Comprehensive Auditing and Ethics Report: Qantas Airways Limited

This report provides a comprehensive analysis of the auditing and ethical considerations for Qantas Airways Limited. It begins by examining the determination of materiality levels, crucial for identifying and assessing material misstatements in financial statements, and explains the three ...Read More

Running head: AUDITING AND ETHIC
Auditing and Ethic
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ETHIC
Table of Contents
Introduction................................................................................................................................2
Section 1.....................................................................................................................................2
Materiality Level Determination............................................................................................2
Reviewing Draft Notes...........................................................................................................4
Section 2.....................................................................................................................................5
Section 3.....................................................................................................................................7
Cash Flow Statement Review................................................................................................7
Audit Report Review..............................................................................................................8
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
Auditing profession involves in the systematic as well as independent review of the
financial statements of the clients in order to make sure they are free from material
misstatements and appropriate audit standards have been used in order to prepare and present
them (William Jr, Glover & Prawitt, 2016). The auditors are responsible for taking into
account different factors in the auditing process. Determination of materiality level is a major
factors that is needed for the determination of material misstatements. Moreover, it is the
responsibility of the auditors to ensure the application of relevant analytical procedures in
order to test different component of financial statements so that the areas of higher audit risk
can be identified. The outcome of the whole audit program helps the auditors in expressing
the appropriate audit opinion. The main aim of this report is the analysis of different audit
related aspects of Qantas Airways Limited like the determination of materiality, audit risks
from financial ratios and others.
Section 1
Materiality Level Determination
Materiality is an important aspect in auditing which is considered as a fundamental
concept of auditing. The auditors apply the concept of materiality in the audit planning stage
and when they undertake the evaluation of the impact of assessed material mistsement on the
financial statements of the client. The same is applicable for the audit of Qantas Airways
Limited (Qantas). It needs to be mentioned that there are three steps that need to be followed
by the auditors while determining the level of materiality of Qantas for the financial year of
2018. These three steps are as follows:
1. Selection of the suitable and relevant benchmark;

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2. Determination of a certain level which is the percentage of the above selected
benchmark; and,
3. Give necessary justification or rationale of the choice.
The following discussion shows the determination of the materiality level of Qantas for
2018 based on the above three steps.
1. In this step, the auditor of Qantas is needed to take into account certain factors for the
selection of benchmark; and these are the nature of the entity and the nature of the
industry in which the entity operates. The mostly used benchmarks are total income,
total expenses, profit before tax, net assets and gross profit. In case of Qantas, profit
before tax is choses as the benchmark because most of the companies in the airline
industry use this benchmark for materiality determination and this is helpful in
comparing the material level of Qantas with its competitors (Eilifsen & Messier Jr,
2014).
2. This step involves in the determination of percentage and this is majorly dependent on
the judgments of the auditors of the companies. In this stage, it is needed for the
auditors to consider the materiality guidelines of AASB 1031. As per AASB 1031, the
auditor of Qantas have two options. First, he/she can select an amount that is equal to
or greater than 10% of the above-mentioned base that is presumed to be material.
Second, the auditor can chose an amount that is equal to or less than 5% of the above-
mentioned base that is considered as material (aasb.gov.au, 2019). From the above, it
depends on the judgment of the auditor to select among 5% to 10%. In case of Qantas,
the auditor needs to consider 5% of the benchmark (Mio, 2013).
Therefore, based on the above discussion, the materiality of Qantas can be determined in
the following manner:

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Overall Materiality = 5% of Profit before Income Tax
= 5% of $1573 million
= $78.65 million
Reviewing Draft Notes
The following discussion shows the draft notes that are crucial for the audit of Qantas:
Areas Significant to the Audit Audit Procedures
Qantas has mentioned about its contingent
liabilities under Note: 17 of the 2018 Annual
Report. As per this section, Qantas has
contingent liabilities due to guarantee in the
normal cause of business for securing a self-
insurance licence, financing agreements for
the acquisition of aircraft and due to its
claims and litigation from normal cause of
business (investor.qantas.com, 2019). In case
these contingent liabilities become due, they
can affect the whole audit planning process
of the company.
The required audit procedures are to read to
the written information to determine the
impact of these contingent liabilities. After
that, it is need to examine the related
documents of these contingent liabilities for
determining the facts about these incidents
(Byrnes et al., 2018).
Qantas has provided the details of the new
accounting standards and interpretations that
it has not yet adopted; and these include
AASB 9 (2014) Financial Instruments,
AASB 15 Revenue from Contract with
Customers and AASB 16 Leases
The required audit procedure is to calculate
the impact of these new accounting standards
on the financial statements of Qantas (Byrnes
et al., 2018).

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(investor.qantas.com, 2019). The outcome of
the financial statements of Qantas can be
affected due to the adoption of these new
standards which can have negative impact on
the audit process.
Section 2
For the purpose of preliminary analytical procedures of Qantas, four categories of
financial ratios are considered; they are profitability, short-term debt-paying ability, liquidity
activity and ability of meeting long-term obligations. These are discussed below.
The above table shows a fluctuation in the operating profit margin of Qantas since this
ration increases from 2015 to 2016; and decreases in 2017 before increasing in 2018. The
same fluctuating trend can be seen in case of net profit margin as this ratio massively
increases in 2016 and then decreases afterwards. Fluctuation in sales can be considered as
one major reason for the fluctuation in these ratios (Teme, 2013). This is an area that needs to
be addressed in the audit of Qantas because of the involvement of the assertions like
occurrence, accuracy and cot off. The audit procedure is to examine the necessary documents
related to the occurrence and cot off of sales in order to determine the reasons for the
fluctuation. In addition, the auditors can check the accuracy of the calculation done by the

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management for determining the calculation of net profit and operating profit of Qantas (Jans,
Alles & Vasarhelyi, 2014).
The above table indicates towards the aspect that there is a fluctuating trend in the
current ratio of Qantas from 2015 to 2018; this ratio decreases from 2015 to 2017 and then
increase in 2018. The same aspect can also be seen in case of quick ratio as the ratio
decreases from 2015 to 2016 to 2017 and then increases in 2018. This indicates towards the
fluctuation in the liquidity position of the company which shows the fluctuation in the ability
of Qantas to meet the short-term obligations. The assertions involved in this case are
existence and accuracy, valuation and allocation of the current assets and liabilities. The
auditor of Qantas is needed to undertake the audit procedure of vouching that involves the
use of documents related to current assets and liabilities in order to verify the recorded
transactions as well as amounts of current assets and liabilities (Plumlee, Rixom & Rosman,
2014).
It can be seen from the above table that there is a decreasing in the debt to equity ratio
of Qantas; it implies that the ratio decreases from 2015 to 2018. The same aspect can be seen
from the above table that the debt ratio of Qantas also decreases from 2015 to 2018. The

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above ratios show that Qantas is hugely dependent on debts for raising capital and therefore,
the company has a huge debt burden as compared to total assets (Rose et al., 2017). In this
situation, decrease in these ratios indicate decrease in the overall debts of Qantas which is
good for the firm. For this reason, this is an area that the auditor of Qantas needs to consider
in auditing. The involved assertions in this case are existence and presentation. The
appropriate audit procedures are to check the appropriate documents of the long-term
liabilities so that existence of these liabilities can be verified. In addition, the auditor is
needed to inquire into the presentation of term loans for checking presentation assertion
(Appelbaum, Kogan & Vasarhelyi, 2018).
Section 3
Cash Flow Statement Review
It can be observed from the 2018 Annual Report of Qantas that cash flow from
operating activities has provided the majority of the cash inflows that is $3413 million and
cash flow from investing activities has the greatest cash outflows that is $2201 million
(investor.qantas.com, 2019).
During 2018, the primary cash receipts is the cash receipts from customers worth
$18039 million; and the primary cash payment is the cash payment to the suppliers and
employees which includes cash payment to employees for redundancies and related costs,
wage freeze, turnaround and record results bounces and the value is $14393 million
(investor.qantas.com, 2019).
A company is not able to generate any cash inflows or cash outflows from the non-
cash financing and investing activities. It can be seen from the 2018 Annual Report of Qantas
that there is not any non-cash financing or investing activities (investor.qantas.com, 2019).
Going Concern Audit Procedures

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It can be observed from the above that Qantas has
been able in generating healthy cash inflows from
operating activities which indicates towards the
strengths of the core business operations of
Qantas. Negative cash flow from investing
activities indicates that Qantas is investing in
future operation through purchase of property,
plant and equipment and others (Amin, Krishnan
& Yang, 2014). Lastly, negative cash flows from
investing activities indicate that Qantas is serving
borrowings and making dividend payments. All
thee indicates that the going concern risk of
Qantas is low.
In order to address going concern risk, the auditor
of Qantas is needed to obtain sufficient evidence
regarding the appropriateness of management’s
use of going concern basis. After that, on the
basis of the audit evidence, the auditor is needed
to assess whether there is existence of any
material uncertainty that cast significant doubt
about the entity’s ability to continue as a going
concern (Geiger, Raghunandan & Riccardi,
2013).
Audit Report Review
It can be seen from the 2018 Annual Report of Qantas that the audit partner of the
company, KPMG, has expressed unqualified audit opinion by mentioning the fact that Qantas
has complied with Corporations Act 2001 and Australian Accounting Standards that gives the
true and fair view of the company’s financial performance and position (investor.qantas.com,
2019).
The section called “Key Audit Matters” in the auditor’s report discusses about three
issues that were most significant in the audit of the financial statements of Qantas. These
issues are mentioned below.

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Recognition of Passenger Revenue – KPMG has considered passenger revenue recognition
as a key audit matter because of its financial importance, high volume of low passenger ticket
and complexities in accounting processes. Adequate steps have been taken for addressing this
issue (investor.qantas.com, 2019).
Recognition of Frequent Flyer Revenue – KPMG has considered the recognition of
revenue from Frequent Flyer as a key audit matter due to the involvement of significant
judgments to estimate the deferred amount as Unredeemed Frequent Flyer revenue. The
auditors have taken adequate steps to address this issue (investor.qantas.com, 2019).
Accounting for Derivative Financial Instruments – The financial accounting related
accounting and valuation is a key audit matter to KPMG because of the presence of complex
inherent estimation of fair value, impact of accounting changes and others. The auditors have
taken adequate steps to address this issue (investor.qantas.com, 2019).
Conclusion
It can be seen from the above discussion that the auditors are required to earlier-
discussed three steps for the determination of materiality level of Qantas like benchmark
selection, appropriate percentage determination and materiality determination. The above
discussion also shows that the analysis of appropriate ratios is a crucial analytical process that
helps the auditors in the identification of the areas of risks in the financial statements that
need to consider in the audit process and this assists the auditors in taking appropriate audit
procedures to address the risk areas. The above discussion also shows the importance of cash
flows analysis for the determination of issues related to going concern of the companies. It is
needed for the auditors to express the audit opinion based on the outcome of the whole audit
operation.

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References
Aasb.gov.au. (2019). Materiality. Retrieved 24 August 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB1031_07-
04_COMPdec09_01-11.pdf
Amin, K., Krishnan, J., & Yang, J. S. (2014). Going concern opinion and cost of
equity. Auditing: A Journal of Practice & Theory, 33(4), 1-39.
Appelbaum, D. A., Kogan, A., & Vasarhelyi, M. A. (2018). Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit
analytics. Journal of Accounting Literature, 40, 83-101.
Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., &
Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297).
Emerald Publishing Limited.
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firms. Auditing: A Journal of Practice & Theory, 34(2), 3-26.
Geiger, M. A., Raghunandan, K., & Riccardi, W. (2013). The global financial crisis: US
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from
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pgyw/file/annual-reports/2016AnnualReport.pdf
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from

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https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1t
pgyw/file/annual-reports/2017AnnualReport.pdf
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pgyw/file/annual-reports/2018-Annual-Report-ASX.pdf
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TEME, E. (2013). Audit procedures for disclosure of errors and fraud in financial
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