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Airlines - Audit & Accounting Guide

Publisher: AICPA
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Get the industry-specific knowledge you need to successfully perform every aspect of your engagement. From revenue recognition challenges associated with frequent flyer programs to guidance for Fresh-Start Accounting, this Guide has you covered.

Airlines - Audit & Accounting Guide provides best practices for accounting and auditing specific to major, regional and cargo airlines, including relevant guidance contained in standards issued through March 1, 2013. Guidance is supplemented with specific “how-to” recommendations for applying the standards to the airline industry.

This Guide covers best practices related to revenue recognition, equipment purchase and maintenance issues, auditing risks, and much more. Covered topics include:

  • Passenger Facility Charges–Save time and avoid errors with the Sample PFC Report–fully updated to comply with the Clarity Standards.
  • Fresh-start Accounting–Step-by-step guidance through the complexities of executing a successful emergence.
  • ASU 2012-02: Impairment Testing for indefinite-lived intangible assets–Guidance on determining when a qualitative assessment is indicated for your client.
  • Audit risk factors–Be prepared to spot red-flags within your audit engagement related to management structure, industry developments, operating characteristics, and more.
  • Revenue recognition–Industry standards and strategies are provided for trouble-spots such as frequent flyer programs, gross vs. net, capacity purchase agreements, manufacturer incentives and multiple element arrangements
  • Clarified Auditing Standards–All auditing content has been fully conformed to reflect changes resulting from the Clarity Project.

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Excerpt

Audit Risk
2.11 Paragraph .A36 of AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA, Professional Standards), explains that audit risk is a function of the risk of material misstatement and detection risk The assessment of risks is based on audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit. The assessment of risks is a matter of professional judgment, rather than a matter capable of precise measurement. 2.12 Paragraphs .A38 - .A40 of AU-C section 200 provide further explanation on the two levels of the risks of material misstatement. The risks of material misstatement exist at the overall financial statement level and the assertion level for classes of transactions, account balances, and disclosures.  Risks of material misstatement at the overall financial statement level refer to risks of material misstatement that relate pervasively to the financial statements as a whole and potentially affect many assertions. Risks of material misstatement at the assertion level are assessed in order to determine the nature, timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence. This evidence enables the auditor to express an opinion on the financial statements at an acceptably low level of audit risk.
2.13 Paragraph .A44 of AU-C 200 explains that GAAS do not ordinarily refer to inherent risk and control risk separately, but rather to a combined assessment of the risks of material misstatement. However, the auditor may make separate or combined assessments of inherent and control risk depending on preferred audit techniques or methodologies and practical considerations. The assessment of the risks of material misstatement may be expressed in quantitative terms, such as in percentages or in nonquantitative terms.
2.14 In considering audit risk at the overall financial statement level, the auditor should assess the identified  risks and evaluate whether they relate more pervasively to the financial statements as a whole and potentially affect many assertions. Risks of this nature often relate to the entity’s control environment and are not necessarily identifiable with specific relevant assertions at the class of transactions, account balance, or disclosure level. Such risks may be especially relevant to the auditor’s consideration of the risks of material misstatement arising from fraud, for example, through management override of internal control.
Refunds, Exchanges, and Reissues
3.37 Several types of refunds and exchanges can be made for an airline ticket. They include full and partial refunds, reissue/even exchanges, reissue/refunds, and reissue/additional charges. All refunds are processed against the original form of payment and adhere to all refund and exchange rules for the fare. If a refundable ticket is surrendered in exchange for a ticket for a flight on a different route or on a different airline that carries the same fare, a reissue/even exchange is required. If a refundable ticket is surrendered for another ticket with a lower fare, a reissue/refund is required. If a refundable ticket is surrendered for a ticket with a higher fare, a reissue/additional charge to the passenger is required. If the original ticket is nonrefundable or restricted, a change fee and change in fare are frequently required in order to exchange the nonrefundable ticket for another ticket. However, refunds are issued rarely, if ever, on nonrefundable tickets.
3.38 Refunds and exchanges for refundable and nonrefundable tickets can be executed at company locations (airport or ticket office), by travel agencies, by the airline refund department, or by other airlines. Depending on the airline's policy, company locations may issue checks or credit directly to the customer or take applications for refunds. If it is a paper ticket transaction and a new ticket is required, the old ticket is collected from the passenger. The old ticket, the auditor's coupon of the new ticket, and refund checks or refund applications are batched and submitted to revenue accounting with the daily ticket sales report documents. The revenue accounting department sorts the refund documents, logs them in a control record, and sends them to refund accounting for pricing, auditing, and issuance of refunds.
3.39 If the refund or exchange for refundable and nonrefundable tickets is requested on an e-ticket, a refund or exchange entry is processed for the e-ticket record in the host reservation or in the GDS, causing the e-ticket to be cancelled in the reservation system. The e-ticket record is then sent electronically to the revenue accounting department for processing.
3.40 If a carrier executes an exchange for an OAL ticket, that carrier then bills the coupon value of the redeemed ticket back to the carrier that sold the ticket via the interline billing process. This exchange item is audited by the OAL carrier as part of the interline settlement process discussed subsequently in this chapter.
3.41 Refunds, exchanges for refundable and nonrefundable tickets, and change fees are recorded as adjustments to the ATL, accounts receivable, and cash accounts as part of the company, travel agency, and interline sales entries.
Passenger Facility Charges
10.01 The Federal Aviation Administration (FAA) issued final rules establishing a passenger facility charge (PFC) program in 1991. The PFC program authorizes local airport authorities to impose specified per passenger charges at commercial service airports to finance airport improvements. Beginning in 1992, the rules require carriers (including non-U.S. airlines) that collect PFCs from more than 50,000 passengers (that is, passengers boarded at airports that assess PFCs) to provide an annual audit of their PFC accounts. Auditors engaged to audit PFC accounts are required to report "on the fairness and reasonableness of the carrier's procedures for collecting, holding, and disbursing PFC revenue." In addition, auditors are required to report whether the quarterly reports that must be filed by the carriers "fairly represent the net transaction in the PFC account." In July 2002, the FAA issued the Passenger Facility Charge Audit Guide for Air Carriers (the PFC Audit Guide). The PFC Audit Guide provides auditors with a comprehensive set of procedures for examining air carrier’s PFC collection, remittance, and reporting practices. The PFC Audit Guide is not intended to define the sole method of complying with the audit requirements. The PFC Audit Guide also recommends that auditors perform certain agreed-upon procedures that are set forth in the PFC Audit Guide and report on such agreed-upon procedures. This agreed-upon procedures report is not required, but may provide additional assurance regarding the carrier’s controls over processing PFCs, which may reduce the possibility that an airport authority would audit the carrier’s PFC reporting. The AICPA has worked with the FAA and industry representatives to develop the following illustrative reports that satisfy both existing professional literature and the FAA's requirements. The PFC Audit Guide is available on the FAA website at www.faa.gov/airports/pfc/audit_guides/. The FAA expects these reports to be filed in a timely manner, and the filing should normally coincide with the carrier’s fiscal year and its corporate audit cycle. Therefore, there is no specific due date as set forth in the PFC Audit Guide.

System Requirements

About the Publisher

AICPA

About the AICPA The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 412,000 members in 144 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, and offers specialty credentials for CPAs who concentrate on personal financial planning; forensic accounting; business valuation; and information management and technology assurance. Through a joint venture with the Chartered Institute of Management Accountants, it has established the Chartered Global Management Accountant designation, which sets a new standard for global recognition of management accounting.