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[answered] Auditing Project Fall 2016 Auditing Project Due December 7t


?Carter & McLean, a Halifax accounting firm, has just taken on the audit of EastJet, a small airline providing private charter service that began operations in? 2007. The airline is owned by Dave Wilson and Ron Joyce. The previous auditor has resigned because of poor health.? You are an audit senior with Carter & McLean and have been asked to work on the audit.


Auditing Project Fall 2016 Auditing Project Due December 7th

 

Carter & McLean, a Halifax accounting firm, has just taken on the audit of EastJet, a small

 

airline providing private charter service that began operations in 2007. The airline is owned by

 

Dave Wilson and Ron Joyce. The previous auditor has resigned because of poor health. You are

 

an audit senior with Carter & McLean and have been asked to work on the audit.

 

EastJet uses rented facilities at Halifax International airport. It has purchased three of its

 

airplanes and is leasing six other planes. It employs six pilots full time and has a database of

 

pilots that can be called if additional flights are required at any given time.

 

EastJet has done well since it began operations but Carter and McLean are concerned about the

 

profit for the first six months of this year. In addition, two of EastJet?s planes have been

 

grounded because of faulty electrical connections. The warranty has expired on these planes.

 

You held an audit planning meeting with Dave Wilson, Ron Joyce and Bill Carter, the partner.

 

You were provided with the interim financial statements for the first six months of the current

 

year along with the prior year audited statements (Appendix 1). Your notes for the meeting are in

 

Appendix 2. A junior accountant from your office has done work on the accounts receivables and property

 

plant and equipment. The work done is documented in Appendix 3. Required:

 

1. Perform the planning analytical review for the financial statements of EastJet, analyzing

 

the key movements. Include supporting calculations. (10 marks)

 

2. Using the audit notes that you took, identify the audit risks and explain how each audit

 

risk could result in a material misstatement in the financial statements. Design the audit

 

approach for each significant audit risk identified. Present your answer in a table with

 

column one identifying the risk and column two explaining the risk. (20 marks)

 

3. Calculate planning materiality for the 2016 fiscal year-end audit. Provide both

 

quantitative and qualitative analysis supporting your figure for preliminary materiality. (5

 

marks)

 

4. Evaluate the audit work done by the audit junior on the accounts receivable and property

 

plant and equipment and outline additional procedures that should be performed by the

 

audit team on future work in this area.(20 marks) Do Not Copy Auditing Project Fall 2016 5. Prepare the property, plant and equipment (PPE) audit program that will be used by

 

Carter & McLean accounting for the December 31, 2016, fiscal year-end audit of EastJet.

 

(20 Marks)

 

6. Discuss the importance of documentation in the audit file and identify which parts of the

 

audit file require documentation.(10 marks)

 

7. Assume the 2016 fiscal year-end audit of EastJet is completed and that Carter and

 

McLean Accounting has determined that the financial statements of EastJet are presented

 

fairly, in all material respects, except for the area of capital leases. Capital leases are

 

material. Your audit work indicated the two capital leases should be accounted for as

 

capital leases; however, EastJet did not want to do this. The amount is material but not

 

pervasive to the financial statements. Draft the expected audit report that will be issued

 

by Carter and Mclean Accounting for this engagement. Assume that the financial

 

statements of EastJet are prepared under one of the two general purpose accounting

 

frameworks used in Canada.(15 marks) Do Not Copy Auditing Project Fall 2016 Appendix 1: Extracts from management financial statements

 

Income statement Extracts Notes

 

Revenue 1 Six months ended

 

June 30, 2016

 

411,998 Operating Expenses 2 367,052 572,041 Other income and expense 3 (3,085) (6,654) 41,860 63,944 Income before tax Year ended December

 

31, 2015

 

642,639 Notes:

 

1. Revenue is evenly spread throughout the year.

 

2. Operating expenses include repairs and maintenance expense of property, plant and

 

equipment of 151,686 for the six months ended June 30, 2016 and 179,438 for the year

 

ended December 31, 2015.

 

3. The amount for the six months ended June 30, 2016 includes a loss on disposition of

 

equipment. Proceeds on sale of equipment was $22,500. Balance Sheet Extracts

 

Do Not Copy Auditing Project Fall 2016 Notes As at June 30, 2016 As at December 31, 2015 117,806

 

24,987

 

6,885 264,037

 

19,087

 

6,674 464,451

 

9,527 368,550

 

9,527 Total Assets 776,899 702,490 Liabilities and shareholders?

 

equity

 

Current liabilities

 

Accounts Payable

 

Advance ticket sales 101,844

 

103,316 86,250

 

86,427 129,225

 

26,700

 

361,085 107,651

 

27,310

 

426,432 13,125

 

171,898 13,125

 

148,743 776,899 702,490 Assets

 

Current Assets

 

Cash and cash equivalents

 

Accounts Receivables

 

Inventory

 

Non-current assets

 

Property, plant and equipment

 

Goodwill Non-current liabilities

 

Long-term debt

 

Maintenance provision

 

Total Liabilities

 

Shareholders? equity

 

Share capital

 

Retained earnings

 

Total liabilities and shareholders?

 

equity Notes to Financial Statements Do Not Copy 1

 

2 3 4 5 Auditing Project Fall 2016 1. Property, plant and equipment

 

Six months ended June

 

30, 2016 Year ended December

 

31, 2015 Cost

 

Opening

 

Additions

 

Disposals

 

Closing 608,182

 

153,750

 

29,863

 

732,069 611,931

 

130,111

 

133,861

 

608,182 Accumulated Depreciation

 

Opening

 

Depreciation expenses

 

Disposals

 

Closing 239,632

 

55,850

 

29,863

 

265,618 194,756

 

101,126

 

56,250

 

239,632 Net Book Value 466,450 368,550 2. Intangible asset - goodwill

 

Goodwill is stated at a cost of $9,526, and no impairment has been made to date.

 

3. Advance ticket sales relate to flights that have been booked for future dates.

 

4. Maintenance provision represents amounts accrued for leased planes that have been

 

returned at the end of the lease. The planes must be in a specific condition or the

 

company is charged the costs to bring the plane to the required condition.

 

5. Dividends paid during the six months to June 30, 2016 amounted to $27,790. Appendix 2: Notes from meeting

 

Dave Wilson and Ron Joyce explained that EastJet operates in a very competitive environment.

 

The economic downturn has resulted in fewer charter flights and airlines have been offering Do Not Copy Auditing Project Fall 2016 reduced rates to remain competitive. EastJet has been paying strict attention to cost controls and

 

have introduced a bonus for management that is based on the company?s profitability.

 

Recently two of EastJet?s major customers have gone into bankruptcy. There is $41,250 in

 

advanced ticket sales related to these customers.

 

EastJet held a manager?s retreat last month to think of ways to boost the business. The company

 

intends on offering an exclusive business class service for business customers such that they can

 

fly to and from a major city in the same day. This service will begin in the new year. EastJet is

 

optimistic that there will be an 80% uptake of seats on these flights that will be offered from

 

Monday through Friday.

 

One of EastJet?s planes was damaged as a result of a fire in the cockpit. Although the plane was

 

insured the insurance company is disputing the claim because the company did not meet safety

 

standards that were required in the industry. The cost of the damage is estimated at $105,000.

 

Because EastJet is anticipating additional flights in the new year, it will need to lease or purchase

 

additional planes. EastJet has begun discussions with a leasing company in regards to leasing the

 

planes. They expect the leasing agreements to be in place by year end. Appendix 3: Notes regarding the accounts receivable and property, plant and equipment

 

work performed by the junior auditor.

 

Accounts Receivables / Unearned Revenue Do Not Copy Auditing Project Fall 2016 When clients book charter flights, the flight is prepaid and the amounts are recorded in unearned

 

revenue. Once the service has been provided (the client takes the flight) the unearned revenue

 

related to the flight is transferred to revenue.

 

Large well established clients do not have to prepay and are invoiced for the amounts of the

 

flights. These represent the accounts receivable amounts on the balance sheet. The prior year

 

audit file indicates there were issues with accounts receivables in prior years - Eastjet had

 

accounted for unearned revenue as accounts receivable.

 

The junior accountant performed analytical review on the accounts receivable noting that

 

percentage of accounts receivable as a percentage of total assets was consistent with the prior

 

year. There were several credit balances in accounts receivable which the junior ignored. No

 

confirmations of accounts receivable were performed. The junior auditor concluded the accounts

 

receivable were fairly stated for the interim period. Property Plant and Equipment

 

Property plant and equipment represents the largest item on the balance sheet and represents the

 

planes that Eastjet owns as well as leased planes. They are separated in the general ledger

 

accounts. The junior auditor traced each item on the subsidiary ledger to the original invoice,

 

added the subsidiary ledger and agreed the total to the general ledger. Then the junior auditor

 

signed the working paper concluding that property plant and equipment was fairly stated for the

 

interim period. Do Not Copy

 


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