Auditing and Assurance Services Liability Limitation

Question: Discuss about the Auditing and Assurance Services Liability Limitation. Answer: Introduction Qantas Airways Limited as nicknamed The Flying Kangaroo was founded in 1920 and is today the largest airline in Australia in terms of fleet size and international destinations. Qantas acknowledges that it has reached the heights due to the strong past of the staff, customers and the manner in which the partners of the business associated. It has a long history of events as it is tagged as a recognized brand and pioneer in the airline industry. The flawless service provided to its customers takes it to the apex of the aviation industry. Its principal competitors are Air New Zealand Limited and Virgin Blue Airlines Pty Ltd. Qantas has been posting good profits which are signs of the successful management action. It has entered into strategic partnerships with airline operators around the world with a view to retain its place in the global aviation industry. Qantas is also a member in the oneworld alliance that is led by British Airways and American Airlines (Kitney, 2014). Thus Qantas can be seen as spreading its wings to achieve growth and maintain the formidable position it has created in the market. The current report aims to shed light on Qantas Airways in terms of audit risk that the company faces in its course of activity. Audit Risk Areas Internal Control Description As per the Management evaluation, the risks that could potentially impact the results and performance are: Variations in the aviation fuel prices, Ever increasing competition by the operators both domestic and international, exchange rates fluctuations , Performance of the engine suppliers and key aircrafts, Industrial relations and regulations, Government and national aviation regulators, Outbreak of war or such other natural disasters, Weakening of the global or Asian economy, Technology updates in the operations, variations in credit rating, Any vital incident in the aviation industry, Operation of the alliance partners on the removal of the vital alliance of airline. The Management follows the Policy of Proactive preparedness for these risks and such other risks that concerns Qantas. The Management is responsible for the establishment of policies, procedures and internal controls. These internal controls are designed in a way that the group achieves its objectives of perfect work, operational efficiency, financial reporting reliability and legal and regulatory compliances (Kruger, 2015). As time, quality of services and safety are utmost essential while operating in the aviation industry, Qantas has designed the internal controls to cover the same. The constant review and update of internal controls is an ongoing process as the internal controls have to be in place for identifying, evaluating and managing the significant risks that the Group is likely to face. As risk cannot be completely eliminated, the internal controls are designed for the effective management of the ongoing risks (Lapsley, 2012). Risks are identified by different departments in a self-written assessment procedure carried out by the Group. The Risk Registers are updated accordingly and the Executive Management Committee makes the required changes in the internal controls to incorporate the same. The internal and external auditors assess whether the internal controls are satisfactory or not and advise the Board accordingly (Hoffelder, 2012). The Audit and Risk Committee has to act on the reports of the auditors with reference to the adequacy and effectiveness of the internal controls, summary of the key issues and work schedules, actions to be taken if any, so on and so forth. In terms of financial controls, adequate checks are established to monitor the pricing at various times and whether these fluctuations are a result of the changes in demand and supply (Ryan, 2015). The internal controls are also designed to monitor the market disclosures and communications regarding share dealing, data privacy, corporate social responsibility, business ethics and legal policies (Hoffelder, 2012). Health, safety and environment related audits are carried out and the required controls are placed. There are also various executives and designated staff at every level to eliminate the possibilities of any lapse or mishap. The Code of Conduct and Ethics is reviewed and revised on a time to time basis to incorporate the amendments and enhancements (Cappelleto, 2010). Thus it can be seen that internal controls almost cover the entire groups operational performance and the timely working of these controls increases the effectiveness and makes Qantas a trusted brand among its frequent flyers (Heeler, 2009). Impact of Audit Risk on companys financial statements The impact of audit risk on financial statements can be understood by first having a look at the business risks. As business risks are wide and diverse, the auditor has to use professional judgment in classifying the risks across various levels and then incorporate audit procedures for the mitigation of these risks. Audit risks are different from business risks in a way that the business risk is known to the owner of the business whereas audit risk can be defined as risk that the auditor provides an opinion that is inappropriate on the financial statements based on the analytical procedures and other auditing requirements complied by the auditor (Gay Simnet, 2015). Hence, the element of danger is contained in both. The audit risk can only be managed by an auditor while financial risks can be tackled by the company and does not necessarily need the presence of an auditor. A few such risks are discussed hereunder: The hedging contracts and programs are entered into on the basis of the management expertise and this is subject to the inherent audit risk of fuel and foreign exchange volatility. Hence the audit procedures should include the provision for inspection of these contracts and the inspection of the same with the risk management planning and procedures of the Group (Horngren, 2013). As technology is advancing, it is essential to be updated with the systems and incorporate the updates in the legal and regulatory framework in the hardware and software. This will help the business in the long term perspective. The IT contingencies and failures are also significant risks that can have an impact on the financial statements of the company. If the IT procedure is not able to meet the expectations then the business is bound to face crisis (Gilbert et. al, 2005). Hence the auditor has to obtain external confirmations and certification about the updated hardware and softwares operational effectiveness as information technology system failure is a significant risk. Variations in credit rating also have an impact on the financial statements. If there is a sudden change in the credit rating, it leads to lessening of the goodwill. Therefore, the companies try to maintain a stable credit rating because too much fluctuation is not a good indicator. For this reason, the inflows and outflows have to be inspected, financial agreements and liquidity positions have to be analyzed and the implications of the changes in credit rating on various avenues has to be studied (Kaplan, 2011). There could be a major withdrawal of investment or such other partnerships or alliances that pose significant risks. Human Resource is the most vital resource for any organization. Hence the worker and labor agreements have to be inspected. The working conditions have to be inspected from time to time to ensure that the environmental, health and safety standards are being met by the company always. The climatic conditions of countries all around the world also needs to be considered in the aviation industry (Livne, 2015). Unscheduled delays can lead to huge financial losses and also loss of reputation. This is because the work tends to stretch and hence, completion of the work does not take place at the accurate time. The economic trends of the company are significant in determining its future course of action. A trend determines the future course of activity and helps the stakeholders in knowing the potential of the company. Therefore, the trend is given strong emphasis. Unusual fluctuations from its known path can bring operations to a peril and so the risk is evident. The projects planned have to be assessed to find out the practicality of the same. Thus it can be seen that the financial statements can be affected by a lot of factors related to audit risk. For instance, if the company decides to sell of a subsidiary that is not performing very well and has a low market value, then the holding company might not be able to recover the complete sale amount in the transaction. The audit risk out here is the subsidiarys financial result that is altered to enhance the market value of its share before the occurrence of sale or the transactions that are related party. It happens with such a subsidiary might be tainted in such a way to enhance the subsidiarys market perception. There are similar kinds of risks associated with mergers, acquisitions and joint ventures (Manoharan, 2011). The auditor also has to determine if any of the risks are a threat to the going concern of the company. Though audit risks are different from business risks, it can be seen that the identification of business risks also leads to the potential for detection of audit risk (Roach, 2010). In the light of corporate scandals during the recent years, the responsibilities of the auditors are becoming more questionable. The scandals in the past have put enormous question on the skills of an auditor. Hence the Top down Approach has to be followed where the auditor has to gain understanding of the entity, its business risks and how these risks can turn out to be audit risks due to misinterpretation or lack of complete information or understanding. The auditor needs to gain an insight into the operation of the company so that an accurate view of the companys operation can be provided (Merchant, 2012). Thus audit risk on the financial statements cannot be quantified and can range from zero to maximum. Auditing Procedures of Qantas The Audit Committee has been established consisting of only Non-Executive Directors, at least three members, financially literate members and at least one member having financial expertise. The objectives of the audit committee are maintaining integrity in financial reporting, legal and regulatory provisions compliances, effectiveness of the risk management and internal control framework throughout the organization and overseeing the independence of the internal and external auditors (Messier Emby, 2005). The Committee also ensures to undertake the Principles and Recommendations laid down in the ASX Corporate Governance Council. Thus the audit committee assists in fulfilling the corporate governance objectives, financial reporting and audit risk management areas. The Audit Committee has to assess the draft in six months and annual financial statements of Qantas whether it represents the correct details about the company. The compliances of the company are verified with Standards of Accounting, unusual transactions that are vital and estimates of accounts, major changes in policies. The Audit Committee also reviews the Declarations signed by the Key Managerial Personnel with reference to the Corporations Act and ASX requirements. In the areas of legal and regulatory compliance, the audit committee along with the Board, CHESS and the management of Qantas monitors the compliance with reference to the Continuous Disclosure requirement by ASX and other legal and regulatory obligations. The internal policies and procedures are also tested by the Audit Committee. The Audit Committee will also consider the implications of any new or proposed accounting or tax practices, disclosure requirements, principles or developments as a result of the legal and regulatory pronouncements on the Group. Thus the Audit Committee is entrusted with the overseeing of the legal and regulatory requirements. The Risk Management and Control framework is audited by the Committee after taking into account the work done by the Management, CHESS and Board. The establishment, implementation and operation of the risk management systems are checked by assessing and monitoring the material business risks of the Group. The Audit Committee will also study the reports by the internal and external auditors regarding the deficiencies in the internal controls and the response of the management to such qualifications. The Committee also confirms if there are adequate provisions for receiving confidential anonymous complaints, retention and treatment of such complaints (Baldwin, 2010). The Audit Committee will also recommend the appointment, reappointment, replacement of the external auditors, and rotation of partners, review audit plans and engagement letters, review the identified risk areas and overall scope of the audit, review the overall independence of the external auditors and resolve conflicts between the Qantas Management and external auditors regarding financial reporting. The Audit Committee will ensure the approval of the appointment, remuneration and internal auditor replacement, review and approve the audit plans, audit budgets, quality control procedures and confirm the independence of the internal auditor. The Audit Committee also maintains a separate line of communication with the audit committee to ensure that there is full and frank disclosure of information. Recommendation There are many challenges ahead for Qantas in maintaining safe operations and world class product standards while building a competitive and viable position of the airline in the long term. Having developed a strong monopoly in the Australian market, it is time Qantas focuses on becoming global and increasing more international destinations. Also Qantas has to ensure that no other airline gets the majority market share in Australia. As it has a high growth rate and rich cash cycle, the global slowdown might not impact Qantas. It still has to increase the investments in Research Development to ensure that it stays updated with the technological advancements and does not miss out on the same. Qantas has to be prepared for increasing interest rates and raw material costs which might prove to be a financial burden or liability (Ryan, 2015). Thus it is recommended that Qantas continues operations at this rate with customer service being its top priority and it can retain its position. Conclusion The journey of Qantas has been thus seen and it takes a lifetime to build and run a successful aviation company. The challenges, ups and downs have to all be efficiently managed and monitored. As Qantas is in the hands of strong management and good governance, it has been able to build the positive image and stands a priority in customer choice. The strong image of the company is by dint of management that is able to meet the shareholder expectation and provide solidity to the working. Moreover, it meets the changing scenarios and competition in a strong fashion that highlights the efficiency of the management. Further, it needs to be noted that the role of an auditor is manifold when it comes to the success of the company. The identification of risk at an early stage highlights the skills of the auditor. It enables the company to succeed in the long run. Further, Qantas meet the expectations by dint of its operation and strong governance. The position is has attained highlights the performance and recognition it received from the customers. References Baldwin, S 2010, Doing a content audit or inventory, Pearson Press. Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne Gay, G; Simnet, R 2015, Auditing and Assurance Services, McGraw Hill Gilbert, W. Joseph J and Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92 Heeler, D 2009, Audit Principles, Risk Assessment Effective Reporting, Pearson Press Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W, Pearson Australia Group. Kaplan, R.S. 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp. 367383. Kitney, D 2014, Qantas strikes joint venture deal with China Eastern, viewed 24 September 2016, https://www.theaustralian.com.au/business/aviation/qantas-strikes-joint-venture-deal-with-china-eastern/news-story/20fd9b7a6466841aa9bfaa6725c78a36 Kruger, Philipp 2015, Corporate goodness and shareholder wealth, Journal of Financial economics, pp. 304-329 Lapsley, I. 2012, Commentary: Financial Accountability Management, Qualitative Research in Accounting Management, vol. 9, no. 3, pp. 291-292. Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 23 Amrch 2016, https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full. Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance, The George Washington University. Merchant, K. A. 2012, Making Management Accounting Research More Useful, Pacific Accounting Review, vol. 24, no. 3, pp. 1-34. Messier, W Emby, C 2005, Auditing Assurance Services: A systematic approach, McGraw-Hill. Parker, L, Guthrie, J Linacre, S 2011, The relationship between academic accounting research and professional practice, Accounting, Auditing Accountability Journal, vol. 24, no. 1, pp. 5-14. Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson. Ryan, P 2015, Qantas defends safety record amid audit report, viewed 24 September 2016, https://mobile.abc.net.au/news/2007-03-21/qantas-defends-safety-record-amid-audit-report/2222502.