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Audit risks and responses:
Audit risk
Donald Co has ordered six planes which may not have been received by the year end. Only assets which physically exist at the year end should be included in property, plant and equipment.
The existing planes have been refurbished at a cost of $15m. This expenditure needs to be reviewed to assess whether it is of a capital nature and should be included within assets or expensed as repairs.
Donald Co has applied for a loan of $25m. It has not received this loan yet, but it has already ordered the planes and if it does not receive the money in time then it may struggle to pay for the planes ordered and this could result in going concern difficulties.
The travel agents who sell tickets on behalf of the airline are struggling to pay their outstanding balances to Donald Co. This could result in an increase in irrecoverable debts and receivables being overvalued.
Donald Co’s website has encountered difficulties with recording sales, this could lead to errors in relation to completeness of income.
Due to the website errors tickets have been sold twice, therefore some customers will require refunds. At the year end there is a risk that the tickets to be refunded have not been removed from sales.
Donald Co is closing its call centre and making the workforce redundant; as it has announced this to the staff then under IAS 37 Provisions, Contingent Liabilities and Contingent Assets a redundancy provision will be required for any staff not yet paid at the year end.
Audit response
Discuss with management as to whether the planes have arrived, if so then physically verify a sample of these planes to ensure existence.
Review a breakdown of the costs and agree to invoices to assess the nature of the expenditure and if capital agree to inclusion within the asset register and if repairs agree to the income statement.
Discuss with management the status of the loan application and if still outstanding whether any other banks have been approached for the loan.
Perform a detailed going concern review.
Extended post year-end cash receipts testing and a review of the aged receivables ledger to be performed to assess valuation.
An allowance for receivables to be discussed with management.
Extended controls testing to be performed over the sales cycle to assess the extent of the errors. Detailed testing to be performed over completeness of income.
Review the cut-off of customer refunds around the year end to ensure that sales are complete and accurate.
Discuss with management the status of the redundancy programme and review and recalculate the redundancy provision.