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Audit plan are prepared to determine the reliability and relevance of financial information in related to a company as a whole (Leung et al. 2007). The purpose of the auditing plan is to ensure all financial information gathered is free from bias and materiality errors (Thomas 2008). Therefore,Â this auditing plan is to ensure all potential audit risks and problems areÂ detected andÂ make sure the boards are given proper attention andÂ respond (Pine 1998).Â In Melbourne Airport annual report, we areÂ taking into considerationÂ five key risk areas which are Aeronautical Revenue, Property Plant and Equipment, Staff Costs, Investment Property and Other Financial Liabilities. The reasonsÂ we choose these 5 key risk area are comparative material in past 2010 financial year.Â Therefore, auditor may not able to identify all the risks in an organisation but auditor should be thoughtful regarding to the entity and its business activities before engaging in an audit review (Leung et al. 2007).
Terms ofÂ Audit EngagementÂ
We are consulting for the first time audit with Melbourne Airport which made us a new auditing engagement. Therefore, an engagement letter should be prepared for the part of the auditing plan.Â Further, this engagement letter will be must be reviewed by the member ofÂ Melbourne Airport and communicate by both parties to ensure all the elements of auditing planning will carries in a proper way as it relate to the entity, development of internal control, and searching of the materiality.Â
In this case,Â an engagement letter has been communicated by the auditor and member of Melbourne Airport. It is also give authority to auditor to review the key area in conducting an audit plan. Moreover, the total audit fees of $180,000 also agreed by the member of Melbourne Airport in engagement letter. These fees are based onÂ considering theÂ time, and material need to setting up an audit plan.Â
Australia Pacific Airports Corporation Limited (APAC) is an unlisted company that own two airports which are Melbourne Airport and Launceston Airport. We currently have chosen this company to do the audit plan. Besides that, we will follow the ASA 200 Objective and General Principles Governing an Audit of Financial Report standard to determine whether our professional adjustment is well prepared (AuASB 2007, ASA200, para 5). Furthermore, we should reduce audit risk to the reasonable level with the efficient and effective manner which required by ASA 300 Planning an audit of a Financial Report (AuASB 2006, ASA 300, para, 5&6). According to Gay and Simnett (2010), there are four steps to do audit plan which are; First, understanding the Melbourne Airport organisation and their environment. Second, understanding the internal control of Melbourne Airport. Third, assessing the risks of material misstatement, and lastly is developing responses to assessed risk.
A.) Understanding the entity and its environment
By referring to ASA 315.26, understanding the entity mean the auditor have to understands its nature, industry, regulatory, objectives and strategies in relating to their business risk (AuASB 2011). Therefore, there are significant areas that an auditor has to recognise for the client (Melbourne Airport) which are; identify the industry condition, regulatory and its framework and the external factors affecting the entity.Â Therefore, it is very important for the auditor to understand the Melbourne Airport conditions as any events and transactions that occurred maybe possibly affect the material misstatement or bias which could affect the year-ended financial statement to make more favourable to investor. Further, ASA 315.5 stated that the auditors need to obtain the information of the entity background and understand the risk of materiality misstatement (Leung et al. 2007). Therefore, after the first step of audit plan which is understand the entity, auditor can obtain an unbiased judgment and understanding of occurred transaction within the entity.Â
Melbourne Airport isÂ aÂ Victoria'sÂ aviation gateway also known asÂ TullamarineÂ Airport, Melbourne. It is a main airport and serving as international airport compare of fourÂ airportsÂ in Melbourne (Australia Pacific Airports Corporation 2010).Â For 40 years serving since 1970 year, Melbourne Airport is now Australia primary aviation gateway. In addition, Melbourne Airport is also administrated by diversely by corporate and the federal government. It is owned and operates by the APAM (Australia Pacific Airport Melbourne Pty Limited) which is owned by APAC. APAC is a privately held corporation owned by institutional investor like superannuation funds (Australia Pacific Airports Corporation 2010).Â Further, itÂ is also operated by the Federal governmentÂ underÂ 50 years long term lease.
The impact of economy factor to Melbourne Airport is considered in three different levels which are at the national levels, local and state. This is because it would be affected by its competitive positionÂ (Australia Pacific Airports Corporation 2010). Melbourne Airport also defined as the activity of business and other government operation within the area of Melbourne Airport. For example, transport operation in Melbourne airport are concerning with freight forwarder, there are also various government services such as customs and polices operating within the airport and other activities located at airport such as retail outlets, car rental operation in the airport precinct.Â
Legislation and RegulationÂ
Melbourne Airport is a leased federal airport and all leased federal airport are governed by Commonwealth Act and relating to airport leases Division 2-8 of Airport Act 1996 (Australia Pacific Airports Corporation 2010). Therefore, Melbourne Airport rules and procedures are subjected to leased federal airport. There are also certain regulation whichÂ Melbourne airport isÂ linked furthers regulation such asÂ environment regulation which is subjected to practice Airport Act 1996 and Airports Regulation 1997 (Australia Pacific Airports Corporation 2010). Besides that, it serves the purpose of the airport operators are required to maintain their responsibility of protecting environment which also ensure everyone who working at the airport have to be aware of their environment obligations. From the result of Melbourne Airport Annual Report (2010), it shows that the Boards are satisfied with the results of environmental which conducted by internal and external specialist during year ended June 2010. This shows that Melbourne Airport is compliance with the Acts and Regulations and operates in positives manner.Â
Moreover, Melbourne Airports is also subjected to Airport regulation 1997 such as restriction on the ownership and control of the infrastructure within airport. The purpose is to maintain services and responsibilities for all activities operated. Others regulation such as Building Control Regulation 1996 must be approved by Airport Building Controller (ABC) which appointed by Commonwealth Law to administer the building control regime (Australia Pacific Airports Corporation 2010). Therefore, all activities from Melbourne Airport must beÂ soughtÂ for approval from ABC for a planning and operational outlook.Â
Melbourne Airport is practicing with the financial reporting framework. Melbourne airport financial report is general purpose financial report in accordance with the corporation law and applicable Accounting Standard. In addition, they are also practicing going concern method. This is because the director of Melbourne Airport believes that the parent entity and economic entity are going concerns based on the future operating cash flows and finance facilities (Australia Pacific Airports Corporation 2010).
B.) Understanding internal controlÂ
According to ASA 315.52, theÂ auditorsÂ need to gainÂ understanding of an organisationÂ internal control structure (AuASB 2011).Â It is because aÂ well-organised internal control system will make the auditor's job easier in making the audit plan (Leung et al. 2007). An organisation could lower their control risk if they have a well-build internal control system. Based on ASA 315.55, there are five components in the internal control which are;
TheÂ audit committee and Board of directors
Melbourne Airport consists of chairman, managing director and chief executive officer, directors and secretaries (Australia Pacific Airports Corporation 2010). Furthermore, this company does not have any audit committee since the Board believes that according to the nature, level, size and the experience of each member from your organisational. Besides that, audit committee have to contain non-executive director. Therefore, the board is responsible for any activities of the audit committee.
The company has several numbers of directors' meetings which are three audit and risk management meetings, seven board meetings and three safety, security, and environment meetings. Moreover, the board and management need to understand its business transactions and check whether the financial report gives a true and fair view as there is no audit committee in this company (Gay & Simnett 2010)
Furthermore, Melbourne Airport has also adapted Risk Management policyÂ (Australia Pacific Airports Corporation 2010). The board is constantly observing the company operational and financial characteristic of the Melbourne Airport behaviour. As there is no audit committee in this company, theÂ board isÂ constantlyÂ taking into their account advicesÂ on the limitation of the risk of Melbourne Airport.Â
Moreover, the board must ensure that all advices given by auditor and external adviser are investigated and appropriate action is taken so the company has a suitable internal control environment in place to manage the risks which are encountering.Â In addition, the board studies ways of enhancing existing risk management strategiesÂ (Australia Pacific Airports Corporation 2010). For example, theÂ board adapts segregation of duties, providesÂ highly professional employment and trainingÂ of suitable and qualifies staff,Â in conjunction with advices of the auditÂ committee and review the scope and work program of internal audit.Â
As to ensure the company has operate in the efficient and effective manner, there are some improvement in the operational systems and processes such as installing new permanent way finding signage system, announcements in new language (Mandarin) and providing security and operational screening staff (Australia Pacific Airports Corporation 2010).
As Melbourne airport does not have Audit committee, the company will have a high possibility of incurring a fraud or an error in their financial statements. Not only that, the board may have a conflict of interest with the management during the business (Australia Pacific Airports Corporation 2010). This company need to have performance review in order to evaluate the member performance as well as the Board performance.
As there is no audit committee, the Board is responsible for the role of audit committee. Therefore, the Board and the management take the responsible and control for reviewing the effectiveness of internal control. Besides that, they are also requiring to revaluate the relationship between we as external auditors and internal auditors which required for improving the quality of internal control (Australia Pacific Airports Corporation 2010).
C.) Assessing the risks of material misstatement
Analytical procedures can be defined as the evaluations of financial information through the analysis of reasonable relationship between both financial and non-financial data (Eilifen et al. 2010). Based on ASA 520, Analytical procedures can be used as a substantive audit procedure. It also involves trend analysis, operating statistics and ratio analysis for the comparison with external and internal data. This process can be used to help auditor to identify areas requiring audit attention as well as to determine the extent, timing and nature of audit procedures.
According to the APAC Annual Report (2010), we have found five key risk areas which are; aeronautical revenues, staff costs, property, plant and equipment, investment property and other financial liabilities. Furthermore, each of these key risk areas can be assessed by using the audit risk model to determine the risk level of material misstatement (Gay and Simnett 2010). Audit risk contains three components that are control risk, inherent risk and detection risk.
The first key risk area is aeronautical revenues. According to appendix 1, aeronautical revenues have increased by 7.60 percent or $ 15,380,000. The inherent risk of this account is high as there is a probability of material misstatement. The amount of aeronautical revenues in the annual report is combined with the amount of security. But in the financial statement, the amount of aeronautical revenues and security are written separately. This shows that the control risk for aeronautical revenues is high because there is a high possibility of fraud and error. Hence, the detection risk of aeronautical revenues will be low as well as audit risk.
The second key risk area is staff costs. The increase amount of $ 2,813,000 or 11.15 percent in the staff costs as at 30 June 2010 (Appendix 1). The control risk for staff costs account is high because there is no note provided about staff costs. This shows that this company has a possibility of fraud and error in the financial statement. Furthermore, the inherent risk of this account is also high as there is a possibility failed in the company project such as a staff accommodation project and staff feedback on business operation. For example, the company may not receive a good respond from staffs regarding their projects. Hence, the audit risk and detection risk regarding the staff costs will be low as the control risk and inherent risk are high.
Property, Plant and Equipment
Another key risk area is property, plant and equipment. This account has increased by 10.02 percent or $ 108,592,000 as at the end of June 2010 (Appendix 2). This means the company has high inherent risk as depreciation and capitalise is required for the fixed assets. Furthermore, the control risk is also high as the useful lives and residual values of the assets will be reviewed for any adjustment required at the end of financial year. Not only that, the directors also decided not to use the revaluation model in the financial statement. This will makes the value of property, plant and equipment lower. Besides that, the accounting policy may content error and fraud. Thus, the audit risk and detection risk for property, plant and equipment will be low.
The next key risk area is investment property which has increased by 1.43 precent or $ 12,489,000 as at 30 June 2010 (Appendix 2). This account has increased because the company team which is Melbourne Airport Property Team has performed well with the capital value growth up to 1.5 precent and income up to 3 precent. Therefore, the inherent risk for this account is high and the control risk is also high as the willing parties can exchanged their properties in an arm's length transaction based on the location of the property. The high control risk and high inherent risk are result in low audit risk as well as low detection risk.
Other Financial Liabilities
The last key risk area is other financial liabilities. The decrease in other current financial liabilities by 13,398,000 or 98.99 precent as at the 30 June 2010 which shows that the company has high inherent risk as there is a high possibility risk of material misstatement (Appendix 2). The control risk of this account is also high as there is a possibility that the consolidated entity cannot pay the interest rate swaps. As there is a significant reduction in fixed interest rate, the value of other current financial liabilities is also fall. As a result, the audit risk and detection risk regarding other current financial liabilities will be low.
D.) Developing responses to assessed risks
The control risk of aeronautical revenues of Melbourne Airport is high. Therefore, the lower assessed level of control risk approach will be applied to this account.
Lower assessed level of control risk approach
Trace a sample of transactions from revenue journal and check for the appropriate authorisation.
Review the revenue account whether all evidence of control of accounting is recorded properly.
Check a sample of transactions whether has been recorded in the correct grouping.
As the control risk of staff costs is high, the predominant substantive test will used for this account.
Predominant substantive approach
Verify whether the staff costs account is recorded correctly.
Check the period of the staff costs account accurately.
Ensure all staff costs are properly recorded in the right grouping.
Property, plant and equipment
As the control risk of property, plant and equipment is high, the predominant substantive approach will be used for this account.
Property, plant and equipment
Predominant substantive approach
Check each sample of the property, plant and equipment whether they exist.
Review whether all capitalised costs are recorded correctly.
Check whether analytical procedures are applied to the depreciation rate of Melbourne Airport's financial statement correctly.
Valuation and allocation
The control risk of Melbourne Airport for investment property is high. Hence, the predominant substantive approach will be used as audit strategy for this account.
Predominant substantive approach
Check whether the loans and advances exist.
Review the general procedures whether all the property investments are correctly recorded in the Melbourne Airport's financial statement.
Trace the investment property amount whether properly valued in accordance with the accounting standards.
Valuation and Allocation
Other financial liabilities
Melbourne Airport has high control risk for other financial liabilities account. So, the predominant substantive approach will be used for this account.
Other financial liabilities
Predominant substantive approach
Trace and check whether the transactions exist in both the balance sheet and income statements.
Review the general procedures to check whether there are similar legal and obligations.
Rights and Obligations
Trace and recalculate the account balance whether are recorded in proper amounts.
Valuation and Allocation
As a result, we have reviewed your organisation by understanding the internal control and the environment of your organisation. We use both audit strategies and materiality to determining the audit plan. From the audit plan, it can see clearly that your organisational control is not effective as it has a high control risk. Therefore, we use predominant substantive approach for all potential risks except for aeronautical revenues.
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