Designing Audit Procedures When Evidence Is Electronic: The Case of E-Ticket Travel Revenue

Article excerpt

ABSTRACT: The objective of the Fly Airline case is for you to learn to develop audit procedures in a context, e-ticket revenue, in which most of the evidence is available electronically, and in which many tests of controls and substantive tests can be performed using data stored in electronic form. In sequence, you will identify controls and their objectives, match controls to financial statement assertions for revenue, develop tests of controls, develop substantive tests for each assertion, and organize audit procedures into an effective and efficient audit program.

Keywords: auditing; e-ticket revenue; collaborative learning; electronic evidence; internal control; monitoring; systems expertise for auditing.

**********

OVERVIEW

Fly Airline's revenue generation begins when a customer selects a flight for a specific date and time. The process is similar whether a ticket agent or the customer interacts with the system to make the reservation. If the customer is paying with a credit card, the system validates the credit card number the customer presents for billing before making the reservation. When it obtains approval of the credit charge (electronically, from the card issuer), the system records the charge and other details of the reservation. The customer gets a confirmation number and itinerary immediately, and gets a boarding pass at the gate only by presenting picture identification.

Daily, the system batches each day's charges by credit card issuer and transmits them electronically to credit card issuers. Until a flight occurs, ticket sales ate recorded as unearned revenue. After a flight, the system records earned revenue based on the reservations for the flight and decreases unearned revenue accordingly. Furthermore, Fly Airline's bank provides electronic bank statements.

In addition to offering flights to customers and allowing customers to make reservations, Fly's system accommodates changing reservations, handling cash and credit card receipts, boarding passengers, and booking revenues. The system includes procedures for setting fares and for passengers flying free. The system includes monitoring activities designed to ensure the effectiveness of operations and information analysis that management uses to maximize revenue per seat-mile. Figure 1 presents an overview of the system and Figure 2 illustrates the system database. Details about how the system works appear following Figures 1 and 2.

[FIGURE 1 OMITTED]

Offering Flights to Customers

Fly offers flights to customers through a system that customers and agents access through the Internet. Customers and ticket agents enter the origination and destination cities and the dates and preferred times for travel. The system generates information that permits customers to choose specific flights.

In collaboration with other Fly units, flight operations establishes the flight schedule. To change the schedule, flight operations enters changes into a flight change edit program. After the flight operations manager has approved schedule changes by attaching an electronic signature to the schedule change file, the system schedules the changes for application on the right day (at midnight), counts the number of schedule changes, creates a hash total of the flight numbers, adds a header record to the charge file containing the count, the hash total, and the manager's electronic signature, copies the file to the update queue, and notifies computer operations of the pending update of the flight table. A file of schedule changes is maintained.

Fares vary based on the route to be traveled, whether travel is during peak or off-peak times, and whether the ticket purchase is an advance of regular purchase. Tickets bought 14 days before the flight date are advance purchase tickets. Given the destination and whether the purchase is an advance or regular purchase, the system determines, based on the date and hour of the flight, whether travel is during peak or off-peak times and displays the appropriate late. …