Virgin Australia Holdings (VAH) is the second largest airline in Australia and operates through domestic and international operations (Farabi, 2012, p. 3). However, there are some business risk factors should be considered before engagement letter preparation.
A. Intense competition
Australian air-service industry is experiencing a tough period. Since early 2000s, with the some restrictions removed, some international companies appear in the domestic air-services and the new entrants are more popular because of the low costs (Kain & Webb, 2003, p. 17). In 2014, a bitter price war began between Virgin and Qantas which contributed $8.75 million into debt a day. It contributes to a $2.8 billion loss for Qantas ---the worst situation in the group’s 90 years history for 2013-14. At the same time Virgin suffered from a $408.4 loss (Srisaeng, Baxter, & Wild, 2014). Facing the pressure of market downturn, VAH could beautify the financial performance and a potential business risk exists.
B. Expansion of the business
VAH purchased the remaining 40 percentage stake in Tigerair Australia for $1.00 per share in October 2014, which has already acquired 60 percentage of that. Additional, VAH bought Western Australian’s Skywest to enhance its role in mining state. Although rebranded Tigerair and taken over Skywest moving up VHA operation scale and increasing VAH market shares from 39% to the current 42%, it is a challenge for VHA to optimise the business consistent and sustainable performance (Srisaeng et al., 2014, pp. 1-3). As a consequent, a number of material misstatements will be required to adjust resulting from misestimating an accurate demand associated with the expansion.
C. Fluctuations in foreign exchange
VAH is a company that engages in business activities in a lot of parts of the world, as a result the portion of VAH consolidation assets and liabilities in various currencies will be burden risks of foreign currency exchange rates fluctuations. Moreover, the market price of Australia dollar shows a decrease tends since 2012, resulting in lower revenues or higher expenditures of international financial activities (Wensveen, 2010, p. 13). In order to mitigate the adverse impact on currency exchange rates fluctuations, a fake sales statistics will be created by VAH.
D. The entity’s objectives
As VAH had a $98.1 million loss after tax in 2013, John Borghetti, the CEO of VAH announced that they were confident to current structure and would earn a profit in the 2014 financial year (VAH, 2013). VAH, however, did not have a sound performance in the following year, a more $355.6 loss occurred in 2014 (VAH, 2014); the managers are under the pressure of the entity’s objectives. In this situation, managers might intent to embellish financial report to alleviate the blame from shareholders. Therefore, it is a potential business risk factor that auditors should pay attention to.
2. Laws related to Virgin Australian Holding
Other than general corporate law, accounting standards, taxation, and ASX listing requirements there are four specific and different categories of laws that would be applicable to VAH.
Firstly, auditor needs to read International Standard on Auditing (ISA) 250 to consideration of laws and regulations in audit VAH. (Consideration of laws and regulations in audit of a financial report, 2009)
Secondly, according to ISA 200 auditor need look at the overall objective in VAH. (Consideration of laws and regulations in audit of a financial report, 2009)
According to ASA102 and ASA315, auditor need to compliance with ethical requirements when performing Audits and Identifying and Assessing the Risks of Material Misstatement (Auditing standards made under section 336 of the corporation act 2001, 2001).
3. The type of fraud that the auditor would most likely focus on
Fraudulent financial reporting is the type of fraud that auditor would most likely focus on within VAH. According to VAH…