Financial Risk Analysis: Flight Centre Travel Group Ltd. Audit Report

This report provides an analysis of the risk of material misstatement at the financial statement level for Flight Centre Travel Group Ltd. It focuses on inherent risks, particularly the integrity of directors and key management personnel, assessing their experience, knowledge, and potential for manipulation of financial records. The report examines factors such as director competency, changes in management, and unusual pressures on management that could affect the accuracy of financial statements. It highlights specific instances, such as increased compensation for key management personnel and related-party loans, that could indicate potential risks. The report refers to relevant accounting standards and provides a comprehensive overview of audit considerations, including the need for auditor caution and thorough understanding of the company's environment. The analysis includes references to consolidation and the elimination of intercompany transactions to assess the overall financial risk profile of Flight Centre Travel Group Ltd.

Flight Centre Travel Group Ltd.
Risk of material misstatement at the financial statement level (Inherent Risk):
a.) Integrity of Directors: As per ASA 315, auditor shall get the thorough understanding of
company and its environment whose accounts are going to be audited. There are various factors
due to which there is risk of material misstatement or inherent risk at financial statement level out
of which integrity of director is one. Auditor should be very careful and cautious to the integrity of
management or directors as there can be chances or possibility that they can manipulate the books
of accounts or financial records (Jones, 2017). In case of Flight centre travel group ltd, integrity of
directors is maintained as there were many questions which were asked to directors or Key
management personnel to which they answered honestly and straight forward. Therefore, other
factors were considered to check for risk of fraud or risk of material misstatement.
b.) Director’s experience, Knowledge and changes: Auditor should check whether
management or directors are experienced, knowledgeable, competent or not. If directors are not
knowledgeable or competent then there are chances of making accounting mistakes or errors like
unable to make necessary accounting adjustments or unable to make proper accounting estimates.
Auditor should also check for competency of directors (Bromwich & Scapens, 2016). Auditor
should check if there are frequent changes in management as there are chances of fraud in case of
regular changes in management. In case of Flight centre travel, there is less risk as directors or key
management personnel are very experienced, knowledgeable and competent enough to deliver
good business to their customers. It was observed that there were no significant changes in state of
affairs of Flight centre travel. It was noticed that there was significant increase in key management
personnel compensation such as in 2017 short term employee benefits was $5,877,810 whereas in
2018 it increased to $8,345,934. Shared based payments in 2017 were $539,212 where as in 2018
it increased to $1,139,067 which is almost double as compare to previous year. A loan of $473,588
was provided to C.Galanty who is a key management personnel at a rate which is lesser than the
market rate of interest, it could be a risk for Flight centre travel as a loan is given to a related party.
Questions were asked from key management personnel for the reason of huge or significant
increase in compensation but no satisfactory answers were received to justify the increase of short
term employee benefits and share based payments (Lessambo, 2018).
c.) Unusual pressure on management: Unusual pressure on management could affect the
genuine-ness of financial statements. For an instance there could be possibility that there is
pressure from bank or any other financial institution to maintain desired current ratio or debt equity
ratio which could lead to intentional misstatement of financial statement if working capital is not
maintained. It was observed that FLT obtained control of Buffalo tours (Singapore) and Buffalo
tours (Hong Kong) as a result of change in control, Buffalo tours got consolidated into group
results out of which loan advanced of $3,071,379 were eliminated on consolidation. Apart from
this all other transactions were made on normal commercial terms and conditions (Fay &
Negangard, 2017).
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References
Bromwich, M., & Scapens, R. (2016). Management Accounting Research: 25 years on. Management
Accounting Research, 31(1), 1-9.
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Lessambo, F. (2018). Audit Risks: Identification and Procedures. Auditing, Assurance Services, and
Forensics, 3(1), 183-202.
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