Question

Aria Aviation is an existing client of CA Partners. The auditors are aware that the impacts on airlines of the recent COVID-19 events have been severe with predictions of a prolonged downturn. Even though domestic travel restrictions are expected to ease soon, the recent collapse of other airlines such as Virgin Australia has prompted Aria Aviation to adopt a conservative approach, which includes using the downtime to perform both major and minor maintenance work on their fleet, and focusing on building their cargo revenues. Unlike some of its sector counterparts, Aria Aviation had, prior to the virus outbreak, posted substantial profits and had significant reserves on its balance sheet.

The client’s policies include the following:

Accounting Policy: Aircraft Maintenance Costs

Major costs:

An element of the cost of a new aircraft is attributed on acquisition to prepaid maintenance and is depreciated over a period ranging from three to ten years from the date of manufacture. Subsequent costs incurred which lend enhancement to future periods, such as long-term scheduled maintenance and major overhaul of aircraft and engines, are capitalised and depreciated over the length of period benefiting from these enhancements. Minor costs:

All other maintenance costs are charged to the income statement as incurred.

From previous audit work you have established that the prepaid maintenance that is embedded in the original cost of aircraft is calculated based on formulae and data including the activity levels of the aircraft and the scheduled cost (not the actual cost) of the maintenance activities.

The latest financial data from Aria Aviation shows that the aircraft and engines at cost (including major maintenance costs) have remained at a similar level compared to last year, before the COVID-19 situation. There is also little variation between this year’s and the previous year’s maintenance and depreciation expenses respectively.

Required:

What key assertions for the aircraft asset, maintenance expense and depreciation expense account are likely to be affected? Explain, only within the context of the given information, why you believe these assertions may be affected.

Prepare a table as shown below to provide your answers.

2

Account affected Key assertion affected and explanation why

Aircraft asset
Maintenance expense
Depreciation expense

Answer 1