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Key Audit Matters of Qantas Airways


  • Executive Summary
  • Introduction
  • Identification of The Assessed Risk of Qantas Airway Limited
  • Increase in Account Receivable
  • Effect on Financial statements
  • Auditor’s response
  • Revenue received in advance
  • Effect on financial statements
  • Auditor’s response
  • Definite and indefinite life of Intangibles
  • Effect on financial statements
  • Auditor’s response
  • Increase in Inventory
  • Effect on financial statements
  • Auditor’s response
  • Interest-bearing liabilities
  • Effect on financial statements
  • Auditor’s response
  • Frequent flyover revenue recognition
  • Auditor’s response and address
  • Derivative Financial Instrument Accounting
  • Auditor’s response and addressing the matter
  • Passenger revenue recognition
  • Auditor’s response and addressing the matter
  • Other risks
  • Liquidity risks its nature and management
  • Interest rate risk
  • Foreign exchange risk
  • Fuel price risk
  • Credit risk
  • Going concern indicators
  • Auditor response and its impact
  • Recommendations
  • Conclusion
  • References

Executive Summary

The company selected for performing this assignment was Qantas Airways Limited. In this task, there is emphasis on the importance of Key Audit Matters (ASA 701). This section of the audit report is for the listed companies and includes the matters or events that are considered most significant as per the auditor’s professional judgment relating to the current period. The Key Audit matters of Qantas Airway Limited include the accounting for derivative financial instrument, revenue recognition for frequent flyer, and the revenue recognition for passengers. Also this task covers the concept of ASA 315 according to which different risks have been identified during the audit of the group.


This task ensures the Auditor’s objective under ASA 315 is to recognize and analyze the risk of material misstatement either because of error or fraud. For the purpose of preparation of the entire strategy and detailed plan for audit there is a need to get an understanding of the entity and its environment. Also the auditor’s responsibilities towards those risks are also discussed along with the supporting data that demonstrates the presence of the risk is also there. Later on, recommendations and conclusion are also provided.

Key Audit Matters of Qantas Airways

Identification of The Assessed Risk of Qantas Airway Limited

When the auditor has obtained the understanding of group, risk of material misstatement is assessed by him in the financial statement, and identifying the significant risk if any. In case of Qantas Airway Limited following financial risks have been identified

Increase in Account Receivable

The groups debtors have increased from $ 840 to $1101m as compared to the last year that consequently increases risk of irrecoverable debts have increased (Dhaliwal, ET AL, 2013)

Data Extracted

 $M                                                                            2019      2018

Trade receivable                                                     975     717

Less: Provision                                                        (4)    (2)

Total trade receivables                                           971     715

Sundry receivables                                                  207     23

Total trade receivables                                  101   840

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Effect on Financial Statements

There is a risk that the said amount is not recoverable and the company’s major customer will default or gone into liquidation. Therefore adequate provision is not made hence there is a risk that the amount of debtors have been overvalued.

Auditor’s Response

  • A discussion would be made with the management for the calculation basis of the provision also analyze credit rating of the major customers and in case of default ask the management to correct the provision.
  • Analyze and review how the old irrecoverable receivables recognized by the finance director and credit control in order to assure that they are effectively operating (Kochetova & Messier, 2011)
Revenue Received in Advance

The Group’s main revenue consists of passenger and freight revenue from Australian and International customers. The nature of the business is that the cash is received from the customers before the services provided or it can be said that there is a large amount of revenue received in advance in the year 2019 $5718 that comprises of un availed passenger revenue of $ 3068, un redeemed frequent flyer revenue $ 1060 and other revenue received in advance of $187m in which current liability is $4315m and non –current is $1466m (2018: $ 5464m). Hence there is a risk of incorrect classification from liability to revenue of current period (Krommes, 2018)

Data Extracted

$M                                                                                           2019          2018 

Revenue received from Australian passengers              11897        11454

Revenue received from International passengers         4,770         4,385

Total revenue                                                                16,667       15,839

Un availed passenger revenue                                           3068          2,901             

Unredeemed Frequent Flyer revenue                              2462          2326

Other revenue received in advance                                   251           237

Total revenue received in advance                         5781         5464  

Effect on Financial Statements

If the group incorrectly classifies revenue in advance which is a liability to the revenue of the current period then there is a risk that revenue would be overvalued and liability would be understated.

Auditor’s response

Team members should be allocated proper time to get the group’s understanding and identify the key resources of revenue and ask for their breakup and in case of need external confirmation can also be obtained by the auditor to verify the balance.

Definite and Indefinites Life of Intangibles 

The groups consist of intangible assets with both definite and indefinite life so there is a risk that the intangible assets having indefinite life before but after analysis its life has become definite.

Effect on Financial Statements

There is a risk that the non -recognition of definite life intangibles would make the value of the intangibles higher resulting in the over statement of non-current assets.

Auditor’s Response

The auditor must analyze the indefinite life of the intangibles and in case if the life has now been determined then amortize it as per the life otherwise an impairment test shall be conducted. Also discuss with management the treatment of revenue received in advance in order to assure its appropriateness.

Increase in Inventory

The accounts showing the balance of $ m in 2019 and in 2018 the increase in inventory occurred due to increased level of pre-year end orders or it can be assumed that the group is striving to sell the inventories that results in the risk of the over valuation of the inventory while the inventory must be valued at the lower of the NRV and cost.

Data extracted

$M                                                         2019        2018

Inventories                                          364             351

Effect on Financial Statements

There is a risk that the inventory would be over stated hence increasing the value of the assets.

Auditor’s Response

The auditor should perform detailed testing of the cost and NRV at the end of the year and there should be the review of the aged inventory report in order to assess the written down inventory (Kochetova et al, 2013).

Interest-Bearing Liabilities

Qantas Airway Limited has a significant liabilities of 2019 $ 5224m (2018: $ 4748m) with covenants attached to it. In case of breach of covenants the balance amount would instantly become repayable. Therefore there is a risk of profit manipulation and net assets in order to assure that covenants are fulfilled.

Data Extracted

$M                                                                   2019        2018

Secured bank loans                                      1126         1411

Unsecured bank loans                                 318           321

Secured other debts                                     1167         347    

Unsecured other debts                                1372         1381

Secured hire purchase liabilities and       1241         1288


Total interest bearing liabilities       5224        4748

Effect on Financial Statements

To fulfill the covenants there is a risk that the group would over state its net assets and profit.

Auditor’s Response

The group covenant calculation should be reviewed by the auditor and recognize the occurrence of any defaults if any. If so, analyze its impact on the group.

Professional skepticism should be maintained by the team and remain alert to the risk that in order to comply with the covenants the profit has been over-stated (Schultz et al, 2010)

Frequent Flyover Revenue Recognition

It is considered as the significant matter and included in Group’s key Audit matter because of great amount of audit judgments and efforts by the Auditors in this regard in order to assess the assumptions of the group underpinning the balance deferred as unredeemed frequent flyer revenue. An emphasis was put on to the assumptions of the group utilized in the estimation of

  • Qantas Points stand -alone price
  • Qantas Points expected proportion to be redeemed in the future by the members.

Due to complex judgments in this regard actuarial specialist and corporate finance were involved in order to the help the senior member in key audit matters addressing (Bhattacharjee et al, 2016)

Auditor’s Response and Address

The steps and procedures involved

  • The assessment of the methodology of the company utilized in order to analyze the stand-alone selling prices against the AASB 15 and company’s accounting policy requirements.
  • The test of calculation integrity was utilized to analyze the Qantas Points stand-alone selling prices also the review of accuracy of calculation formulas was tested.
  • With the help of our specialist the relevance of group’s breakage calculation was assessed by forming a model that was independent, utilization of the frequent flyer program understanding, requirements of accounting standards and comparing it to the calculation of the group.
Derivative Financial Instrument Accounting

Accounting for cash flow hedge and financial instruments valuation are also considered significant and included in groups key audit matters. It is because of the following:

  • The complexity involved in the estimation of fair value of derivative financial statements. Market fair value techniques are utilized by the group to determine the options, swaps fair value.
  • The changes and their impact in the fuel market prices and rates for foreign exchange that are regarded as the valuation of derivatives major inputs.
  • Counterparties and transactions volume.
  • Forecast high proportion of future cash flow hedging
  • Program for financial risk management importance on the financial outcomes.

In order to understand the derivate portfolio of the group valuation specialized were involved to assist the member having knowledge regarding relevant assumptions and inputs.

Auditor’s Response and Addressing The Matter

The following procedures undertook:

  • Major internal controls of the group were tested.
  • A comparison was take place between the fair values of the financial instruments in the accounting records of the group to the records in the treasury risk management system.
  • The cash-flow hedge accounting designations sample was tested against the accounting standards requirements.
  • The relevance of the presentation and classification of the derivative financial statements were evaluated as well as the disclosure for concerned financial risk management against the requirements of the accounting standards was evaluated (Yeaton, 2015)
Passenger Revenue Recognition

It is considered as the key audit matter because of

  • Its financial importance to the company
  • Low value tickets for passenger greater value
  • Decision with regard to the estimation of the unused tickets proportion that are expected to expire.
  • Difference point of sales and conditions of ticket.

$M                                                                                           2019          2018

Revenue received from Australian passengers              11897        11454

Revenue received from International passengers          4,770         4,385

Total revenue                                                                  16,667       15,839

Auditor’s Response and Addressing The Matter

The procedure involved:

The performance obligation of the group was identified and the recognition of the revenue by comparing to the underlying contracts of the relevant features. The revenue recognition criteria were also evaluated by the auditors against the accounting policies of the group.

Passenger revenue received in advance sample was checked to the underlying records in order to access the revenue recognition completeness.

Other Risks

Qantas operations involve the following risks that are considered an inherent component. These risks are the risk that considered inherent risk which states that items in the financial statements may be misstated as the result of the inherent features or characteristics. In case of high inherent risk, there is a high risk of misstatement of an item in the financial statement (Ruhnke & Schmidt, 2014). These risk exposures are managed by the Group with the help of utilization of different financial instruments. However different methods are used to assess and control various financial risks types to which it is exposed. Methods include interest rate sensitivity analysis, correlation between risk kinds, sensitivity and ageing analysis for credit and liquidity analysis. Details are given below:

Liquidity Risks its Nature and Management      

 It is the risk that the company will fail to meet its financial obligations. And it is managed by the Group by managing the assurance of long term commitments considering the budgeted cash flows, getting variety of funding sources access like commercial papers, looking after maturity profile. The group seeks to buy and retire outstanding debt from time to time in an open market transaction with the help of the cash purchases.

$M                                                                                                 2019                            2018   

Payables                                                                                        2470                           2220

Bank loans – secured                                                                 1223                           1560

 Bank loans – unsecured                                                            379                             378      

 Other loans – secured                                                                1638                           444  

 Other loans – unsecured                                                            1521                            1740         

Lease and hire purchase liabilities                                            1393                           1486      

Derivatives – inflows                                                                     (9)                              (20)

Derivatives – outflows                                                                   23                               48

Net other financial assets/liabilities – inflows                         (303)                         (552)

Total financial liabilities                                                                8335                           7304

Interest Rate Risk

A risk in the fluctuation of the financial instrument fair value or future cash flows due to market interest rate changes this type of risk is called interest rate risk. The group contains risk due to interest rates movements taking place from the interest rate portfolio, sensitive liabilities and assets, in the currencies like USD and USD.  These include leases, company debt and cash. However, such risk is managed by the company through the utilization of the floating versus fixed debt framework. Options, interest rate swabs, forward rate agreement are used for managing the relative mix of floating and fixed interest rate. The interest bearing liabilities in the year 2019 was $5,224m (2018: $ 4,748m). 56% and 44% are the fixed/floating split (2018: 53% and 47% respectively).

Sensitivity to Interest Rate Risk

$M                                                                                                 2019  2018            2019  2018

                                                                                                                        PBT                       Equity 100bps Increase in Interest Rates1

 Variable rate interest-bearing instruments (net of cash)                (5)    (7)                –            –                  

 Derivatives designated in a cash flow hedge relationship                –         –                  2            7

 100bps Decrease in Interest Rates1

 Variable rate interest-bearing instruments (net of cash)                  5       7                   –             –

 Derivatives designated in a cash flow hedge relationship                –          –                  (2)        (8)

Foreign Exchange Risk

This risk is managed as per the policy of the group with the utilization of the currency options and contracts for forward foreign exchange to hedge a risk for foreign exchange.

20% movement in Foreign Exchange Risk                 PBT                 Before tax Equity

                                                                                                        2019     2018         2019   2018       

 20% (2018: 20%) USD depreciation                                        –            –             (114)   (31)                 

 20% (2018: 20%) USD appreciation                                        –            –              156      84        

Fuel Price Risk

This risk is managed with the utilization of the swaps and options on crude oil, jet kerosene, gas oil to hedge exposure to variation in USD price of the aviation fuel. The contracts for foreign exchange and currency options are utilized for the risk of foreign exchange in the entire fuel expenditure which is separately hedged.

Credit Risk

The default of payment by the debtors is considered as the credit risk. The credit risk concentration minimizes by the Qantas Group by undertaking the transactions with a high volume of counterparties and clients in various countries as per the policy approved by the board (Florin et al, 2013)

Going Concern Indicators

There seems a risk that Qantas Airway Limited might face financing global crisis due to Increase in debtors as compared to last year that increases the default risk. Cash outflow in case of investing and financing activities. Increase in financial liabilities which mean that company is unable to generate enough cash to meet its expenditures and obligations and is highly dependent on loans, Decline in share Capital, non -payment of dividend to shareholders, decrease in profit these are all are considered as going concern indicators.

Data Extracted

$M                                                                                 2019                  2018

Account receivable                                                     1101                   840  

Payables                                                                        2470                 2220                                               

Interest bearing liabilities                                          5224                 4748                

Other liabilities                                                             48                      25

Share Capital                                                                1871                    2508

Net cash outflow from investing activities             (1651)                 (2201)    

Net cash outflow from financing activities             (705)                  (1296)

Dividend paid                                                                 –                         (249)   

Auditor Response and Its Impact

The auditor if considers going concern assumption valid but the material uncertainty exists then ask the management to disclose this uncertainty in the disclosure to address the global financial crisis to investors. But if the assumption is not valid then the financial statements will be prepared on NRV basis and if prepared on normal basis then the auditor will give adverse impact in its report.


Auditor must response to the risks of material misstatements by adopting the following:

  • Emphasizing the audit team the need to maintain and demonstrate an attitude of professional scekptisim during the entire audit.
  • Sending well experienced audit team members at the client
  • Audit staff supervision should be increased.
  • The use of experts (such as Environmental experts, IT experts, lawyers etc.)
  • Altering the nature, timing and extent of procedures for audit (for example performing more audit procedures at the final stage of the audit rather than an interim stage of the audit, or obtaining more persuasive audit evidence.
  • Incorporating more unpredictability into the audit procedures (Niemi et al, 2018)

Therefore it is concluded from the above analysis and research in order to get the reasonable assurance either the accounts are error free or not the auditor must respond to the risk of the material misstatement and their impact on the financial statements by performing relevant substantive procedures and test of control and if consider significant the matter contain high level of judgments must communicate to the investors with the help of Key Audit Matters (ASA 701)  

  • Dhaliwal, D., Michas, P.N., Naiker, V. and Sharma, D., 2013. Major customer reliance and auditor going-concern decisions. Working Pa-per, University of Arizona
  • Kochetova-Kozloski, N. and Messier Jr, W.F., 2011. Strategic analysis and auditor risk judgments. Auditing: A Journal of Practice & Theory30(4), pp.149-171.
  • Schultz Jr, J.J., Bierstaker, J.L. and O’Donnell, E., 2010. Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach. Accounting, Organizations and Society35(2), pp.238-251.
  • Ruhnke, K. and Schmidt, M., 2014. Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments. Auditing: A Journal of Practice & Theory33(4), pp.247-269.
  • Krommes, W., 2018. Kommentar International Standards on Auditing: The Risks of Material Misstatement-Das Aufklärungsmodell des ISA 315. Springer-Verlag.
  • Kochetova-Kozloski, N., Kozloski, T.M. and Messier Jr, W.F., 2013. Auditor business process analysis and linkages among auditor risk judgments. Auditing: A Journal of Practice & Theory32(3), pp.123-139.
  • Bhattacharjee, S., Maletta, M.J. and Moreno, K.K., 2016. The role of account subjectivity and risk of material misstatement on auditors’ internal audit reliance judgments. Accounting Horizons30(2), pp.225-238
  • Yeaton, K., 2015. A new world of revenue recognition: revenue from contracts with customers. The CPA Journal85(7), p.50
  • Florin, D., Daniel, V. and Florina, P.A., 2013. Financial Reporting under XBRL and the Impact on the Financial Audit. Ovidius University Annals, Series Economic Sciences13(1).
  • Niemi, L., Knechel, W.R., Ojala, H. and Collis, J., 2018. Responsiveness of auditors to the audit risk standards: Unique evidence from Big 4 audit firms. Accounting in Europe15(1), pp.33-54.


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