Auditing Project: Audit of EastJet

Student Name

Professor Name

Course title

Institute
Question No. 1

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

movements. Include supporting calculations.

After analytical review of Income financial Statements following are some points found in

suspicious in the financial statements:

 The revenues for the six months are more than 64% of the revenues last year. This figure

is against the expectations as the notes from meeting say that due to economic downturn

the company is struggling with its cost cutting and reduced prices. It was expected that

the revenues were less than 50% rather than more. It is suspected that the revenues are

inflated by the management in order to increase their remuneration as the remuneration is

attached with the profits of the company. So in this audit, the revenues will be cross

checked with the individual customers.

 The disposal of asset for $30000 is not represented separately in the disposal income or

other comprehensive income. It is also suspected that this income is added in the

revenues to make the revenues inflated in order to increase their remuneration as the

remuneration is attached with the profits of the company as described in the meeting.

 Cash and cash equivalent account has shown more than 55% decrease from the last year.

This amount is very huge. There is a suspicion that the management has increased the

credit sales against company policy or beyond the limits in order to increase the sales and

revenues so that they can increase their remunerations.

  Account receivables have also increased by more than 30% which is also one of the

evidence that the management has increased the credit sales to a great extent in order to

increase their remunerations by inflating the sales.

 The current ratio has been reduced to less than half in the last six months which is creates

a suspect that there is high increase in the current liabilities. The increase in the current

liabilities may be as a result of the decreased cash and cash equivalent and increase

current liabilities because of the intention of the management to increase production and

sales so that they can increase their remuneration.

Question No. 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.

Risk Identified Explanation

Profit linked bonuses Management has attached

remuneration of the

management with profits. It is

the risk that the management

will intend to inflate the

profits and revenues or make

the decisions that increase the

 profits in short term even if

there is loss to company in

long term.
Existing long term debt The long term debt has

increased more than 20% in

last six months which could be

a risk for the company as the

long term loan is increasing.

This presents challenge for the

auditors.
Economic Down turn As said in the meeting there is

chances of economic down

turn which may cause

problems to the company in

near future. So the company

has risk of facing problems.

Problem in Receivable The account receivables have

collection increased by 30% in the last

six months which is worry and

there is a risk of bad debts or

problems in collection of

receivables.
Problem in recovery of One of EastJet’s planes was

insurance 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.

Question No. 3

Calculate planning materiality for the 2014 fiscal year-end audit. Provide both quantitative and

qualitative analysis supporting your figure for preliminary materiality. (5 marks)

Planning Materiality Planning Materiality

Calculation
0.8% of revenues $4394.64
So, any amount greater than $4394.64 is the planning material amount and it should be corrected

or it will cause a qualified audit opinion. Following are some qualitative and quantitative

analysis for supporting the preliminary materiality:

 Any amount of misstatement that is greater than $4394.64 will lead to changes in trend

especial trend in profitability.

 Any amount greater than $4394.64 may change the losses into profits or profits into

losses which may affect the opinion of the users of the financial statements.
  Any misstatement that amounts to $4394.64 in the profits or revenues will have impact

on the remunerations of the management as the bonuses are linked with the profits.

Question No. 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)

The audit work done by the junior auditors is satisfactory but there are some issues that

need to address by adopting some additional procedures that the audit teams should perform in

future work in these areas. Following are some points of evaluation of the work done by the

junior auditors:

 The junior auditors have done well by conducting an analytical review of the account

receivables and found that the accounts are consistent as percentage of total assets. But

they haven’t crossed check it with the trend analysis as the trend analysis tells that there

is more than 30% increase in the account receivables which is also one of the evidence

that the management has increased the credit sales to a great extent in order to increase

their remunerations by inflating the sales.

 The auditors did not conduct a confirmation of account receivables which could result in

fake entries of account receivables.

Following are some additional procedures that the auditors should do in conducting the audit in

this area in future:

 The auditors should cross check the amounts with trend analysis in order to check

whether there are any abrupt changes in the trends.

 A confirmation of the account receivables and other accounts should be done in order to

confirm that these accounts are real and the amounts presented in these accounts are

correct and not misstated.

Question No. 5

Prepare the property, plant and equipment (PPE) audit program that will be used by Carter &

McLean accounting for the December 31, 2014, fiscal year-end audit of EastJet.

(20 Marks)

AUDIT PROGRAM FOR PROPERTY, PLANT AND EQUIPMENT

Name of the client

Audit Date Staff In-Charge Audit In-

Charge .

OBJECTIVES OF AUDIT:

The audit has the following objectives:

 Investigate whether the property, plant and equipment that is included in the balance

sheet is physical existent or not. Also weather the additional capitalizable cost are

removed or not.

 Determining that the property, plant and equipment all include capitalizable costs and

these costs are not expensed.

 Determining that weather the company has the legal title to the property, plant and

equipment or not.

 Determining that the property, plant and equipment are stated at the cost and all the

allowance, depreciation etc are calculated on consistent methods and also accept

methods.

AUDIT PROCEDURES Done Date WP Remarks

by Ref.

1. Prepare a summary of transactions related to

the property, plant and equipment.

2. Conduct or obtain the analysis of the

accumulated depreciation during the year.

3. Conduct physical inspection of the property

plant and equipment acquisition

4. Check the vouchers related to the property,

plant and equipment. Document these

 AUDIT PROCEDURES Done Date WP Remarks

by Ref.

vouchers as evidence.

5. Investigate the retirement and disposal of

the property, plant and equipment.

6. Examining the papers for legal ownership of

the property, plant and equipment

7. Analyze the repair and maintenance of the

property plant and equipment expense

accounts
8. Perform analytical procedures review of the

property plant and equipment

9. Review presentation of financial statement

and stated property, plant and equipment

balances and related figures

Question No. 6

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

file require documentation.(10 marks)

The documentation of audit file is very important because it is the only evidence of work

performed by the auditors. Without the audit documentations, the work of the auditors cannot be
checked and confirmed that how the work was done and how the conclusion was drawn by the

auditors. So it is important that the auditor’s document the work and evidence found and the

procedures followed in order to reach a conclusion. If the audit file is not documented then the

audit work and opinion made is questionable. So for the quality of the audit it is important to

document the evidences collected during the process of the audit. In the work paper, the audit file

parts require documentations are the evidences that are found during the audit process, the

procedures performed in order to obtain these evidences and the conclusions reached for any

process. All these should be documented so that the work done can be considered as quality

audit.

Question no 7

Assume the 2014 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)

Qualified Audit Report

Basis for Qualified Audit opinion

It is found that two of the assets that were presented in the balance sheet of the EastJet on 31

December 2014, should be represented as capital leases. The company should make full

representation of the capital leases with full disclosure of the lease payments.

Qualified opinion arising from disagreement of accounting treatment

In our opinion, the financial statements of the EastJet have been properly prepared in all material

respect except the effect of the matter described in the basis for qualified opinion on the financial

statements. In addition our opinion the financial statements of the EastJet have been properly

prepared in all material respect except the effect of the matter described in the basis for qualified

opinion on the financial statements is properly drawn as to exhibit a correct and fair view of the

state of the company EastJet on 31 December 2014 according to the best of our information and

explanation given to us and as shown in the books of the company.