Auditing Case Study Solution
Inherent risk analysis
It is pertinent to note that the aviation industry is highly prone to the inherent risk and challenges. Virgin Australia is exposed to various inherent risk, which includes, but are not limited to, changes in government regulation, exposure to economic conditions changes, foreign exchange and fuel volatility, and other exogenous events such as an epidemic, war, natural disasters and aviation incidents. These inherent risks could affect the achievement of financial prospects and the strategy of the company as a whole.
Robust competition
Despite continued efforts to be the best value airline, Virgin Australia is highly affected by the robust competition in the market from other airlines and other modes of transportation. For example: the airline industry is characterized by imperfect competition structure, low entry barriers because of the presence of established market competitors. Furthermore, the competitors are in a race of stealing the market share of other competitors, and the customers are benefiting from the unprecedented combination of affordability, access, competition and choice.
Foreign exchange movements
The change in foreign exchange and fuel prices is an inherent part of the airline’s operations. The frequency and complexity of the foreign currency transactions also lead towards higher inherent risk in the account of unearned revenues, interest-bearing liabilities, passenger revenues and intangible assets. For example: the adjusted net debt of the company increased by 95.8 million dollars, due to adverse movements in foreign exchange. In addition to this, the rate of foreign exchange and the changes in prices of fuel impacts contributed to the decline of approximately 87.6 million dollars. Due to the adverse effects of the prices of fuel and foreign exchange movements; the company’s attempts to maintain a stringent hedging program to protect itself against foreign exchange movements and adverse effects of the fuel prices, because the foreign exchange and fuel prices trend affect the costs,including funding, aircraft and fuel costs.
Cyber-terrorism
The cyber-terrorism threat is on the rise and the operations of the airline are vulnerable to the potential disruption of networked infrastructure in air traffic control, communication, weather forecasting and routing. For example; the company is prone to the high losses related to the cyber threats, which include the exposure of vulnerable software and systems, the introduction of malware to critical network, denial of service attacks and the compromise of sensitive data and information. Due to an increased prevalence of security threats in the airline industry; the company needs to enhance the data governance framework to ensure that commercial and ethical data risks are managed in addition to data privacy and protection.
Climate changes
Another significant and considerable inherent risk is the changes to climate, which has a direct as well as an indirect impact on the business. For example; the transition and physical risk related to the climate change might last a significant impact over the customer’s demands, such as: the changes in the travel demand to locations affected by the climate change, changes in charter and corporate level markets because of the changing economics of the industry as well as overall softening of demand because of the customer preferences & improved prices. Thus, the company uses scenario analysis to have in-depth knowledge and understanding of potential implications of reduced demand. This in turn helps the company in improving the effectiveness of controls and enables it to make efficient long-term decision making(Report F. S., 2019)...............
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