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Catalogue
1. Description of Qantas Airway Limited .......................................................................................... 1
A. Nature of revenue sources ................................................................................................... 1
B. Conduct of operations, Product and services ................................................................ 1
C. Market conditions & Competitions .................................................................................... 2
D. Regulatory environment ....................................................................................................... 2
2. PEST analysis...................................................................................................................................... 3
A. Political factors ....................................................................................................................... 3
B. Economic factors ................................................................................................................... 3
C. Social factors ........................................................................................................................... 4
D. Technical factors .................................................................................................................... 4
3. Audit Risk ............................................................................................................................................. 5
1) Audit risk on aircraft and engines on financial report level ............................................ 5
2) Audit risk on revenue received in advance account ......................................................... 6
3) Audit risk on revenue account ................................................................................................ 7
4) Audit risk on fluctuation of foreign exchange rate ............................................................ 8
4. Impact of Grounding on audit planning ....................................................................................... 8
1) General impact ............................................................................................................................ 9
2) Customer recovery initiatives ................................................................................................. 9
3) Industrial Action........................................................................................................................ 10
Reference: .................................................................................................................................................... 1


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1. Description of Qantas Airway Limited
A. Nature of revenue sources

Source: Annual report for the financial year ended 30 June 2011 of The Qantas Group.
Passenger and freight revenue is measured at the fair value of the consideration
received, net of sales discount, passenger and freight interline/IATA commission and
Goods and Services Tax (Qantas Annual Report, 2011).
B. Conduct of operations, Product and services
Founded in the Queensland in 1920, Qantas has grown to be Australia's largest
domestic and international airline. The main business of Qantas Groups is the
transportation of passengers using two complementary airlines, Qantas and Jetstar,
operating international, domestic and regional services. In addition to the core
business of transporting passengers and air freight, Qantas operates a number of
wholly owned subsidiaries as followings:
QantasLink operates over 2000 flights each week to 56 metropolitan, regional and
international destinations across Australia and to Papua New Guinea.
Qantas Catering Group Limited operates two catering businessesQ Catering and
Snap Fresh. Q Catering has catering centres in six Australian ports. Snap fresh built in
Queensland to centralise meal production for airlines non-aviation markets.
Qantas Freight not only markets the freight capacity of all international Qantas,
Jetstar and Jetstar Asia aircraft but also operates its own ground handling facilities in
Sydney, Melbourne, Brisbane, Perth and Los Angeles.
Express Ground Handling provides comprehensive ground handling services to
Net passenger
revenue
81%
Net freight revenue
5%
Other
14%
REVENUE AND OTHER INCOME
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Jetstar and several regional airlines.
Qantas Holidays, part of the Jetset Travelworld Group wholesale suite, is one of
Australia's leading travel wholesalers.
Jetstar is Australia's and Singapore's low fares airline for Australia and Asia-Pacific.
Jetstar's Australian operation is wholly owned by Qantas.
C. Market conditions & Competitions
The Qantas Groups main business is the transportation of passengers using two
complementary airline brandsQantas and Jetstar.
Qantas group retains a 65 per cent share of the Australian domestic market and
carries 18.7% of all passengers travelling in and out of Australia.
In the domestic market, Qantas is more focused on the business market, where there
is not any strong market competitor. However Qantas is trying to control the budget
airlines through the introduction of Jetstar, where Virgin Blue and Tiger Airways could
be seen as competitors.
In the international market, Qantas faces a number of competitors, such as Singapore
airline which is its major competitor, Emirates and other more up-market airlines.
D. Regulatory environment
The regulator of aviation safety and security in Australia is the Civil Aviation Safety
Authority (CASA).
The International Air Transport Association (IATA) Operational Safety Audit
Certification requires Qantas to be subject to frequent external audits and assessed
against stringent standards. In addition, comprehensive internal audit programs
underpin ongoing compliance and oversight of safety performance.
The Qantas risk management and internal control system aligns with the AS/NZS ISO
31000:2009 principles included in the Australian/New Zealand Standard on Risk
Management () and the Committee of Sponsoring Organisations of the Treadway
Commission (COSO) framework for evaluating internal controls.
Financial statements are prepared according to the Corporations Act 2001,
Accounting Standards and Interpretations, and other requirements of the law.
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2. PEST analysis
A. Political factors
1) Carbon tax
After long debating, carbon tax is adopted in an increasing amount of countries. From
January 2012, a carbon price which estimated to be 15% of the emissions generates
from services to and from the EU will be charged. Domestically, from July 2012, a
fixed carbon price of $23 per ton will be introduced by Australian government
(QANTAS Annual Review 2011). All these will be passed to passengers and have
negative effects to the aviation industry.
2) Passenger movement charge
Passenger movement charge was increased by $9, to $47, with effect from 1 July
2008, which increased the cost on international flight (Commonwealth of Australia
Explanatory Memoranda 2008)
i
.
B. Economic factors
1) The growth of Asia-Pacific
The Asia-Pacific is now the worlds fastest-growing region for air travel demand, which
comes from air cargo market and passengers, as the region's economies continue to
expand. Boeing has forecasted that air traffic in the region will grow by 6.7% per year
during the next 20 years, as a result of which the region's carriers will order planes
worth $1.5 trillion over the same period (BBC News, 2012)
ii
. The Qantas Group must
capitalise on the opportunities which Asia-Pacific presents as well as position strong
brands and portfolio strategy in this highly competitive market.
2) The escalation of fuel prices
Fuel is one of the most important inputs in aviation industry. However, the global fuel
price has been rising significantly during recent years. According to the Index Mundi
2012, the Brent Crude Oil price has increased from US$40 per barrel in late 2008 to
over US$120 per barrel by 2012
iii
. At current prices, jet fuel prices are close to the
tipping point for airline profitability and it is doubtful whether the market is sufficiently
resilient to absorb much more in the way of higher fares (Airline Leader, 2012)
iv
. Even
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fuel surcharges, fare increases and hedging are unlikely to fully offset this cost
increase.
3) The fluctuation of foreign exchange
Australian aviation industry heavily relies on import. Although the prices for factors
associated in airline service, including fuel, aircraft and spare parts, are extremely
high, the appreciation of Australian dollar over the past 5 years decreased costs in
aviation industry. Recent fluctuation of Australian dollar takes serious toll on airline
companies.
C. Social factors
1) Migration country
As an ocean surrounded migration country, a huge portion of Australians hometown
visit plans rely on international flights, which lead to a greater demand of international
flights than other countries. This demand is enlarging with the growing number of the
immigration population (Australian Bureau of Statistics 2011)
v
.
2) Increasing popularity of international business and tourism
A booming international business and tourism needs is forming under globalization
(Australian Bureau of Statistics 2012)
vi
. What accompanies with that is increasing
demand of international flights. Evidence can be found in the latest statistic of
Australian government (BITRE2012)
vii
.
D. Technical factors
1) Maturation of internet and mobile website
Internet plays an indispensable role in contemporary airline service. A well-designed
online booking and check-in system could provide inestimable value to customers. In
addition, a mobile website allows customers to create new bookings, change existing
bookings and check flight status more conveniently.
2) Faster and smarter airport facilities
More simplified and convenient facilities have been introduced to airports all around
the world, such as self-serve check-in facilities, permanent bag tags and automated
bag drop facilities. The availability of faster and smarter airport facilities can not only
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save time for customers, but also reduce costs for airline companies.
3. Audit Risk
1) Audit risk on aircraft and engines on financial report level
The net value of Aircraft and engines is approximately AUD10, 462 million which is
76.7% of the total Plant, property and equipments net value in 2011. The table below
briefly describes what we concern on these items.
Audit Risk Key Account Key Assertion
Misstatement of the value of
Aircraft and engines
Total Aircraft and engines V+A
Difficulty in physically inspect (related account Aircraft and Engines owned &
Aircraft and Engines finance leased)
Scattered locations may cause trouble for auditors to physically inspect the existence
of aircraft and engines as they may well exist in documents but actually have been
disposed.
Diversity of aircraft would give rise to the risk of manipulation or misstatement.
(related account Accumulated Depreciation)
There are different types of aircrafts and engines in Qantas with different service life,
fair values and different methods for impairment testing. Although Qantas uses
straight line method to calculate depreciation for simplicity, there is still a big chance
for accountants to miscalculate the depreciation and the carrying amount of aircraft
and engines. For a single aircraft the amount might be immaterial, however, the
accumulation of miscalculation could give rise to materiality.
Complication for auditors to audit the maintenance costs. (related account
maintenance of aircraft and engines)
Modifications that enhance the operating performance or extend the useful lives of
airframes or engines are capitalised and depreciated over the remaining estimated
useful life of the asset.
viii
There is a significant risk of whether the capitalised
amounts judged by the expert reliable or not, as the auditors are 100% responsible for
relying on the independent experts work.
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2) Audit risk on revenue received in advance account
Qantas Frequent Flyer (hereafter referred to as QFF) is a leading coalition loyalty
program in Australia. Members of QFF could accumulate points with Qantas as well
as its partner airlines and spend them on flights or a range of other goods and
services. According to the Notes to the Financial Statements of Qantas Group,
Revenue received for the issuance of points is deferred as a liability (revenue
received in advance) until the points are redeemed or the passenger is uplifted, in the
case of Qantas Group flight redemptions (Qantas Annual Report, 2011).
Audit Risk Key Account Key Assertion
Risk on misstatement of the
obligation arising under the
Frequent Flyer program
Revenue Received in Advance Completeness
QFF contributes to most part of Revenue Received in Advance account of the Qantas
Group (a total amount of $1,858 million in both current and non-current revenue
received in advance in 2011). Failure to redeem the points from the passengers is a
business risk which may damage the reputation of the company.
The complexity of the QFF program may lead to the material misstatement of the
Revenue Received in Advance account. First of all, members can accumulate points
in many ways, as a result of which there would be a risk for the omission of the
transaction which has been authorized by the system and can earn new point.
Therefore, the omission will have a great impact on the amount of the revenue
received for the issuance of points and eventually affect the balance of the Revenue
Received in Advance account. Besides, the level of membership may range from
bronze to platinum which means that revenue received for the issuance of points
would be quite different between levels. Thus, there would be a risk that some
members might be omitted or temporarily understate their membership level at the
balance date when they level up their membership with QFF, which may eventually
lead to the understatement of Revenue Received in Advance account. Furthermore,
due to the complicated of the QFF program, it requires the auditors to understand the
process of the program, acquire professional knowledge of the IT system and the
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method of calculating revenue received in advance based on the accumulated points
which all increase the possibility of the failure to detect the misstatement of the
Revenue Received in Advance account.
In conclusion, as the Revenue Received in Advance is one of the primary liabilities of
Qantass Group, the QFF program should be audited carefully. Considering the risk
mentioned above, the key assertion should be completeness.
3) Audit risk on revenue account
The airline industry operates under the concept of delayed revenue. Typically, airlines
collect payments for airfare before they deliver the purchased services. The basic
principle that revenue should only be recognised when transportation is provided is
well established, reflecting the application of the accruals basis (Akers, 2011)
ix
.
Audit Risk Key Account Key Assertion
Revenue manipulation risk Net passenger revenue Occurrence
When Qantas receives payments for services that it has not yet delivered, it should
recognise its liability as unavailed passenger revenue (revenue received in advance)
for the amount of the payment, which means the company still owes its customers
services. Recording the same amount under both cash and unearned revenue
ensures that the company balances its assets and liabilities. As a consequence, it is
possible that the payment is received in previous accounting period but the revenue
cannot be recognised until the next period.
The company should not recognise revenue until the service is actually provided.
However, in order to window dress the revenue for the current period, the company
has an incentive to recognise the payment as revenue when it is received rather than
when the customer boards. Furthermore, cancellations are always a possibility with
the purchase of airline tickets and the company may need to refund customer
payments. If the company recognises revenue when receiving payments and does not
write off the revenue when the cancellations happen, the revenue account will be
overstated.
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4) Audit risk on fluctuation of foreign exchange rate
The fluctuation and the volatility in the currency exchange market have great influence
on Qantas Group because the purchase of fuel, aircraft and leasing costs are
primarily paid in US dollars. The company use derivative instrument such as forward
contracts to mitigate the risk of inaccurate payments and hedge the risk of future
exchange rate fluctuations. However, the recognition and measurements of hedging
instrument could be highly risk. Qantas have a significant decrease in other
comprehensive income from 101 million gains in 2010 to 33 million loss in 2011,
almost 53.82% of the statutory profit for the year 2011.
Audit Risk Key Account Key Assertion
Misstatement of Other
comprehensive income
Other comprehensive income Accuracy
When the company enters into purchase contracts, the hedging instruments are
initially measured at fair value at the same date, and are subsequently re-measured
as their fair value at each reporting date. Any gain or loss proportion of the hedge,
which initially deemed as being effective, will go to equity as other comprehensive
income rather than profit or loss. In the future, the amounts recognized in equity
relative to hedging instrument shall be transferred to profit or loss in the same period
as the cash flows on the hedged item occur
x
. These complicated procedures need
quite a high level of knowledge to implement. There will be a great chance that
company may fail to comply with the requirement, which will lead to the misstatement
of the other comprehensive income. As a result of the complicities, there is also a risk
for the omission of the hedging transaction, which has been authorized properly. Also,
there is a risk that the company may manipulate the profit through the fluctuation of
foreign exchange rate, which is not allowed by the accounting standard. Thus, by
considering the risk of failing to comply with the accounting standard, omission of the
transaction and the incentive to manipulate the profit, the key assertion should be
accuracy.
4. Impact of Grounding on audit planning
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1) General impact
A series of event happened in the second half of 2011 exposed a number of problems
of corporate governance, which lead to a higher business risk. Therefore, the reliance
of internal control should be adjusted; business risks should be reassessed; the
materiality of audit risk should be revaluated.
2) Customer recovery initiatives
Aviation industry is highly competitive and customers value a lot on punctuality of the
flight; therefore, failing to do so will result in loss of market share. Qantas act very
positively on customer relationship management upon this issue.
Respond 1
Anyone whose Australian flight was cancelled because of the grounding between
October 29 and October 31 is eligible for a return domestic flight (Qantas 2012)
xi
.This
response can recover Qantass reputation in some degree, thus decrease the
business risk. However, the account of provision and expense is very likely to be
undervalued. Those free tickets can be redeemed in flexible time (customer can take
the flights any time before 14 December2013) and flexible destination. Therefore, the
value of the provision account relies heavily on estimation. Since there are incentives
for Qantas to manipulate profit in crisis, this response brings audit risk.
Response 2
Up to a total value of AUD 350 per person per day may be reimbursed by Qantas to
customer with cancelled flights as a direct result of the grounding (Qantas
2011)
xii
.This response can also decrease the business risk of losing market share.
The materiality of the audit risk depends on whether Qantass insurance covers this
issue and the extent if it covers.
However, there are still a number of actions against Qantas, which may lead to a huge
amount of liability or contingent liability. The audit risk exists in the valuation and
allocation of liability and contingent liability. These can also raise high business risk,
such as going concern raised by shot of liquidity, and further damage of reputation.

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3) Industrial Action
As a union action the ultimate subject was nothing but employment issue. One of the
result is a large amount of employment contract was renewed with more benefit for
employees (Steve O'Neill 2012)
xiii
. Another is that Qantas cut 500 jobs to recover from
the action (Jessica Wright 2012)
xiv
.
First, the renewed contracts result in higher cost base and further enlarge the cost
difference between Qantas and industry average, where the former already has a
relative poor performance. This is a significant business risk because Qantas can
either decrease the profit margin or charge customer, both of which will lead to lower
profit.
Audit risk also exists associated with the renewed contracts. As a result of the
bringing in of more employee benefits, employee benefit cost (in profit & loss
statement) and long service leave (in balance sheet) may be undervalued.
The job cut have more effect than those contracts. Firstly, it can reduce cost to some
extent, but the compensation is huge and many of which have complex terms;
therefore, Compensation cost and Provisions for termination benefits may be
undervalued. Secondly, it is a shock on corporate culture, and has negative impact on
employee loyalty. Therefore, the long service live may be overvalued. Last but not
least, a high employee turnover undoubtedly will lead to higher cost and down grading
of the safety level of flight, as a result, the provision maybe undervalued as one of the
sequences. Actually, in half year report Qantas did adjust the estimation index: the
discount rate was adjusted higher resulting in a 9 million decrease in the total of
compensation and long service leave, which shows that they are trying to hide the
effect on Profit and Loss statement.
An aggressive operating style is also shown in the action of job cut, which implies
higher risk of profit manipulate.
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Reference:

i Commonwealth of Australia Explanatory Memoranda 2008, PASSENGER MOVEMENT CHARGE
AMENDMENT BILL 2008, viewed 8 April 2012,
http://www.austlii.edu.au/au/legis/cth/bill_em/pmcab2008341/memo_0.html
ii Boeing forecasts $1.5tn growth for Asia-Pacific market 2012, BBC News, viewed 17 April 2012,
http://www.bbc.co.uk/news/business-17008827
iii Crude Oil (petroleum); Dated Brent Monthly Price - US Dollars per Barrel, Index Mundi, viewed 17 April
2012, http://www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=60
iv Rising fuel prices: the constant sorrow of the airline industry 2012, Airline leader, viewed 17 April 2012,
http://www.airlineleader.com/this-months-highlights/rising-fuel-prices-the-constant-sorrow-of-the-airline
-industry
v 3412.0 - Migration, Australia, 2009-10, Australian Bureau of Statistics, viewed 8 April 2012,
http://www.abs.gov.au/ausstats/abs@.nsf/Products/83C762F4BB0D22FECA2578B00011968B?opendocu
ment
vi 3401.0 - Overseas Arrivals and Departures, Australia, Feb 2012, Australian Bureau of Statistics, viewed 8
April 2012, http://www.abs.gov.au/ausstats/abs@.nsf/mf/3401.0/
vii International airline activity, The Bureau of Infrastructure, Transport and Regional Economics (BITRE),
viewed 8 April 2012,http://www.bitre.gov.au/statistics/aviation/international.aspx
viii Qantas annual report, Qantas, viewed 15 March 2012, http://www.qantas.com.au/
ix Akers, H 2011, What is delayed revenue, ehow, June 10, viewed 21 April 2012,
<http://www.ehow.com/info_8576519_delayed-revenue.html>
x Deegan, C 2009, Australian Financial Accounting, 6th edn, McGraw-Hill Irwin
xi Qantas free flight offer, Qantas, viewed 15 April 2012,
http://www.qantas.com.au/travel/airlines/fly-with-us/au/en
xii Form for expense claims arising from the grounding of Qantas Flights, Qantas, viewed 15 April 2012,
http://www.qantas.com.au/travel/airlines/refund-form-disruptions-flight-grounding/global/en

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xiii Steve O'Neill 2012, The gods must be crazy: chronology of and issues in the Qantas industrial dispute
2011, Parliament of Australia, 23 January, viewed 15 April 2012,
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/
2011-2012/ChronQantas
xiv Jessica Wright 2012, Jobs take centre stage after Qantas announces 500 to go, National Times, 16
February, viewed 15 April
2012,http://www.nationaltimes.com.au/opinion/political-news/jobs-take-centre-stage-after-qantas-anno
unces-500-to-go-20120216-1taen.html