange movement. This has meant that the revenue environment will be hit hard when the division is forced to pay the fuel cost with a high foreign exchange rate. The competitive aviation industry, combined with slow demand growth and high financial costs, have seen Santa international experience a decline in sales. (c).

Changes to the SANTA Sale Act The Santa Sale Act imposes a restriction on Santa foreign ownership and dictates that Santa’ head office and “principal” operational centers for its planes ND key services be located in Australia (Griffith and Ganja 2014). The limitation on foreign investment flow causes a liquidity issue for Santa reinvestment and less frequency in trading, which further emphasizes the significant financial struggle of Santa International in FYI 2014 as discussed above.

With the Sale Act, Santa obtains competitive disadvantages, especially when other airlines including its major competitors, Virgin Australia, are allowed to access foreign capital investment unlimitedly. Moreover, Klan and White (2014) presents the issue that Santa pays the average employee costs of $115,000, while two f Virgin’s four major shareholders, Air New Zealand and Singapore Airlines, have an average of $83,000 and $84,000 respectively. This uncompetitive cost structure is based on limitation of moving jobs offshore.

Therefore, Santa suggests lobbying the Federal government to amend part 3 of the Santa Sale Act. Firstly, the removal of foreign ownership restrictions allows foreign investors to invest in the profit-making domestic division. That is, the domestic division to be majority foreign-owned while international stays majority Australian and keeps its overseas air rights (Griffith and Ganja 2014). Secondly, this change assists Santa to aggressively reduce employee costs by moving jobs offshore where wages are cheaper.

However, it is unlikely the airline will shift too many of those jobs overseas, there are additional opportunities in relation to outsourcing some of its maintenance. This may bring about potential cost savings. Finally, the modification is likely to slow down the trend of intense competitive pressure continued in the international aviation market as defend its market position. Q. Assessing Business Risk Business risks are any factors that could prevent or hinder the achievement of an organizations goals and objectives.

They arise from a change in the business environment or through a failure to recognize the need for change (AS 315 Para 41). In order to provide a useful and true audit report, an understanding of the corporations business risks are essential, as in increases the likelihood of identifying any material misstatements in the financial reports (AS 315 Para 41). The following two articles will explore how Santa may face a number of business risks in the short term. Santa has recently reported a significant $2. 4 billion net loss as it wrote off a considerable portion of its fleet (Creed 2014). This loss was a huge hit for the company compared to its $1 million profit a year ago (Creed 2014). This bold move was carried out in hopes of aiming to return the company to profitability in the first half of 2015. The write off of the fleet gives rise to a financial business risk as Santa will be losing out on a large portion of income from the lost number of aircrafts and hence the loss of available flights. The write off can also lead to an operational risk of changes in the Santa supply chain.

The airline’s aircraft suppliers may seek to take their business elsewhere, as a result of the sorption of a loyal relationship, and if Santa were to return to profitability and need more aircrafts, finding a new supplier with a low cost may be difficult. When the time comes to purchase new aircrafts, Santa may face the risk of failing to meet the financing requirements due to the increased spending for their One loyalty program (Freed 2014). New products and services offered for One members may result in a risk of increased product liability.

These risks may cause a change in the audit plan as the auditor will now need to include the write off of the fleet and will need to investigate whether this session will lead to an increase in growth and financial stability. An estimate of the financial growth will be required, and since it is an estimate, it bears the risk that the accounting evidence will not be accurate and hence an accurate audit report will not be produced. The audit firm may face difficulties in obtaining these estimates as Santa has not written off a fleet of this scale before.

The assistance of an expert in the airline industry may needed here to assess the risk and collect the appropriate evidence, as the audit firm may not specialize in the activities Santa are carrying out. The write off of the fleet will also lead to thousands of jobs being cut. This causes a risk of losing a significant number of personnel who have years of invaluable experience and expertise in the airline industry. These personnel could also be equipped to deal with changes in the short term aviation industry and business environment as a whole.

Cutting a vast number of Australian jobs will also have an impact on consumer confidence with Santa which increases the likelihood of Australians choosing other airlines to travel with. This affects Santa’ position in the Australian society, as they will no anger be seen as the old loyal Australian company that provided thousands of Australians with jobs. It will severely impact their image in the Australian market. Santa’ customer base will shrink which may increase the risk of misstatements associated with the valuation of receivables.

This type of evidence will be difficult for the auditor as it is hard to measure customer satisfaction and loyalty. This also relates to Santa’ recent decision to drop the Sydney to Gladstone route due to low passenger numbers (Petitions-Sodden 2014). Although low passenger numbers are a reasonable rationale for dropping the unprofitable out, it still gives rise to the financial risk that they will be losing out on business. Santa no longer providing this route highlights the business risk that another airline will pick up the route and take Santa’ customers, which is what Jetty did (Petitions- Sodden 2014).

Santa will lose a number of its loyal customers which may affect the decision of others to fly with the company. However this will allow Santa to obtain the relevant funds for it use for its restructuring program that aims to return the company to profitability. The audit plan will need to include he figures of revenue and expenses before and after the Gladstone route was dropped. Because the Sydney to Gladstone route is not a major route, there should not be any major impact on the growth and financial stability of Santa in the long run. The savings should far outweigh the short term costs of losing business from the route.

CEO Alan Joyce has defended the company’s poor performance of the grounds of two cumulative years market capacity growth exceeding market demand, a record high fuel cost and a slower demand for flying due to a decrease in consumer confidence (Creed 2014). 440 million worth of costs were cut and a further $900 million in initiatives were under way with a projected $600 million in cost reductions from the restructuring program (Creed 2014). The effects of implementing a new strategy will lead to new accounting requirements (AS 315 appendix 1) which may run the risk of incomplete or improper implementation.

The risk that they have not implemented a restructuring project of this scale can result in false predictions and projections of profit or the risk of implementing the program at the wrong time as the business environment is constantly hanging. However if the restructuring program is a success then it would have a major impact on the growth and financial stability of the company, especially in the short term. Joyce has stated that this restructuring program will bring the company back to profitability, meaning there was a figure computed that suggested profitability in the next financial year.

The audit firm will need to collect the evidence used to compute this figure and recalculate it using various methods to ensure it is an accurate estimate. There should not be any difficulties in obtaining this information. Joyce set forward new plans to create a new holding structure and corporate entity for Santa International after ideas to change the Santa Sale Act, which Joyce stated would increase the likelihood for the potential for future investments in the international aviation market with the primary objective to be able to provide returns to shareholders and improve their efficiency levels (Creed 2014).

Expansion of the business in an ever-changing economy runs the risk that the demand for an investment with Santa has not been accurately estimated and will not result in the planned outcomes. Joyce also predicted that the Santa group would return to an underlying profit before tax in the first half of the next financial year through costs reductions from the transformation program, the return of stable fuel prices, the abolishment of the carbon tax and decreased depreciation costs (Creed 2014).

Because of the unpredictability of the business environment, especially in the short term, these factors could easily change and work against the favor of Santa. Q. Business ‘Risk Analysis Key Account Business Risk Assertion AS Impairment of PEP Due to the restructuring of the fleet and introduction of a number of new aircrafts, it is noted that the increasing diversity of aircrafts induce the risk of misstatement and hence it is questionable as to whether their impairment of PEP is correctly reflected in the income statement.

Santa (2014) reported that the depreciation of owned assets is calculated on basis of estimation of asset’s useful life and residual value. Furthermore, recoverable amount depends on Santa’ board’s approved assumptions or discount factors and multiples. Since management accountants may not have the professional judgment about these values of aircraft and engines regarding the technological developments, they re likely to understate the impairment of PEP, because the value of PEP will appear to be higher in the next years.

Accuracy AS 540 provides a guide to collect sufficient evidence as its objective is to ensure that the accounting estimates are truly and fairly presented in the financial statements. For the Santa Group, AS 540 could assist the auditor in assessing the reasonableness or bias of management’s estimation used as inputs to calculate the impairment loss when determining a misstatement. In doing so, it should be applied to verify the accuracy of impairment loss of PEP. AS 620 should also be used as a guide to determine the objectives and accuracy of that expert’s work for the auditor’s purposes.

Especially, the Santa group owns specific assets such as aircraft and engines, which refers to professional knowledge and judgments about their useful life and fair valuation in the market. Hence, AS 620 helps the auditor to obtain appropriate evidence in a field of expertise, to further determine whether the impairment loss calculated by management accountant is reasonable or not. Impairment of international division An impairment loss of $2560 million in the Santa International Cash Generating

Unit (GU) as a result of wide body aircrafts purchased during a period where the Australian dollar was significantly weaker against the US dollar compared to previous years, is a concern and should be examined (Santa AAA). As a result of the newly established corporate entity for the Santa International Division, a change in Santa’ Gus for impairment testing is required (Santa AAA). The Gus for Santa Domestic, Loyalty and Freight are all in surplus except for the International Division which required a non-cash impairment charge of $2. 6 billion, hence why this account is at risk of material misstatement.

In addition, one of Santa’ cost reduction aims was to reduce spending in the International Division (Santa Bibb), hence the Division is at risk of overstatement as depreciation costs would be reduced in the future years. Accuracy AS 540 outlines the responsibility of auditors relating to accounting estimates, including fair value accounting estimates and related disclosures, which directly relates to the impairment of the International Division. The degree of estimation uncertainty affects the likelihood of material misstatements in the financial statements.

Thus accuracy is the main assertion relevant to the impairment f Internal Division as it is has a potential to be overstated. Hence the auditor should use AS 540 when preparing the audit plan to gather sufficient and appropriate evidence to validate the accuracy of the impairment of Santa’ Internal Division and to detect any possible material misstatements. Provision of redundancies Santa announced it would cut 5000 jobs as part of its $2 billion cost reduction program over 3 years (Freed and Smith 2014), 2500 have been implementing as at 28 August (Santa Bibb).

The number of jobs cut is considerably higher than when the group launched its three years cost reduction program. Therefore, there may be a risk of misstatement of the value of redundancies and a high possibility of redundancies provision being understated. Moreover, redundancy consists of management, engineering, catering facilities and the integration of Australian air Express, the different levels of employees have different redundancy payments, which raises the complexity to identify provision of redundancies, which could increase the risk of misstatement due to the accurate total value of redundancy provision being hard to recognize.

Furthermore, the uncertainty of actual number of employees laid off in this year generates equines risks that the value of provision will be incorrect. As the instability of financial performance and increased competition in the aviation market, Santa may have to cut more jobs than originally forecasted in order to make a positive cash flow during the year. Therefore, the auditors would be concerned that provision of redundancies would be understated in the balance sheet and it is possible that the group is not correctly recognized the value of redundancy payment.

Valuation & Allocation AS 540 provides guidance to collect evidence on the audit of accounting estimates contained in a financial report. In addition, AS 540 provides guidance to the auditors on items that cannot be measured accurately, only estimated. As provision of redundancies is an accounting estimate used by management, AS 540 can be applicable. Moreover, the provision is merely related to an estimate of potential future costs that will be incurred, assumptions were made about matters that were uncertain.

For example, the number of employees that will be laid off, the termination payment incurred in relation to different employee contract. The termination payment is considered by management’s assumptions, Santa auditor is impossible to directly measure this transaction accurately. Therefore, AS 540 can be served as guidance to the auditor on the indicators of possible management bias that may determine in material misstatement. Q. Substantive Tests linking to the Key Accounts Substantive tests of detail focus on obtaining audit evidence to support those assertions where a risk of significant misstatement has been assessed.

In accordance with SAAB 1 36 ‘impairment of assets’, assets are tested for impairment to ensure that they are carried in the balance sheet at a value no more than its recoverable amount. Also, the carrying amount is the amount at which PEP is recognized after deducting any accumulated depreciation and accumulated impairment losses. Since Santa(AAA) has stated that their depreciation expenses are provided on a straight-line basis on all items of PEP, the auditor should begin the test by hiring the expert to assess the useful lives and depreciation rates of their specific assets in previous years.

Particularly for aircrafts and engines, they takes up approximately 78. 13% of total Pep’s net value in 2014. Then the auditor has to recomputed the proper depreciation expenses ND the carrying amount of PEP,either manually or with the aid of a computer. By comparing the results provided by experts with those estimated by the management accountant, the auditor could determine whether assumptions made by management are described reasonably when making accounting estimate. Furthermore, the recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use.

In terms of Santa Transformation program, it has resulted in specific impairments of $328 million relating to property, plant and equipment being categorized as held for sale and impaired to their fair value sees costs to sell. These impairments primarily relate to accelerated retirement of the non-reconfigured 8767-300, 8747-400, and BIBB-400 fleet. AS a result of complex estimating processes concerning specialized techniques of aircraft and fleet, auditor is not expected to have these aspects skill, therefore, auditor may use the work of an expert (AS 620) to help in determining management’s accounting estimated.

The recoverable amounts are determined based on value in use. Therefore, in the substantive test, we need to evaluate whether the management assumptions are a realizable asset’s value in use. According to he annual report, the value in use was determined by discounting the future cash flows forecasted to be generated from the continuing use of the units and were based on the following assumptions about cash flows, discount rate, fuel and currency.

The risk associated with cash flows consists of potential variability in the amount and timing of the cash flows and related effect on the discount rate. Hence the auditor needs to use a financial expert (ASSAYS) to recalculate the discount rate and use this to discount the projected cash flows; and then compare with the previous amount, and then the auditor should consider whether they are consistent with the entity’s plans and past experience.

Provision of redundancies Provision of redundancies is a present legal or constructive obligation that can be measured reliably, and it is possible that an outflow of economic benefits will be required to settle the obligation. AS 540 provides guidelines for the auditor on procedures that management’s estimate is within reason and not understated. This includes assessing management’s assumptions and the possibility of management bias. Firstly, Redundancy consists of management, engineering,

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