Audit of Airline Industry PDF

QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy AUDIT OF AIRLINE INDUSTRY Prepared by: Am-is, James Lee Babila. Crea...

QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy AUDIT OF AIRLINE INDUSTRY Prepared by: Am-is, James Lee Babila. Creamy Anne Cabiyaan, Aira Mae Crisostomo, Cherisse Delacruz, Hazel Anne Diosana, Trixie Jane Gallego, Allysa Ibañez, Richene Claire Luces, Jireh-lyn Mangawang, Kyla Gayle Real, Chzaira Sy, Kyla Mae Villaluz, Marjolyn SBAC-4B 0  QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy AUDIT OF AIRLINES OVERVIEW ➔ Airline Company is a company that provides air transport services for traveling passengers and/or freight. ➔ The airline industry in the Philippines continues to be a booming business. It plays a significant role in the country’s economy, connecting its archipelago of over 7,000 islands and facilitating international tourism and business. ➔ In 1931, the government created an office under the Department of Commerce and Communications to handle airline matters. ➔ In 1941, Philippine Airlines (PAL) was founded and considered a flag-carrier airline of the Philippines. ➔ The country has 71 airports. 11 are equipped to handle international flights, while 32 accommodate only domestic travel. Additionally, 28 airports are primarily used for general navigation purposes. (Civil Aviation Authority of the Philippines) ➔ The most prominent airport is the Ninoy Aquino International Airport (NAIA). ➔ The four major commercial airlines in the Philippines are Cebu Pacific, Air Asia, Philippine Airlines, and Skyjet, which handle most of the country's air traffic for both international and domestic routes. TYPES OF AIRLINE 1. Low-Cost Carrier (Budget Airlines) – lower ticket prices but fewer onboard conveniences. 2. Full-Service Airlines – includes all the comforts and conveniences 3. Regional Airlines – a scheduled service with regular departure and arrival times, with the scheduled frequency, depending on local demand. 4. National Airlines – also called flag-carrier airlines because they represent the national government of their country of origin. 5. International Airlines – complies with international regulations for the country of origin or destination. Most countries that accept flights from other countries will have bilateral agreements that govern these flights and rules by which both countries must abide. 6. Charter Airlines – offers their aircraft on an on-demand basis as a charter instead of a scheduled flight. It is usually rented as an entire unit rather than on a seat-by-seat basis. 7. Alliance Airlines – a collaboration of airline companies to benefit both airlines. These agreements can include the participating airlines advertising scheduled flights for both companies. 8. Freight or Cargo Airlines – focuses on carrying freight and does not offer a passenger service. 9. Network Airlines – mainline airlines collaborate with smaller regional airlines. 10. Mainline Airlines – focus on operating major routes from hub airports. These airlines generally operate large passenger jet-engine aircraft and rely on the high demand for air travel from large cities or popular destinations. 11. Legacy Carrier Airlines – airlines that were in operation and had established routes before the deregulation of airlines and flying routes. REGULATORY BODIES 1. Department of Transportation (DTr) ➔ Responsible for the country's land, air, and sea communications infrastructure. ➔ Ensures safe and efficient air travel and implements policies for various transport modes under the Philippine government's oversight. 1  QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy ➔ 2. Civil Aeronautics Board (CAB) ➔ Regulate, promote, and develop the economic aspect of air transportation in the Philippines as they perform quasi-judicial functions which allow it to handle disputes related to its regulatory activities. ➔ Issues permit such as Certificates of Public Convenience and Necessity (CPCN) to domestic carriers, Foreign Air Carrier's Permits (FACP) to foreign carriers, and Letters of Authority to airlines that are fit to perform services as required by public convenience and necessity. ➔ Protects consumers through the Air Passenger Bill of Rights, concerning delays, cancellations, and other service issues. It aims to enhance consumer confidence in air travel by ensuring airlines meet their obligations. 3. Civil Aviation Authority of the Philippines (CAAP) ➔ is the civil aviation authority of the Philippines and is responsible for implementing policies on civil aviation to assure safe, economical, and efficient air travel. ➔ CAAP is mandated to set comprehensive, clear, and impartial rules and regulations for the Philippine aviation industry. REGULATORY FRAMEWORKS 1. R.A. 776 (Civil Aeronautics Act of the Philippines 1952) ➔ Established the Civil Aeronautics Board (CAB) and enforced air traffic rules and regulations. ➔ Issue, amend, and revoke certificates for air carriers and investigate accidents and incidents involving civil aircraft. 2. R.A. 9497 (Civil Aviation Authority Act of 2008) ➔ Established the Civil Aviation Authority of the Philippines (CAAP) and aims to align Philippine aviation standards with international guidelines, particularly those set by the International Civil Aviation Organization (ICAO). ➔ Regulate and supervise all aspects of civil aviation in the Philippines. ➔ Develop and implement policies and programs to ensure aviation safety and security. ➔ Issue licenses and certificates, such as Air Operator Certificate (AOC), Air Traffic Controller License (ATC), and Certificate of Airworthiness (COA). ➔ Conduct inspections, investigations, and enforcement actions to ensure compliance with aviation laws and regulations ➔ 3. Civil Code ➔ These articles under the Philippine Civil Code specifically outline the responsibilities of common carriers, including airlines, regarding the safety and security of passengers and their belongings. ➔ Article 1733. Common carriers are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them ➔ Article 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods unless it is caused by a natural disaster, war, omission of shipper, defective goods, or order of a public authority ➔ Article 1735. Common carriers are presumed to have been at fault or to have acted negligently if the goods are lost or destroyed unless they prove that they observed extraordinary diligence as required in Article 1733. ➔ Article 1755. Common carriers are bound to carry the passengers safely as far as human care and foresight can provide. ➔ Article 1756. In case of death or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in articles 1733 and 1755. 2  QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy AUDIT CONSIDERATIONS 1. PFRS 15: Recognition and Measurement ➔ Record unearned revenue when a ticket is sold and scheduled service is at a later date. ➔ Recognize revenue when the carrier provides the transportation service, completing the earnings process. ➔ Revenue Recognition: a. Station Sales and Travel Agency Sales – sales made at airport stations or other sales locations and sales generated through travel agencies. Revenue is recognized when the service is performed, not when the ticket is sold. b. Tickets Breakage – revenue from tickets sold but never used by customers. Recognize revenue if it is highly probable that breakage will not result in significant revenue reversal. c. Commissions under Codeshare Agreement – one airline sells a ticket, but another airline operates the flight. Recognized as revenue when the operating airline's passenger or cargo is flown or lifted. Revenue is recognized at gross when acting as principal and at net basis when acting as agent. d. Air Travel or Loyalty Points – rewards earned by passengers for purchasing flights, which can be redeemed for future travel or services. Account for the award credits as a separate component of the initial sales transaction. The consideration allocated to the points is initially recognized as deferred revenue and subsequently recognized revenue when redeemed. 2. PAS 16: Aircraft and Related Equipment ➔ Under PAS 16, aircraft and related equipment typically consist of: a. Flight Equipment – includes airframes, engines, and improvements made to owned or leased aircraft. b. Ground Property and Equipment – consists of land, buildings, leasehold improvements (e.g., in passenger or cargo terminals), and equipment used for aircraft servicing, cargo handling, and facility maintenance. ➔ Depreciation Methods in the Airline Industry are: a. Unit Depreciation: Applied to high-value assets like aircraft and engines, where each asset is depreciated individually over its useful life. b. Group Depreciation: Used for similar assets grouped together, such as rotable parts and assemblies. Depreciation is calculated for the group rather than individually. Control Procedures Analyze transaction records for aircraft, including accumulated depreciation and repair expense accounts. Perform physical inspections to verify aircraft existence, condition, and ownership. Vouch and investigate additions and disposals for accurate recording. Recalculate depreciation to ensure correct estimates of useful lives and residual values. 3. PFRS 16: Leases ➔ A lease is a contract that conveys the right to use an asset for a period of time in exchange for consideration. ➔ Some airlines lease their PPE, like planes or equipment, to other carriers. ➔ The Airlines Company needs to review the leases using the same guidelines under PFRS 16 to determine how the leases should be accounted for, either as finance or operating leases. ➔ Subleases of equipment should be reviewed for classification in the same manner as all other leases. 3  QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy UNIQUE ACCOUNTS 1. Air Traffic Liability ➔ The value of unused transportation sold by the reporting air carrier. ➔ The liability for transportation to be provided by the carrier selling the ticket, as well as a liability for transportation that may be provided by other air carriers ➔ Components of Air Traffic Liability: a. Station Sales – These are ticket sales made directly by the airline through its physical locations (airport counters, city offices, etc.). b. Travel Agency Sales – these are tickets sold by third-party travel agencies on behalf of the airline. Control Procedures Regularly check that the number of passengers and flights matches the money received. This helps keep records accurate. Only count ticket sales as revenue when the flight happens, not when the ticket is sold. Track unused tickets as liabilities (money owed for future flights). Regularly review accounts where unused tickets are held as liabilities to ensure they’re correct until the flight is taken. Have different people handle booking, ticketing, and financial checks to prevent mistakes or fraud. Regularly check for old unused tickets and have a policy to cancel or write off liabilities after a certain time, following rules. 2. Aircraft and Engine Lease ➔ Agreements in which airlines rent aircraft or their engines from lessors instead of purchasing them outright to lower costs. ➔ Two types of lease are: a. Finance Lease – lessee substantially all the risks and rewards of ownership and the asset is used most of its useful life or has the option to buy the asset. b. Operating Lease – lessor retains the risks and rewards of ownership and the lease term is shorter than the asset's useful life. X COMPANY AUDIT PROGRAM FOR AIRCRAFT AND ENGINE LEASE Audit Objective: 1. To confirm the accuracy of lease payments, including rents, maintenance reserves, and other related charges. 2. To ensure compliance with the lease terms and applicable regulatory requirements. 3. To assess the condition and use of the leased aircraft and engines. 4. To verify proper accounting treatment for leased assets. 5. To identify any risks associated with the lease, Audit Assertions: Presentation and Disclosure (PD), Existence or Occurrence (EO), Rights and Obligations (RO), Completeness or Cutoff (CO), Valuation, Accuracy, and Valuation (VAA) 4  QUEZON CITY UNIVERSITY 673 Quirino Hi-way, San Bartolome, Novaliches, Q.C. College of Business Administration and Accountancy Audit Procedure: Activities WP Ref Date Done by 1. Obtain copies of all aircraft and engine lease agreements and verify the key terms of each agreement 2. Confirm whether payments are made under the lease agreement and ensure that payments are made on time. Check for any discrepancies or adjustments. 3. Review maintenance records, logs, and reserves to confirm compliance with scheduled maintenance and lease requirements for the aircraft/engines. 4. Ensure the lessee complies with PFRS 16. 5. Evaluate redelivery terms, assess the condition of assets at lease end, and verify financial settlements. Remarks: Prepared by: Reviewed and Approved by: 3. Passenger and Cargo Revenue ➔ Passenger Revenue: is the income generated by an airline from selling tickets to individuals traveling on its flights. ➔ Cargo Revenue: represents the income from transporting goods, mail, and freight on aircraft. Control Procedures Ensure that revenue is recognized only when the service is provided (e.g., flight taken or cargo delivered), preventing premature or deferred recognition. Implement automated systems to track unflown tickets and undelivered cargo as deferred revenue, and ensure these are accurately transitioned to revenue when the service is completed. Maintain robust IT controls over the airline’s reservation, ticketing, and cargo management systems to ensure accurate data capture, processing, and reporting of transactions. Perform regular reconciliations between revenue data from operational systems (e.g., booking systems) and the general ledger to ensure completeness and accuracy of recorded revenue. Establish strict approval and authorization processes for adjustments, refunds, discounts, or cancellations to prevent unauthorized changes that could misstate revenue. Reference American Institute Of Certified Public Accountants. (2016). Audit and accounting guide. Airlines. John Wiley & Sons, Inc. https://books.google.com.ph/books?id=vvtNDQAAQBAJ&source=gbs_navlinks_s Valmonte, A. (2024, September 12). EoPT invoicing, clarified. https://www.pwc.com/ph/en/tax/tax-publications/taxwise-or-otherwise/2024/eopt-invoicing-clarified.html Centre for Aviation. (n.d.). Philippines Department of Transportation (DOTr). Centre for Aviation. Retrieved https://centreforaviation.com/data/profiles/government-bodies/philippines-department-of-transportation-dotr Civil Aeronautics Board. (n.d.). Policies and regulations. https://www.cab.gov.ph/mandates/category/policies-and-regulations Civil Aviation Authority of the Philippines. (n.d.). Philippine civil aviation regulations. https://caap.gov.ph/philippine-civil-aviation-regulations/ 5