Qantas Airline Audit: Materiality Assessment and Audit Program Design

This report provides a detailed audit program for Qantas Airline, focusing on the assessment of materiality and the design of audit procedures. It identifies key account balances, including both assets (cash, receivables, inventories, property, plant, and equipment, and intangible assets) and liabilities (payables, interest-bearing liabilities, advanced revenue, provisions, and deferred tax liabilities), and discusses the relevant financial report assertions for each. The report outlines specific audit procedures to address these assertions, ensuring sufficient and appropriate audit evidence is collected. Additionally, it includes a sampling plan, detailing the use of sampling for each material account balance tested, specifying the percentage of items to be tested for each category. The materiality calculation is based on various benchmarks like sales revenue, total assets, net profit, and shareholder's equity, providing a comprehensive approach to auditing Qantas's financial statements. Desklib is your go-to platform for similar solved assignments and past papers.

Running head: AUDITING
Auditing
Name of the student
Nam of the university
Student ID
Author note

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Table of Contents
Answer A...................................................................................................................................2
Answer B....................................................................................................................................3
Answer C....................................................................................................................................7
Reference....................................................................................................................................9

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Answer A
Materiality regarding account balance and its calculation
Materiality is considered with regard to quality as well as quantity. Both amount
(quantity) as well as nature (quality) for misstatements is taken into consideration while the
materiality is considered. In auditing not only the quantified amount is considered as
material, but the impacts of that amount in different context are also taken into consideration.
During the planning process for audit the auditor determines the materiality level by
considering entire financial statement subject to audit (Legoria, Melendrez and Reynolds
2013). Materiality is associated with content of the financial statement as well as the type and
level of testing required. The decision regarding materiality is based on the judgements
regarding size, nature and specific circumstances of the misstatement. Once the auditor
recognizes and assesses the materiality regarding the financial statements the auditor set up
the tolerable misstatement that is the performance materiality for the financial statements.
However, the planning materiality shall be higher than the tolerable misstatement
(Christensen, Glover and Wood 2013). The below mentioned quantitative factors are
considered for computing the materiality for any account balance –
 1% to 5% of sales revenue
 1% to 2% of total assets
 5% to 10% of net profit
 2% to 5% of shareholder’s equity (Eilifsen and Messier 2014)
In case of Qantas Airline, the materiality calculation will be as follows –
 1% to 5% of sales revenue - $ 17,600 *1% = $ 176 million to $ 17,600 *1% = $ 880
million

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 1% to 2% of total assets - $ 18,647 *1% = $ 186 million to $ 18,647 *2% = $ 372
million
 5% to 10% of net profit - $ 980 * 5% = 49 million to $ 980 * 10% = $ 980 million
 2% to 5% of shareholder’s equity = $ 3,959 million * 2% = $ 79.18 million to $ 3,959
million * 2% = $ 197.95 million
Generally, the benchmark for tolerable misstatement is set up at 50% to 75% of the
materiality. Therefore, in the given case if total asset is considered for materiality, then
tolerable misstatement will be considered for around $ 250 million.
Answer B
Table format
Account
Balance
Amount Assertion (s) Audit Procedures Audit Evidence
Assets
Cash and
cash
equivalents
$ 1,694
million
Valuation – it is
related to the
valuation that the
all the cash related
transactions are
recorded at proper
valuation.
Existence – all the
account balance for
cash balance exists
on balance sheet
date
All the cash related
transactions shall
be matched with
the cash register.
Cash shall be
reconciled with
the bank books
(Edgley 2014)
Cash register,
bank statement,
bank
reconciliation
statement
Receivable
s
$ 908
million
Existence – all the
account balance for
receivables exists
on balance sheet
date
Valuation – it is
related to the
valuation that all
All credit sales
transactions shall
be matched with
the sales voucher
and sales register
Debtor ageing
analysis shall be
performed for
Sales register,
debtor register
with details like
name, amount due
and credit period
allowed

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the credit sales
transactions are
recorded at proper
valuation.
checking that no
overdue balance
left
Inventories $ 351 Completeness – all the
account balance for
inventories reported
fully
Valuation – it is
related to the
valuation that the
all the inventories
are valued properly
Inventory balance
shall be matched
with the Inventory
purchase register
and inventory
sales register
Inventories shall be
verified
physically to
make it sure the
inventories in the
books of account
at the balance
sheet date actually
exist (Ruhnke and
Schmidt 2014).
Method of inventory
valuation and
whether the
method is used by
the company on
consistent basis
Physical stock
count for
inventories,
inventory
purchase register,
inventory sales
register
Property,
plant and
equipment
$ 12,851
million
 Rights and
obligation – the
company has rights
with regard to the
assets
 Valuation – it is
related to the
valuation that the
all the fixed assets
are valued properly
Closing balance of
plant, property
and equipment
shall be verified
with the fixed
asset register
Plant, property and
equipment shall
be verified
physically to
make it sure the
assets in the
books of account
at the balance
sheet date actually
exist.
Method of
depreciation on
Physical stock
count for plant,
property and
equipment, asset
purchase register,
asset sales register

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the asset and
whether the
method is used by
the company on
consistent basis
Intangible
asset
$ 1,113
million
 Rights and
obligation – the
company has rights
with regard to the
intangible assets
 Valuation – it is
related to the
valuation that the
all the intangible
assets are valued
properly
 Method of
acquiring the
intangible assets
 Intangible asset
register shall be
checked and the
balance shall be
compared with
the balance
shown in the
balance sheet
(Council 2013)
 Valuation
method shall be
checked for
verifying that the
entity used
proper valuation
method
Intangible asset
register, valuation
report
Liabilities
Payables $ 2,295
million
 Existence – all the
account balance for
payables exists on
balance sheet date
 Valuation – it is
related to the
valuation that all
the credit purchase
transactions are
recorded at proper
valuation.
All credit purchase
transactions shall
be matched with
the purchase
voucher and
purchase register
(Stewart 2013)
 Creditors
payment system
and credit period
allowed shall be
analysed to check
that no overdue
payment left
 Creditors dues
can be confirmed
through
Purchase register,
creditor’s list with
details like name,
amount due and
credit period
allowed

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contacting the
third parties that
is the creditors
Interest
bearing
liabilities
$ 4,344
million
 Valuation – it is
related to the
valuation that the
all the interest
bearing liabilities
are properly valued
 Existence – all the
account balance for
interest bearing
liabilities exists on
balance sheet date
 Agreement for
the liabilities
shall be checked
with the amount
recorded at the
balance sheet
 Terms of
repayment shall
be confirmed to
check the
payments are
made on time
 Rate of interest
shall be checked
to verify that over
payment or
underpayment has
not been occurred
(Christensen et al.
2016)
Loan agreement
with details of
repayment
schedule and rate
of interest, bank
account for
payment details,
authorization of
borrowings, report
mentioning the
purpose of loan
Advance
Revenue
received
$ 3,939
million
Cut-off – all the
transactions for
advance revenue
have been recorded
under appropriate
reporting period
 Rights and
obligation – the
company has rights
with regard to the
revenue
 Revenue
recognition
criteria of the
company shall be
verified
 Revenue received
for the sales shall
be checked with
the sales voucher
Sales register,
debtor register
with details like
name, amount
received in
advance and credit
period allowed for
balance amount, if
any
Provisions $ 860
million
 Occurrence –
chances are there
that recorded
transaction under
provision may take
place in future
 Basis on which
the amount is
provided as
provision (Griffin
2014)
 Evaluation of the
reasonableness
with regard to the
accounting
Test and review
the procedure
used by
management in
making estimates,
reviewing the
subsequent events

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projections made
by the
management.
Deferred
tax
liabilities
$ 910
million
Cut-off – all the
transactions for
DTA have been
recorded under
appropriate
reporting period
 Auditors shall
check that the
DTA has been
created for
temporary
difference only
Tax rate
applicable to the
company, amount
of difference
between taxable
amount and
accounting
amount.
Answer C
Sampling plan
Audit sampling is applying the audit procedure to lower than 100% items within the
account balance to evaluate the characteristics of balance. It provides the guidance for
planning, evaluating and performing audit samples (Reding et al. 2013). Sampling plan for
the material items identified will be as follows –
 Cash – for cash substantive tests of detail will be performed and cash transactions
involving higher amount that is nearly 50% of the transactions will be selected for
sampling
 Receivables – receivables involving higher amount and overdue will be tested. 30%
of transactions will be selected for sampling
 Inventories – inventories purchased and sold that involves higher amount will be
tested. 20% of transactions will be selected for sampling
 Plant, property and equipment – Plant, property and equipment purchased and sold
during the year will be tested. 20% of transactions will be selected for sampling

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 Intangible assets – all the intangible assets will be tested. Therefore, 100% of the
items will be selected for sampling.
 Payables – payables involving higher amount and overdue will be tested. 25% of
transactions will be selected for sampling
 Interest bearing liabilities – borrowing raised during the year will be tested. 10% of
items will be selected for sampling
 Provisions – provisions created during the year will be tested. 20% of items will be
selected for sampling
 DTA – all the DTA and DTL related transactions created during the year will be
tested. 40% of items will be selected for sampling

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Reference
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), pp.1648-1684.
Council, F.R., 2013. Consultation Paper. Revision to ISA (UK and Ireland) 700 Requiring the
Auditor’s Report to Address Risks of Material Misstatement, Materiality and a Summary of
the Audit Scope. London, England: Financial Reporting Council.
Edgley, C., 2014. A genealogy of accounting materiality. Critical Perspectives on
Accounting, 25(3), pp.255-271.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Griffin, J.B., 2014. The effects of uncertainty and disclosure on auditors' fair value
materiality decisions. Journal of Accounting Research, 52(5), pp.1165-1193.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and
earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Reding, K.F., Sobel, P.J., Anderson, U.L., Head, M.J., Ramamoorti, S., Salamasick, M. and
Riddle, C., 2013. Internal Auditing: Assurance & Advisory Services. Institute of Internal
Auditors, The IIA Research Foundation.

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Ruhnke, K. and Schmidt, M., 2014. Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of
Practice & Theory, 33(4), pp.247-269.
Stewart, T.R., 2013. A Bayesian audit assurance model with application to the component
materiality problem in group audits.