To: Worldwide Transportation Facility
Date: March 6, 2019
Subject: Issues Noted Relating To Airport Revenues
The objective of this memo is to communicate issues regarding the audit of revenues of WTF. There are several issues which are needed to be cleared to you including the internal controls, substantive procedures to performed to verify the data and other audit procedures and communication between the auditor and the board and/ audit committee.
The basic question regarding the revenues is whether they are correctly recorded and in the period where they arise. There is a risk that the aircraft’s point of origin is not recorded accurately which is very important to correctly record as landing and terminal fees depend on it. There is a risk that the data regarding aircraft origin, engine, weight, and seats are inaccurate as WTF has no control over it. As a matter of fact, the billing is done on the basis of the data provided by the aircraft operators which is risky because they can exploit this weakness to lower the billing amount. This could be a serious issue because there are instances where the record provided by the Airline does not agree with that of ATC data and then Airline data is used for billing purpose. There are around 5 to six such discrepancies happen each month where the Airline data is not matched with that of flight data.
WTF can obtain corroborating evidence by comparing the airline’s data to the record of movements recorded by the ATC, a government-controlled organization, however, is no formal agreement in place that obliges the ATC to (i) provide the data or (ii) ensure that it is complete and accurate with respect to aircraft movements. 97% of the WTF revenues depend upon this information and thus are at risk of inaccurate recording. A formal agreement will help WTF greatly as it would mean that WTF will be able to use actual data collected by the third party for billing purpose instead of relying on Airlines which already results in discrepancies.s
Correct recording of the revenues is not only important for the financial reporting purpose as any misstatement, omission, and error may result in financial statements not giving true and fair view, but it may also impact the decisions of users taken on the basis of this information particularly the bank covenants can get broken that requires an interest coverage ratio of 1.5 to 1 to be maintained. This is very crucial as WTF wants to raise more money.
As already explained, a major concern is whether the airlines are correctly reporting this information and that adequate controls are in place to verify this. This is an issue given the current turmoil in the aviation industry. If errors are found, the impact on the airport’s financial statements must also be determined. The audit committee needs to look into the issue and ensure proper internal controls are in place to ensure the revenue is accurately recorded.
The correct recording of revenue is also important for management accounting purpose. It is necessary for both planning and budgeting purpose. The management accountant is responsible for informing if bank covenants may break. So he also needs accurate information regarding revenue recognition and recording. Again, the value of having an agreement with the ATC regarding the accurate recording of the flight information is invaluable.
The auditors would first obtain an understanding of the revenue recognition policies and the extent of internal controls operating in the same area. Then they make an assessment regarding the risk of material misstatement relevant to all relevant assertions about all significant revenue classes at the WTF airport. The auditors will then perform substantive procedures to verify assertions regarding the data regarding aircraft origin, engine, weight, and seats are accurately recorded. The auditor also needs to evaluate the effect of any potential error, omission or misstatement related to revenue at the balance sheet accounts. The breaking of the covenant is a very important issue and auditor needs to assess whether the WTF will remain a going concern in case of breaking the covenant and that WTF prepares the financial statements on breakup basis if it does not remain a going concern.
The auditor may also need to use information technology to support the audit, particularly when it comes to revenue verification. This is because the information regarding the revenue comes in the soft form. After determining the control level on IT infrastructure, the auditor can determine the extent of reliance it can put on the system and design substantive procedure to ensure the data coming through IT systems is accurate. Moreover, if the controls are too weak, the auditor can decide to test 100% of the data which is only possible through IT. Apparently, as the data comes in excel format which can manipulative, it can be reasonably said that the controls are weak. This is further proven by the fact that each airline disagrees around 5 to 6 times monthly regarding the data provided by ATC of the flight record.
Internal audit is a consulting activity that is concerned with improving organizational performance by recognizing and evaluating risks and their controlling measures and helps in the governance of the organization. The auditors will also suggest improvements to the business process where the control are weak or non-existent and what the company needs to do to improve control and ensure that revenues are appropriately and accurately recorded.
The basic purpose of the internal audit is to ensure that financial reporting of the company presents a true and fair view of the financial situation at the company particularly all financial and non-financial risks to the organization are managed.So the auditors communicate control weakness and other significant findings of the audit to the management. This communication is normally conducted through the Audit Committee. The internal auditor is also responsible for ensuring external audit goes smoothly.