The accounts receivable account is a large account for American Airlines given their continuous
booking of flights at all times of the day. The account itself is at a large risk for overstatement
due to management’s desire to portray a successful company with a growing customer base.
However, year over year comparison shows that the accounts receivable balance went down
from 2017 to 2018. Upon further review of the financial statements we identified that revenues
have increased from the prior year which causes speculation about the receivables going the
opposite direction. The decrease in receivables is not material or significant and can be
attributed to customers being proactive in paying for their flights upfront.
2018
2017
1706
1752
(10K)
To test the receivables account we have identified an audit risk of 5% which was set by the
audit team. We believe that this is an appropriate overall risk for the account and the audit as a
whole due to the industry and our company standards. We have set inherent risk for the
receivables account at 75% due to the nature of the account and the large size of the company.
There are a lot of areas for the account to be potentially misstated and we believe this is a fair
evaluation for the account. Control risk will remain at 35% for the account which was also set for
the audit as a whole. The controls in place by American Airlines are effectively designed,
however the client is very large and the areas for misstatement are vast. And finally the
detection risk is set at 19%, a calculation from the other parts of the formula for risk of material
misstatement.
To accomplish our task of reasonably assuring that there are no material misstatements for this
