MAA303 Audit And Assurance - Chapter 3: Risk Assessment Help

3.31 Fraud risk

An airline company has been adversely affected by a slump in business travel during the last two years. In addition to lower overall demand, the airline company faces increased competition from other airlines who are heavily discounting flights. The airline company policy for revenue is to credit sales to revenue received in advance, and subsequently transfer to revenue when passengers or freight are uplifted or tours and travel air tickets and land content are utilised.

In preparing for the 2017 audit, you review the 2016 financial statements and note that revenue from passengers represents 8 per cent of total revenue. The interim financial information for the 2017 year shows a 6 per cent fall in revenue from passengers, and an 11 per cent decrease in revenue from passengers in advance.

You read in the financial press that the global airline industry is facing an increased incidence of fraud and the majority of these frauds are committed by company directors and senior managers.

Required
Explain why the revenue from passenger accounts in the income statement is at significant risk of fraudulent financial reporting by management.

Source: Adapted from the CA Program’s Audit & assurance exam, May 2010.