Reference no: EM131217783

Zaird and Associates is preparing their third audit of Universal Air and has uncovered a policy that raises some concern. When sales are booked on the airline website, a receivable account is debited and a sales account is credited. If the ticket is subsequently cancelled, there is no accounting entry that occurs. An entry is only made to a database that maintains seat availability on the flight. Customers are sent a form to cancel their reservation and must request a refund in writing. If the customer fails to request a refund in writing, the receivable is billed to their credit card. When the charge appears, many customers call to complain and are issued a refund. A journal entry is then made for the cancellation. Upon inspection, the cancelled reservation form that is sent to customers does not say in writing that a refund must be requested. When this finding is presented to the controller, they state that the information is found on the website under the company’s business policies and procedures section. The controller also estimates that only two thirds of customers request refunds and the remaining third do not. Zaird has contacted their legal team about the policy. The legal counsel is unable to say if the policy is illegal and suggests that is it probably not. The policy has been in existence for three years and Zaird has not found this policy in their previous audits of Universal Air. Is this a significant deficiency? Should it be reported to the audit committee? Should it be reported elsewhere? Where? How? What impact should this policy have on the audit?