Audit Planning Considerations forAGL Energy Limited and Qantas Airways Limited

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TO: The Engagement Partner

FROM: Engagement Team Lead of AGL and Qantas

DATE: April 25, 2020

SUBJECT: Audit Planning Memorandum – Identification of key risk areas and suggested audit strategy

Dear Sir,

The management of AGL Energy Limited (“AGL”) and Qantas Airways Limited (“Qantas”) will present the annual financial statements before their respective Boards in 3 weeks’ time. Our engagement needs to be conducted and performed before the end of third week for timely availability of audited accounts for the management to take informed decisions. Realizing this fact, the engagement team responsible for conducting the audit of two entities have assisted me in identifying the key areas that require special audit consideration and also identified controls that are most relevant to the true and fair preparation and presentation of financial statements. In the following paragraphs we set forth our findings for your attention and further guidance, so that audit engagement is performed in accordance with Australian Standards on Auditing (ASAs) in an efficient and effective manner.

1. Identification of Inherent Risks

1.1 AGL

AGL owns Australia’s one of the oldest integrated energy generation portfolio with a capacity of over 10,413 MW. It market share is around 20% of the Australia’s National Electricity Market (AGL Energy, 2020). Based on the initial understanding of the company and the environment in which it operates, following inherent risks are identified in its operations (ASA 315, 2016):

  1. As at June 30, 2019 the Company has reported $898 million of unbilled revenue (included in trade and other receivables). This effectively represents the electricity and gas supplied to customers between the date of last bill and the reporting date (June 30, 2019). Besides, the company has also recognized the related costs of $400 million as reported in Note 17 of the accounts. Reporting of these figures is based on estimates and management judgments are also made in determining the estimated electricity and gas consumption between these dates. Therefore, this warrants special audit attention (ASA 520).
  2. During the year the company has expanded $141 million on the upgradation of its enterprise resource planning and management information systems. Implementation of the new IT system combined with the already complex MIS appears to be a key aspect because these systems are critical to the integrity of the financial reporting process (ASA 315).
  3. The company has huge amounts of financial instruments recorded in its accounts ($798 million of current financial assets, and $590 million of non-current). This is because the company enters into signification long-term derivative financial instruments to hedge its exposure to variability in energy prices, interest rates and forex rates. This presents a key risk in financial statements (AASB 9 – Financial Instruments).

1.2 Qantas

Founded back in 1920, Qantas proudly defines itself as the “Australia's largest domestic and international airline”. It’s business is the transportation of customers through various regional, domestic and international air flights. It operates through two airline brands, namely: Qantas and Jetstar. Following inherent risks are identified based on the initial understanding of the business and prior year audits:

  1. Being and airline service provider, majority of the assets comprise of aircrafts and carriers. These may be subject to impairment and their regular maintenance and running expenditure are usually biggest hit to profit. Hence, being a key to operational efficiency this is a key risk area (ASA 330).
  2. The company provides frequent flyer miles to its customers, and recognition of frequent flyer revenue requires high level of management judgments and assumptions as to the deferment of Unredeemed Frequent Flyer revenue. There is a risk that the same might not be recognized in accordance with the new AASB 15 Revenue from Contracts with Customers.
  3. The company hedges the risk of commodity prices and foreign currency through cash flow hedges. These in turn require estimation of the fair value of options, swaps and cross-currency at several dates and are therefore prone to errors (ASA 200).

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