Assume that your audit partner asks you to design detailed substantive testing programs for accounts receivable and sales; inventory; purchases and accounts payable; and payroll systems of Air New Zealand. Your partner also asks you to incorporate specific analytical procedures and tests of detail (i.e. direct tests on balances and tests of transactions of a balance).

Note that- identified weaknesses and other issues, as described in each of the following subsystem (a - e), are created for teaching purposes and bears no relationship to events relating to Air New Zealand, nor does it apply to any other organization.

Required:

Design/develop a substantive audit tests program and explain & justify your audit program in terms of audit objectives (also called ‘audit assertions’)

Questions to be addressed by those presenting and for those not presenting, in your bullet-point summaries are:

1. Trade and Other Receivables and Operating Revenue: You have assessed the inherent risk of management distortion, and overstatement of Revenues, to be high this year because senior management is trying to obtain an extended loan from their financial institution. However, the only weakness revealed in the testing of controls is a lack of review of adjusting journal entries.

2. Inventories (Engineering expendables and Consumable stores): A perpetual stock system isinplacewithsometypesofinventoryandastockcountisperformedevery sixmonthsby off-shift employees after the relevant depot closes. The employees complete stock forms (not prenumbered) each with the following headings: Stock Item #, Stock count. When they’re done, they sign off the form and leave.

3. Trade & Other Payables: Air New Zealand has many suppliers, but several of them are particularly large. Controls over purchases include a separate Purchases Officer who must seek at least 2 quotes for each large order, and whose purchase costs (and product quality complaints) are reviewed each month by the Internal Auditor. David has been the sole Purchasing Manager for the last 23 years.

4. Fixed Asset Subsystem: Controls are generally strong, however you discovered that management is not transparent about how they assess the value of some of the Intangible assets and derivative financial instruments. Assumed that Air New Zealand management informed you that they have will adopted the new NZ IFRS 16 – Leases for 2020 annual report.

5. Payroll Subsystem (Labour Expenditure): Assume that Labour expenditure includes airline crews, general employees and contractors. Any changes to airline crews and general employees’ salaries and conditions are negotiated by the union. Previously it was observed that there is usually a delay between when a negotiation is complete and the time at which that is incorporated into the system. Net salaries are made by auto-deposit to the all employee’s bank account. No comparisons are made between employee records and this payment system. Also assume that in recent years average staff turnover is very high and processes to close personnel files when someone leaves are weak.

Answer rating: 100% (QA)

To design a substantive audit tests program for Air New Zealands accounts receivable and sales inventory purchases and accounts payable and payroll systems we need to consider the identified weaknesse... View the full answer