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Transcript of Airline Industry
•Industry, external factors, business strategies and processes
•After evaluating business risk the auditor then can assess the risk of material misstatement and apply the audit risk model
•Things that affect costs in airline industry (and could increase business risk): Fuel costs, rapid spread of contagious illnesses, terrorist attacks, extensive government regulations and competition in the market. Acceptable audit risk how willing the auditor is to accept that the financials may be materially misstated after audit is complete and opinion is issued. Six ratios that we used to assess the four companies in the industry The AICPA Audit and Accounting
Guide “Audits of Airlines” Industry Estimated Losses 2 – 5% of identifiable revenue is lost each year due to leakages and inefficiencies in partner channels
These include: revenue losses due to ticketing, under-collection of fares and incorrect application of fare rules, inaccurate settlement between other airline partners, either intentionally or erroneously.
About 0.7 - 1% of this is directly attributable to ticket sales related errors.
Lost revenue has a direct impact on the bottom line of the airline business both in monetary terms as well as strategic decision making processes.
An IATA survey estimates $1.5 billion USD.
The Accounting Standards
Executive Committee (AcSEC) AcSEC Disclosure Requirements The goal is to provide users with information about controllable costs and revenue attributable to those costs.
Disclosure should include the nature of the arrangement.
Disclosure of other information, for example, the extent of the arrangement without dollar amounts, may be appropriate.
The Guide should include examples of best disclosure practice, possibly including examples of MD&A (Management Disclosures and Analysis) disclosures.
Provide taskforce with guidance to draft a guide
Revenue Breakage Guideline
History vs. Revision
No liability for invalid tickets (airline has nor further obligation to customer & no longer part of breakage)
Revenue from invalid tickets should be recognized when tickets become invalid, usually at departure date.
AcSEC agreed that it would be appropriate to recognize the revenue at the ticket expiration date.
If an airline recognizes revenue from breakage prior to the ticket expiration date, it should be recognized at the departure date.
A manual wrote by the FAA (Federal Aviation Administration)
It has five volumes
Regulates everything in the airline industry
MECHANICS They also have to undergo a lot of training
Required to have certain certifications
Specifically a medical certification
Maintain a logbook that contains: the they flew, the total time, the location of departure and arrival, and the condition under which they flew
PILOTS Have to acquire certifications in order to work on planes
A required amount of schooling
If the mechanic was trained in the military, he doesn’t have to go to school. He just has to pass a written and oral exam
They have to keeps records of every repair. The report needs to have: the description of the work done, date it was completed, name of the person who performed the rapair, and has to be signed by an approver.
Current Ratio = Current Assets / Current Liabilities
Accounts Receivable Turnover = Net Sales / Average Gross Receivables
Debt to Equity = Total Liabilities / Total Equity
Earnings Per Share (EPS) = net income available to shareholders/ number of shares outstanding
Gross Profit Margin = gross income / Sales
Return on Assets = Income Before Taxes / Average Total Assets
Originally issued in 1981
Top 10 US Airlines control Market Share without regulation
Birth of Regional Airlines
Task Force 2002
Audit Risk: risk that an auditor will make incorrect evaluation of their clients No one involved in the airlines is allowed to drink on the job.
Pilots cannot drink 8 hrs before a flight
Mechanics cannot drink 4 hrs before work
Federal Aviation Regulation (FAR) Main airline categories: International
Cargo airline competition Factors:
extra baggage charge
flight schedules aLCohoL Airline Employee Merger/Acquisition Concerns: Lay-offs
Seniority airline merger/acquisition issues: cost efficiency
customer (passenger) benefits