(a) Principal control risks and internal controls to mitigate

Fuel
Risks

• Fuel could be lost or misappropriated.
• Fuel could be used without being charged to an external customer.
• Fuel could be stored inadequately leaving the company exposed to breaches of environmental/health and safety regulations.

Controls

• Fuel should be stored in accordance with environmental/health and safety regulations.
• Receipts of fuel should be logged.
• Receipt and issue of fuel should only be made by one of the mechanics.
• Internal issues of fuel (to the flying school) should be authorised, by one of the two directors on a fuel requisition form.
• External issues of fuel should only be made to credit-checked clients, within their credit limits, and should result in a form, signed by the client, acknowledging receipt of that quantity of fuel.
• Regular fuel reconciliations should be carried out agreeing a fuel dip to the record of theoretical fuel. Discrepancies outside a certain range should be investigated.

Maintenance
Risks

• The company’s aircraft may not be properly maintained, leading to safety/regulatory risks.
• Parts and mechanics’ time may not be properly charged to clients’ accounts.
• Parts could be lost/misappropriated.

Controls

• An adequate timesheet system should be operated to ensure that all hours worked are properly authorised, all chargeable hours are properly charged, and that mechanics are properly employed on the company’s or its clients’ aircraft.
• An adequate stores control system should be set up to ensure that parts ordered and issued are authorised, checked on receipt and charged to clients.
• A periodic physical inventory count should be carried out and any discrepancies between book and physical inventory investigated.

Flying school
Risks

• Tuition charged on a credit basis could lead to irrecoverable receivables.
• Outside instructors could be paid for hours not worked.

Controls

• Tuition should only be offered on a credit basis to credit-checked clients, within their credit limits.
• All other clients should purchase pre-paid vouchers.
• Charges for outside instructors should be authorised to ensure that only tuition provided is paid for and at an agreed rate (e.g. agreed rate × number of hourly lessons taken).

Tie down and hangar services
Risks

• Unauthorised aircraft could be tied down/stored in hangars.
• Charges for authorised aircraft may not be billed.

Controls

• Physical controls over access to hangars/tie down lots with only authorised aircraft allowed access.
• Daily log taken of aircraft stored in hangars/tied down with monthly bills drawn up on this basis.

Regulations
Risks

• If the company does not adhere to local aviation authority regulations (e.g. over safety, fuel storage, flight records, maintenance and testing of aircraft) it could lose its operating licence.

Controls

• The directors should ensure that regulations are followed and monitor any changes in regulations.(b) Appropriate audit strategy

  Even with the controls suggested above, SkyWing Aviation remains a small family-owned company. As such, it carries the internal risks of domination by individual family members. The risk of misstatement or otherwise depends on the compliance and integrity of those family members.

  The company has very few employees amongst whom it can achieve effective segregation of duties. Any computerisation of systems may improve efficiency but controls over such systems in small companies are rarely adequate. Therefore the audit approach is likely to be wholly substantive.

  The auditor will also need to consider the laws and regulations surrounding this business sector. In order to properly assess risk he will need a detailed knowledge of such regulations.