AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

AUDIT OF AVIATION SECTOR EXAMINATION REVIEWER

Chapter 1 – The Airline Industry

1. All the following are industry accounting services provided by Air Transport Association of America except:

a. Corporate Accounting

b. Partnership Accounting

c. Agency Accounting

d. Revenue Accounting

2. A voluntary organization of international air carriers established in 1946 to negotiate air fares, cargo rates, condition
of service and ancillary matters.

e. Air Transport Association of America

f. Commuter Airline Association of America

g. Civil Aeronautics Board

h. International Air Transportation

3. The national association of member airlines that are engaged in scheduled air transportation of passengers and
cargo in local, feeder, and short-haul markets throughout the United States, and its territories.

i. Commuter Airline Association of America

j. Air Transport Association of America

k. International Air Transportation

l. Civil Aeronautics Board

4. Each division in an airline organization is the responsibility of a manager who reports directly to the chief
executive or operating officer, who in turn is responsible to the board of directors.

A. True
B. False

5. Air carrier accounting information is controlled by the Uniform System of Accounts and Reports (USAR).

A. True
B. False

6. Public related revenues result from services that are incidental to air transportation, such as liquor sales, sublease
income, and maintenance work performed for other airlines.

A. True
B. False Transport related revenues

7. What is the act that introduced the first federal legislation dealing with air safety?
a. Federal Aviation Act
b. Civil Aeronautics Act
c. Air Mail Acts
d. None of the above

8. What governs airline industry employees and permits Congress to intervene in the negotiation or settlement of
strikes?
e. Federal Aviation Act
f. Civil Aeronautics Act
g. Air Mail Acts
h. Railway Labor Act
 9. What was identified to be the major cause of aircraft replacement obsolescence in the 1950s – 1960s?
i. Technological advances
j. Physical deterioration
k. All of the above
l. None of the above

10. It is a type of contract in which shareholders of a corporation create a voting trust by pooling their voting rights and
transferring them to a trustee.
 Bilateral Agreement
 Revolving Credit Agreements
 Pooling Agreement
 Unilateral Agreement

11. There are three forms of debt financing predominate except

 Revolving Credit Agreements
 Bond Issues
 Leasing
 Debt Issues

12. Who plays a major role in air transportation by financing, owning, and operating terminal facilities necessary for
air travel?
 Federal Aviation Administration
 Corporate Aviation
 Auditors
 Air Carriers

Chapter 2 - Accounting and Auditing in an Airline Environment

1. Are substantive tests of financial information made by a study and comparison of relationships among data," including
comparisons to forecasted results, prioryear results, and industry performance.
a. Analytical review procedures
b. Accounting control
c. Benchmarking
d. Accounting information

2. Defined in SFAS No. 14 as "a component of an enterprise engaged in providing a product or service or a group of
related products and services primarily to unaffiliated customers for a profit."
a. Industry segment
b. Accounting control
c. Foreign operations
d. Domestic operation

3. Defined in SFAS No. 14 as including "those revenue-producing operations that are located outside of the enterprise's
home country (the United States for U.S. enterprises) and are generating revenue either from sales to unaffiliated
customers or from intraenterprise sales or transfers between geographic areas.
a. Industry segment
b. Accounting control
c. Foreign operations
d. Domestic operation

4. Amount of compensation is generally dependent on the following, except:

a. Number of variables,
b. including,
c. among others,
d. advance

5. Usually represents a significant portion of an airline's operating expenses

a. . Accounting control
b. . Benchmarking
c. . Accounting information
d. Flight Compensation

6.Major portion of an airline

a. Accounting control
b. Foreign operations
c. Domestic operation
d. Fixed Assets
7.It comprises the plan of organization and the procedures and records that are concerned with the safeguarding of assets
and the reliability of financial records and consequently are designed to provide reasonable assurance
A. Financial Management
B. Federal Aviation Act
C. Accounting control
D. Auditing Standards

8.It is called as a refinement of the load factor concept that examines the relationship of the revenues generated and the
expenses incurred.
A. Break-even load factor
B. Yield
C. Fixed Assets
D. Mail ton miles

9.The total of all expenses incurred on the ground incident to preparation for aircraft arrival and takeoff
A. Traffic expenses
B. Capacity expenses
C. Aircraft servicing expense
D. Reservations and sales expense

10. Many airline activities are unique, and, as a consequence, several internal accounting controls are peculiar to the
industry.

A. True
B. False

11. The auditor should be aware of potential problem areas that may exist in a company engaged in airline
operations. Such areas may include the following:

A. Unreported ticket sales, which can result from delays or from lack of controls surrounding the matching of
tickets lifted with tickets sold.
B. Expenses incurred at the local level in the pursuit of passenger service, including meals, transportation, and
accommodations of various kinds for both scheduled and delayed passengers.
C. The risk of ticket exchange transactions, whether authorized or unauthorized, and similar arrangements that
are inherent in a business devoted to the sale of an attractive but perishable commodity.
D. All of the above.
E. No Correct Answer

12. Although not unique to the airline industry, a/an _________ may be an integral factor to be considered by the
auditor in his evaluation of internal control.

A. Internal Audit Group

B. External Audit Group
C. Regulatory Agencies
D. Independent Auditor

13. Designed to assist the auditor in meeting the requirements outlined in Statement on Auditing Standards No. 3

A) Federal Aviation Act

B) Electronic Data Processing
C) Online Systems
Answer: B. – Electronic Data Processing

14. Are defined in SFAS No. 14 as including "those revenue-producing operations that are located outside of the
enterprise's home country (the United States for U.S. enterprises) and are generating revenue either from sales to
unaffiliated customers or from intraenterprise sales or transfers between geographic areas.”

A) Domestic Operations
B) Operations via the Atlantic Ocean
C) Foreign Operations
Answer: C. – Foreign Operations

15. Defined as "sales to customers in foreign countries.”

A) Export Sales
B) Foreign Sales
C) Import Sales
Answer: A. – Export Sales
 16. What is generally refundable if not used by the customer for up to one year after the sales date?

A) Flight Points/Rewards
B) Plane tickets
C) Excess Baggage Fees

17. __________ is the percentage of revenue passenger miles to available seat miles in revenue passenger service.

A) Available seat miles (ASMs)

B) Yield
C) Load factor

18. The CAB currently requires air carriers to report earned revenues and related expenses by "entities", except

A) Domestic operations
B) Operations via the Arctic Ocean
C) Operations via the Pacific Ocean

Chapter 3 - Specific Accounting Principles and Auditing Procedures

1. An airline ticket consists of several coupons indicating the itinerary of the passenger. One copy is
a. located on the top sheet and at the time to fill / write tickets will suppress coupons underneath / karbonis.
b. the auditor's coupon, which is the initial document used to record a sale.
c. to keep an eye on the company at all times, developing periodic reports to discuss specific safety issues
and concerns.
d. to indicate the details on the items that are to be purchased, such as the types of goods, quantity, and
price.
2. The task for airline revenue accounting is twofold:
I. To record unearned revenue when a ticket is sold, and scheduled service is at a later date.
II. __________.
a. To recognize revenue when the carrier provides the transportation service and thereby completes the
earnings process.
b. To evaluate the future revenue-producing capacity of the intangible asset.
c. To properly apply the concept of a balanced audit approach, the auditor must give equal attention to all
the financial statements.
d. To maintain systematic record of financial transactions.

3. Air Traffic Liability is

a. obligation or commitment of any nature required to be reflected or reserved against on a balance sheet
under GAAP
b. expenses that have not yet been paid or logged under accounts payable during an accounting period.
c. the value of unused transportation sold by the reporting air carrier.
d. a liability that may occur depending on the outcome of an uncertain future event.

4. The main objectives are to invoice other airlines for lifts of tickets that other airlines have issued and to audit
interline payable billings from other airlines for lifts by those airlines that the carrier has sold.
a. Revenue recognition
b. Sampling Method
c. Refunds and Exchanges
d. Interline Accounting

5. One of the basic methods for calculating earned revenue which recognizes revenue on the basis of a survey of
lifted off-line and on-line coupons for the period.
a. Sales Match Method
b. Lift Match Method
c. Sampling Method
d. Audit Method

6. These are recorded in the air traffic liability account, in accounts receivable, and in cash accounts as part of the
station, travel agency, and interline sales entries.

a. Revenue Recognition
b. Interline Accounting
c. Refunds and Exchanges
d. Interline Billings

7. The administrative and accounting aspects of this operation involve the processing required to route and trace
shipments and to perform the accounts receivable and accounts payable functions for the associated shipping
charges.
a. Air Traffic Liability
 b. Refunds and Exchanges
c. Revenue Recognition
d. Air Cargo

8. The carrier whose airbill is used for initiating and routing the shipment.
a. Transferring airline
b. Receiving airline
c. Issuing airline
d. Delivering airline

9. The auditor should consider the following procedures when testing station sales except
a. Tests of compliance with internal accounting controls
b. Review of the bank reconciliations of station accounts for propriety.
c. Test of the cutoff of station sales at the fiscal year-end.
d. Agreement of recorded commissions with the travel agency sales summary.
10. The following accounting methods are most often employed in airframe engine overhauls expense except :

a. Direct expensing method

b. Expense method
c. Deferral method
d. Built-in overhaul method

Answer B. Expense method

11. Direct Expensing Method is the actual cost of each overhaul is capitalized and amortized to the next overhaul.

Answer : False(Deferral Method)

12. Used Aircraft acquired in various conditions and at various times between overhauls.

Lease agreements often contain provisions that require the aircraft to be returned to the lessor with a minimum number
of hours remaining to the next overhaul.

a. First statement is True

b. Second statement is True
c. Both statements are True
d. Both statements are False

Answer: C. Both statements are True

13. This insurance relates to flight equipment, and rates are normally based on the dollar value of insured equipment.
a. Passenger Liability Insurance
b. Hull Insurance
c. Contents Insurance
d. Group and Workmen's Compensation Insurance

Answer: Hull Insurance

14. The auditor should review the insurance policies in force to determine that the costs of coverage have been
accounted for properly.
Answer: TRUE

15. The recognition of insurance expense is not based on the policies and rates in effect for the period.
Answer: FALSE (-is based on the policies…)

16. It is a detailed report of the other crew members working the flight, actual travel time on all segments of the flight,
the flight number, and equipment type are prepared by the senior officer on the flight.
 a. Timeplan
b. Timesheet
c. Timetable
d. Timeline
Answer: b. Timesheet
17. When accurately calculating payroll, it is okay not to use proper measures of service time and the authorized rates
for reimbursement.
Answer: FALSE (...-use proper measures...)

18. The following procedures should be considered when testing the payroll of flight personnel, except:
a. Tests of the split between day and night hours, as well as the calculation of hours to be paid (ramp hours or
scheduled hours).
b. Tests of the type of equipment flown by reference to the flight logs.
c. Tests of the accumulated vacation time and credit plan account hours.
d. Payroll expenses were charged against operations in the proper accounting period.
Answer: d. Payroll expenses were charged against operations in the proper accounting period.

19. An air carrier’s fixed assets generally consist of, except for one
a. Flight Equipment
b. Ground Property and Equipment
c. Capital Leases
d. Inventory
Answer: D - Inventory
20. Under the Group method, the airline depreciates the cost of the individual items of property and equipment.
Answer: False (Unit Method)

21. All leases should be classified as either capital or operating in accordance with FASB Statement No. 13,
Accounting for Leases.
Answer: True

22. Rotable parts and assemblies of significant value are classified along with flight equipment as current assets.
ANSWER: FALSE - fixed assets

23. Expendable parts are classified as current assets.

ANSWER: TRUE

24. Cost of repairing rotables is charged to expense as it is incurred.

ANSWER: TRUE

25. Development and maintenance costs are deferred within the guidelines of APB Opinion No. 17, Intangible Assets.
ANSWER: FALSE- Development and Preoperating Costs

26. The following criteria should be considered in determining the appropriateness of the deferral of developmental
and preoperating costs, except:
a. Estimated benefit for future periods
b. Physical inspection of aircraft
c. Recoverability through future operations
ANSWER: B. Physical inspection of aircraft

27. ________ include those types of costs directly related to the development of new routes or extension of existing
routes.
a. Developmental Costs
b. Preoperating Costs
c. Interest Costs
ANSWER: Developmental Costs
Chapter 4 – Regulatory Matters
1. May compensate airlines for providing services to eligible communities. The compensation is paid under either Section
406 or Section 419 of the Federal Aviation Act.
A. Civil Aeronautics Board
B. Department of Transportation and Communications
C. Department of Tourism
D. Bureau of Aeronautics

2. I. Section 406 subsidy has been in effect for many years.

II. It was initially designed to compensate carriers for providing mail service to communities where such service would
otherwise be unprofitable for the carriers.

A. Both statements are correct

B. Both statements are incorrect
C. Statement I is correct
D. Statement II is correct

3. Determines the need for, and amount of, subsidy payments required by an individual carrier or a class of carriers on a
case-by-case basis.

A. Department of Tourism
B. Civil Aeronautics Board
C. Bureau of Aeronautics
D. Department of Transportation and Communications

4. Was added by the Airline Deregulation Act of 1978 to guarantee essential air service to small communities.

A. The Airline Deregulation Act of 1978

B. Section 406 subsidy program
C. The Section 419 subsidy program
D. The Airline Deregulation Act of 1999

5. I. Audit considerations doesn’t include testing of revenue by reference to monthly billings and payments received and
inquiry relative to potential rate adjustments.
II. The carrier may NOT have a contingent asset or contingent liability for any period for which a final subsidy rate has
not been determined.

A. All statements are correct

B. All statements are incorrect
C. Only statement 1 is correct
D. Only statement 2 is correct

6. Requires the Section 406 subsidy program to be phased out by January 1, 1986.
A. Airline Deregulation Act of 1978
B. Section 406 subsidy program
C. The Section 419 subsidy program
D. Bureau of Aeronautics

7. Its objectives are to further the commerce and postal service of the United States by providing air service to
communities that would otherwise be without such service.

A. Aviation Programs
B. Aeronautics Programs
C. Subsidy Programs
D. Contingent Programs

8. Include testing of revenue by reference to monthly billings and payments received and inquiry relative to potential rate
adjustments.

A. Audit considerations
B. Contingent Considerations
C. Financial Considerations
D. Accounting Considerations

9. I. Since the implementation of this subsidy program, passenger air service has grown significantly.
II. The Section 406 subsidy doesn’t compensates carriers for air transportation service generally, including both mail
and passenger service.

A. Statement III is incorrect

B. Statement I is incorrect
C. Both statements are correct
D. Both statements are incorrect
10. All are importance of CAB except one:

A. Mandated to regulate the economic aspect of air transportation

B. Have the general supervision, control and jurisdiction over air carriers, general sales agents, cargo sales agents,
and air freight forwarders as well as their property, property rights, equipment, facilities, and franchise.
C. Created in state statute to assist state government in the licensing and regulation of the public accounting
profession.

11. CAB requires carriers receiving subsidy under Section 406 of the Federal Aviation Act to depreciate flight equipment
on what kind of method?

A. Straight-line method
B. Built-in overhaul method
C. Direct expensing Method
D. Deferral Method

12. The Airline Deregulation Act of 1978 was initially designed to compensate carriers for providing mail service to
communities where such service would otherwise be unprofitable for the carriers.

A. True
B. False

13. Audit considerations include testing of revenue by reference to monthly billings and payments received and inquiry
relative to potential rate adjustments.

A. True
B. False

14. A carrier is entitled to be compensated for losses it incurs in providing forced services.

A. True
B. False

15. Disclosure in the financial statements is not appropriate if final settlements have occurred for subsidy rates applicable
to prior periods.

A. True
B. False

17. The Civil Aeronautics Board may compensate airlines for providing services to eligible communities.
A. True
B. False

18. The compensation is paid under either Section 406 or Section 426 of the Federal Aviation Act.

A. True
B. False
Answer: Section 419 of the Federal Aviation Act.
19. The Civil Aeronautics Board determines the level of essential air service for eligible cities including minimum number
of available seats and reasonable scheduling.

A. True
B. False

20. Section 419 subsidy currently compensates carriers for air transportation service including both mail and passenger
service.

A. True
B. False
Answer: Section 406

21. The ______ can set prospective rates, which are final and not subject to adjustment. It also has the authority to issue
temporary subsidy rates, which can be increased or decreased retroactively.

A. CAB or Civil Aeronautics Board

B. Airline Deregulation Act of 1978
C. Section 406 subsidy program
D. The Section 419 subsidy program

22. The Section 419 subsidy program was added by the ________ to guarantee essential air service to small
communities.
 A. CAB or Civil Aeronautics Board
B. Airline Deregulation Act of 1978
C. Section 406 subsidy program
D. The Section 419 subsidy program

Chapter 5 – Illustrative Financial Statements

1. The notes indicate the subject matter generally required to be disclosed, but they should be expanded, reduced, or
modified to suit individual circumstances or materiality considerations.

A.T rue
B. False

2. The notes to an airline's financial statements should include any other appropriate disclosures, such as information
concerning related-party transactions and subsequent events.

A. True
B. False

3. Passenger and cargo sales are not recognized as earned revenue when the transportation is provided.

A. True
B. False

4. Significant costs, such as those for traffic promotion and personnel training, related to the inauguration of service over
major new routes and to the introduction of new types of aircraft are not deferred and not amortized over a period of two
to five years.

A. True
B. False

5. Flight equipment expendable parts are priced at what cost?

A. Direct Cost
B. Indirect Cost
C. Average Cost
D. Variable Cost

6.
I. Property and equipment like flight equipment and other property are carried at cost.
II. Maintenance and repairs, including major overhauls, are charged to operating expenses as they are incurred.

A. All statements are correct

B. All statements are incorrect
C. Only statement I is correct
D. Only statement II is correct

7. Interest related to deposits on aircraft purchase contracts is ______ and amortized over the useful lives of the aircraft.

A. Recognized
B. Deferred
C. Capitalized
D. None of the above

8. Investment tax credits generated by the acquisition of assets are recognized by using what kind of method?

A. Straight line method

B. Flow-through method
C. Declining Method
D. Sum of the year’s digits