Case Analysis : Southwest Jet

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EastJet Audit
Answer 1

1. Analytical procedures
a. Comparisons
b. Ratio Analysis
East Jet has experienced an increase of 28% in revenues which is in line with the increase in expenses the company has seen. However, there is an overall 31% increase in income before tax (EBIT). Revenues have stayed the same in 2014, even though there was 80% uptake of seats on the flights offered Monday to Friday.
Ratio Analysis
1. Current Assets
Since we do not have figures for the second half of the year 2014 we have compared balance sheet as at December 31, 2013 with balance sheet as at June 30, 2014. Only six months into 2014 and current liabilities are already more than what they were last year. On the half year mark current assets in 2014
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Some of the unearned accounts receivable belongs to unearned revenue, hence this amount should be revised which as a result will show a bigger increase.

Answer 2

Do better understand the analysis of audit risk let us first define what audit risk is and what its components are. Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. This means that an auditors reports that in their opinion the financial statements are fairly presented when, in fact, they contain a significant error or fraud, and therefore are materially misstated.
Audit risk consists of:
1. IR = Inherent risk
2. CR = Control risk
3. DR = Detection risk
Audit Risk = Inherent risk (IR) x Control risk (CR) x Detection risk (DR)
Audit Risk Explanation
1. Inherent risk This is the first stage in assessing the risk of material misstatements, where the auditor considers the risk of material misstatement before consideration of any internal controls. This is done at the financial statement level by considering such things as the nature of the business, the industry, and any previous experience with the client.
Carter & McLean has just taken on the audit of EastJet and since it is the first time they are performing audit on this client it would be safe to assume that inherent risk exists here.
Prior year
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