Requirements

Task 1 – Risk Assessment (60 marks)

1. Gain an understanding of the client (20 marks)

Research Virgin Airlines to gain an understanding of the client.  You can use Internet research (e.g. business and financial media articles) and the other information in the annual reports.  It is essential to reference all sources with in-text referencing and a reference list.   From your research, you need to:

• 1. Provide a brief summary of the client. (3 marks)
• 2. Identify business risks at the entity level. (8 marks)
• 3. Identify business risks at the industry level. (6 marks)
• 4. Identify business risks at the economic level. (3 marks)

2. Perform preliminary analytical procedures (15 marks)

Perform analytical procedures on the current unaudited data from Virgin’s 2016 Preliminary Final Report (refer to the resources section).  You will need prior period data (e.g. from the 2015 and 2014 Annual Financial Reports) for calculating comparative figures from previous periods.  You need to:

• 1. Calculate the following five financial ratios for both 2016 and 2015. For each ratio, show the general formula (in words), the actual formula (in numbers) and your final answer: (5 marks) 2.1.1 Profit margin (profitability)
• 1.2 Return on equity (profitability)
• 1.3 Current ratio (liquidity)
• 1.4 Cash flow ratio (liquidity)

Not in your text – formula: net cash flows from operating activities / current liabilities = x times

• 1.5 Debt to equity ratio (solvency)
• 2 Perform trend analysis for the following items: (3 marks) 2.2.1 Total revenues
• 2.2 Net profit/(loss) after tax
• 2.3 Net cash flow from operating activities

2.3 Interpret the results of your ratio and trend analysis in parts (a) and (b) above.  Discuss any potential areas of concern for Virgin Airlines and how this relates to risks for the audit. (7 marks)

3. Assess inherent risk (20 marks)

Use the research and data you have prepared in parts 1 and 2 to assist you in answering this question.

• 1. Discuss the risk of fraud in the audit of Virgin Airlines. (3 marks)
• 2. Discuss any risk factors for the going concern assumption in the audit of Virgin Airlines. (3 marks)
• 3. Identify six inherent risks facing Virgin Airlines. For each of these risks, explain which accounts would be affected, the key assertions at risk for each account, and briefly explain why these accounts/assertions are affected. (12 marks)
• 4. Provide an overall assessment of the inherent risk level for Virgin Airlines (high, moderate, or low) and briefly justify your assessment. (2 marks)

4. Assess internal control risk at the entity level (5 marks) 4.1. Describe factors that contribute to the control environment for Virgin Airlines at the entity level, based on the information provided in the annual reports. (4 marks)

• 2. Provide an overall assessment of the control risk level for Virgin Airlines (high, moderate, or low) and briefly justify your assessment. (1 mark)

Task 2 – Planning the Audit (30 marks)

5. Plan your overall audit strategy (5 marks) 5.1. Describe how your assessment of inherent risk and control risk relates to the overall audit risk, the planned detection risk, and the amount of evidence required to be gathered. (2 marks)

• 2. Describe the relevant audit strategy to address Virgin Airline’s risk profile. (3 marks)

6. Set planning materiality (5 marks) 6.1. Choose a relevant base and justify your choice. (2 marks)

• 2. Set a relevant percentage and justify your choice. (2 marks)
• 3. Relate your final planning materiality figure to your risk assessment from part 5. (1 mark)

7. Plan your audit procedures – tests of controls (10 marks)

• Identify four What Could Go Wrong’s (WCGW) for the passenger revenue cycle (i.e. from the booking process until the passenger takes the flight). For each WCGW, identify the accounts and assertions at risk.
• Describe a control that addresses the WCGW and classify it as a prevent or detect control.
• Briefly describe how the control could be tested.
• (4 controls x 2.5 marks per control = 10 marks)

8. Plan your audit procedures – substantive testing (10 marks)

• Select four of the accounts that are at risk of misstatement from your inherent risk assessment in part 3.3, and the list the key assertion at risk for each account. Select your accounts appropriately so that you are addressing four different assertions for testing.
• For each account/assertion, describe a substantive audit procedure you would perform, ensuring you identify both how the procedure is performed and when it would be performed.
• For the audit procedure, identify which items would be tested and how these items would be selected for testing.
• (4 accounts/assertions x 2.5 marks = 3 marks)

Task 3 – Using the Work of Others (6 marks)

• Discuss the different circumstances where you (the engagement partner) may need to use the work others in your audit of the Virgin Airlines Group. Refer to the Auditing Standards where applicable.

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