Auditing Theory and Practice for Air Canada

This report provides an audit of Air Canada, the largest airline in Canada, including analysis of financial statements and risks faced by the company. It also discusses the internal control system and changes in engagement risks.

Running head: AUDITING THEORY AND PRACTICE
Name of the Student
Name of the University
Author note

1AUDITING THEORY AND PRACTICE
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Internal Control system:.........................................................................................................3
Changes in engagement risks:................................................................................................3
Conclusion:................................................................................................................................4
References:.................................................................................................................................4

2AUDITING THEORY AND PRACTICE
Introduction:
In this report, an audit of a Canadian Airline company ‘Air Canada’ has been
performed. A detailed analysis of the financial statements and the various risks faced by the
company has been provided.
Discussion:
Air Canada is the largest airline of Canada and is responsible for being the largest
provider of passenger services in Canada. It also provides international flights from Canada
to USA and the rest of the world.
The four business risks and their mitigation are as follows:
 Fuel risk: The risk of fluctuation of future cash flows because of changes in the prices
of jet fuel is the primary area of concern for fuel risk. Fuel deeply influences the
growth and survival of an airline company. Over the years, Air Canada has been
facing this issue for a long time now. It prepares various hedging strategies to counter
this risk. The company may window dress the fuel expenses in the financial
statements and as per CAS 315, the auditor must scrutinise these statements and
assess whether their transactions in an impartial way.
 Foreign exchange risk: It refers to the threat the consistent fluctuations would have on
the operations results and cash flows of the business. Air Canada conducts its business
operations in largely US dollars and in other foreign currencies. Its debt obligations,
commitments related to capital and other expenses are also done in US dollars
(Aircanada.com, 2018). While it reports all its financial results in the Canadian
dollars. To counter this, it holds US cash reserves, as an economic hedge in terms of
US dollars. The auditor as per the provisions of CAS 315, must be wary of the
manipulations of these figures.

3AUDITING THEORY AND PRACTICE
 Interest rate risk: It refers to the risk of fluctuation of the fair value or future cash
flows due to the changes in the market rate of interest. As it deals with both fixed and
floating interest rate, the company always remains cautious while handling them
(Frascanada.ca, 2018). Air Canada manages the interest rates risks on a portfolio basis
and initiates financing terms on individual basis which helps to take all details on
individual basis.
 Terrorist attacks and causality losses: The potential of terrorist attacks and the
accidents or other causality occurring to the passengers and crew because of the
nature of the airline business is a great risk Lee, Seo and Sharma 2013). The company
opts for insurance and stringent checks as well as using state of the art technology to
avoid all this.
Internal Control system:
The company follows an efficient and robust internal control system. It has been
designed by the management under the active supervision of the CEO as well as the CFO. As
a result of which the accountability of the operations have increased.
The external auditors have duly reported on the internal control regarding the efficacy of the
financial reporting. It has also stated that it finds the internal controls relevant to the
company’s standards of financial reporting.
Changes in engagement risks:
The three changes in engagement risks are changes in independent reporting,
managerial interference and drop in auditing efficiency (Cpacanada.ca, 2018). The changes in
audit planning procedures are:
 Setting up of a separate audit review committee to ensure impartial auditing.

4AUDITING THEORY AND PRACTICE
 Increased rotation of auditors in order to reduce the chances of the dilution of auditing
reports in favour of the company.
Conclusion:
A fair and impartial audit review is the aim of every audit operation and it has been
into in this report. Air Canada strives to ensure that it maintain the ethical standards of audit
procedures and efficiently reduce the risks associated with the business.
References:
Aircanada.com. (2018). Air Canada - The Official Website. [online] Available at:
https://www.aircanada.com/ca/en/aco/home.html [Accessed 9 Apr. 2018].
Cpacanada.ca. (2018). Canadian auditing standards (CAS). [online] Available at:
https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/
canadian-auditing-standards-cas [Accessed 9 Apr. 2018].
Frascanada.ca. (2018). Identifying and Assessing the Risks of Material Misstatement |
Financial Reporting and Assurance Standards Canada. [online] Available at:
http://www.frascanada.ca/canadian-auditing-standards/projects/active/item83589.aspx
[Accessed 9 Apr. 2018].
Lee, S., Seo, K. and Sharma, A., 2013. Corporate social responsibility and firm performance
in the airline industry: The moderating role of oil prices. Tourism management, 38, pp.20-30.