Discuss about the Auditing of Woolworths Pty Ltd.
Corporate governance can be described as the framework of rules, relationships, systems and processes established within the corporations that all people within the workplace need to follow. The corporate governance framework provides the necessary directions and rules for business leaders and employees to carry out their job responsibilities. ASX Council has established good corporate governance principles to be followed by entities for promoting investor confidence by improving transparency in business operations. The principles recommended need to be followed by ASX listed entities for achieving good governance outcomes (Plessis, McConvill and Bagaric, 2005). Woolworths Pty Ltd, a supermarket giant in Australia listed on ASX, also develops and publishes its corporate governance statement as per the Council principles. The compliance of the company with the ASX principles and recommendations for corporate governance can be analyzed as follows:
ASX principles have directed the business corporations to establish and disclose the respective roles and responsibilities of the board and management. Woolworths, as per this principle, have established the role of Board members as over-viewing and appraising the strategies, policies and performance of the company. The main responsibility of the Board is to create value for the shareholders by adequately managing the business activities. The corporate governance statement of the company has presented a Board Charter for summarizing the key roles and responsibilities of the Board members. The Chief Executive Officer, CEO, is accountable to the Board and functions in support of the key management personnel. The senior management holds the responsibility of developing strategic objectives and goals of the company and making recommendation of the Board for their execution. The performance of the Board is evaluated by the Nomination committee established by the Board itself annually in support of an external advisor. This is done to ensure that the process of performance evaluation is free from any biasness and thus takes place in presence of an external advisor. Board has established remuneration committee for reviewing the performance of key management personnel during the time of determining the variable component of their remuneration (Corporate Governance Statement, 2016).
Woolworths have also maintained an appropriate size of Board having effective composition, skills and commitment for meeting their roles and responsibilities. Board consists mainly of non-executive directors having diverse range of skills and competencies to ensure that it contains sufficient knowledge for carrying out its roles and responsibilities properly. Board also analyzes the skills and competencies of a person before appointing him/her as Board member. The company also largely emphasizes on maintaining genetic diversity within Board for promoting trust and confidence of its stakeholders within the business corporate governance policies (Corporate Governance Statement, 2016).
The Code of Conduct developed by the company is applicable to all directors, senior executives and employees that have established the ethical standards and procedure to be followed and maintain diversity within workplace. The code is developed on the basis of ethical standards of integrity and honesty and fair dealing. Also, it has developed different type of activities and compliance programs for ensuring accountability in the business operations and reporting of nay unethical practices. The sustainability committee developed by the company ensures that all business functions are carried out in a responsible manner without having nay negative impact on society or environment in which it operates (Corporate Governance Statement, 2016).
Business corporations also need to have the presence of a formal and rigorous process to independently verify the integrity in corporate reporting. The audit, risk management and compliance committee (ARMCC) is developed by the company for managing risk, designing internal control systems, internal and external auditing and financial reporting (Corporate Governance Statement, 2016). The presence of ARMCC has ensured that there is integrity in corporate reporting maintained by the company (Fleckner and Hopt, 2013).
ASX listed entities need to make timely and balanced disclosure of information in relation to all matters that can have a material impact on the price of its securities. Woolworths Pty Ltd in this contest has disclosed its policy of continuous disclosure in the corporate governance statement. The company has established processes for proving timely, direct and equal access of information to all the stakeholders. Its continuous disclosure policy is specifically meant to ensure that it complies withal the regulatory requirements and promote investor confidence in its operational activities (ASX Corporate Governance Council, 2014). The policy is reviewed periodically and is also disclosed on the website of the company. In addition to this, the sustainability committee of the company ensures that it is develops and disclosed the corporate responsibility report on an annual basis. The report provides non-financial information to the stakeholders of the company and thus ensuring that the business processes are carried out in a sustainable manner. Therefore, it can be said that Woolworths effectively makes timely and balanced disclosure of information as per ASX principle (Corporate Governance Statement, 2016).
The companies listed on ASX need to also ensure that the rights of security holders are protected by disclosing them all the relevant information. Also, they should be provided with appropriate facilities for enabling them to exercise the rights effectively (Nordberg, 2010). In this context, Woolworths places special emphasis on ensuring that all the shareholders possess adequate information about the material matters impacting the securities prices. The information is disseminated to the shareholders on a regular basis by the use of diverse range of forums and applications as stated in its shareholder communication policy. In addition to this, the investor center an online platform of the company also serves as an interactive medium for providing information to the shareholders of the company. The information is regularly communicated to the shareholders includes published reports, share price updates, details of the meeting and other ASX announcements that will have a material impact on the price of securities (Corporate Governance Statement, 2016).
Woolworths have also established a sound risk management framework to identify and take proactive actions against the risk for their mitigation in advance. The risk management governance structure established by the company is specifically developed for identifying, evaluating and managing the business risk to enhance the shareholder value. The risk management policy has defined the roles and responsibilities of the key management personnel for identification and mitigation of the risk. The risk management framework has been disclosed in the corporate governance statement of the company that provides a clear depiction of the risk management structure developed for overcoming the risks. Board is responsible for annual review of the risk management framework in order to determine its effectiveness in controlling the risk (Bazley, Hancock and Robinson, 2014).
The company in order to provide fair and responsible remuneration to the management personnel has established a remuneration committee reviewed by Board. The remuneration committee reviews the performance of management for determining their incentives and rewards on the basis of performance (Corporate Governance Statement, 2016).
As audit of any company is to provide audit opinion on the correctness of financial statement, so it is important maintain integrity and reliability of financial statements. There can be many material risks present in the annual report that can impact the audit opinion given by the auditor. In order to ensure that there no material risk present in annual report of Woolworth Company it is essential to carry out the risk assessment procedure that includes evaluating company profile, market that it operates in, business strategy and financial performance. Risk assessment is the part of audit process and it is essential to follow it every time the audit has been taken up. Risk assessment helps to identify any type of material misstatement that has been left in the financial statements and other assertion level. Risk assessment not refers to process that helps the auditors to provide auditor’s opinion on the true and fair view of financial statements. There are three main steps that need to follow in the risk assessment procedure. These steps are to conduct inquires from the management, carrying out the analytical procedures, and lastly observations and inspection (Auditing and Assurance Standards Board, 2009).
The process of risk assessment has been provided in the International Standard on Auditing 315 and main purpose of this auditing standard is to ensure that any financial as well as non financial information provided to the auditor to provide the audit opinion must be free from the any material misstatement. In this section risk assessment process has been applied in case of Woolworth Company in order to ensure that the financial statement does not contain material misstatement. ASA 520 discusses about the analytical procedure that need to be followed in while carrying out the risk assessment of any company. As per ASA 520, analytical process means analyzing the market condition, evaluating the business strategy, identification of nature of business and finally carrying out the evaluation of the financial performance of the company using the ratio analysis as the accounting tool (O’Donnell and Perkins, 2011). Risk assessment procedure of Woolworth is provided below:
Nature of Company: Woolworth is the multinational retail company and its origin is based in Australia. It sells consumers goods and other home needed items through its online stores, big departmental stores and other channels also. Some of important market segment of the Woolworth are supermarket, petrol, liquor, home improvement products, hotel services and other retail services. The main purpose or aim of the Woolworth Company is to provide quality goods and services at very reasonable price to their valuable customers (Woolworths Group: Annual Report, 2017).
Market analysis: Woolworth has its origin in Australia and it has physical stores at all the important areas in Australia. In addition to this it has international presence in many countries in form of online stores as well as physical stores. Woolworth has acquired many subsidiaries that have business outside Australia so that it can take advantage of international presence of company and also expand its business. The retail market of Australia is growing at rapid pace and there are much opportunities for the existing companies due presence of competitive advantages as companies that have just entered in the retail market (Woolworths Group: Annual Report, 2017).
Business Strategy: It has been seen that Woolworth has developed and applied the business strategy that helps to develop the business through applying the principles of integrity. The Woolworth business strategy is developed to promote the well being for the shareholders and to provide maximum returns in form of dividend and increase in market share price. On looking the business performance it can be said that business strategy is in line with the business requirements and its vision. On the basis of complete evaluation it can be said that there is no such information contain in the business strategy of the company that shows that company is following any unethical practices which can lead to the losses to the shareholders of the company (Strategy and objectives, 2018).
In order to perform the analytical process for review the financial performance of the company it has been decided to conduct the ratio analysis. Ratio analysis is conducted through calculating the income statement ratio and balance sheet ratios (Putra, 2010). So the income statement and balance sheet ratios of Woolworth for current year have been provided below:
Income Statement ratio: Income statement ratio refers to ratios that are derived from the using the financial items of the income statement. Some of the important financial ratios are gross profit ratio and net profit ratio. These ratios have been calculated for year 2017 and it has been provided below:
Balance Sheet Ratios: The ratios that are calculated using the financial items of the balance sheet are known as balance sheet ratios. Some of the important balance sheet ratios that are calculated in this report are debt equity ratio and fixed asset turnover ratio (Woolworths Group: Annual Report, 2017).
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Financial Data on Woolworth Group |
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Particulars |
2016 |
2017 |
|
|
Net profit |
$ 840.00 |
$ 1,482.00 |
|
|
Gross Profit |
$ 15,599.00 |
$ 15,929.00 |
|
|
Revenue |
$ 58,276.00 |
$ 55,669.00 |
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|
Total Assets |
$ 23,502.00 |
$ 22,916.00 |
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|
Long term Debts |
$ 3,868.00 |
$ 2,775.00 |
|
|
Shareholder’s Equity |
$ 8,471.00 |
$ 9,526.00 |
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Income Statement Ratios |
Formula |
||
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Net Profit Ratio |
Net Profit/Revenue |
1.44% |
2.66% |
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Gross Profit Ratio |
Gross Profit/ Revenue |
26.77% |
28.61% |
|
Return on Assets |
Net Profit/Assets |
3.57% |
6.47% |
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Balance Sheet Ratios |
|||
|
Debt Equity Ratio |
Debt/Equity |
0.46 |
0.29 |
|
Fixed Assets Turnover |
Revenue/Total Assets |
2.48 |
2.43 |
There can many audit risk that give to the material misstatement in the financial statements and also affects the audit process. Some of the major audit risk that are present in the Woolworth Company are as follows:
Market Risk:
Market risk refers to risk that arises due to price movement in different currencies of countries in the international market. As Woolworth trades in the international market it is more likely to get impacted by the market risk. Market risk can be easily managed by using various financial control techniques and use of swap contract option in order arbitrage the market risk.
Credit Risk:
Credit risk occurs when company has not been able to meet the obligations that results in creditability loss to the company. So it is important to analyze the liquidity position of the company in order check the liquidity position of the company. The ways through which liquidity can be maintained in the company is to regular check the liquidity position and if any shortage has been found in funds that it should be fulfilled as early as possible to avoid the loss to the company (Woolworths Group: Annual Report, 2017).
References
ASX Corporate Governance Council. 2014. [Online]. Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed on: 29 April, 2018].
Auditing and Assurance Standards Board. 2009. Auditing Standard ASA 520 Analytical Procedures. [Online]. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf [Accessed on: 29 April, 2018].
Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage Learning Australia.
Corporate Governance Statement. 2016. Woolworths Pty Ltd. [Online]. Available at: https://www.woolworthsgroup.com.au/icms_docs/182380_Corporate_Governance_Statement.pdf [Accessed on: 29 April 2018].
Fleckner, A. and Hopt, K. 2013. Comparative Corporate Governance: A Functional and International Analysis. Cambridge University Press.
Nordberg, D. 2010. Corporate Governance: Principles and Issues. SAGE.
O’Donnell, Ed and Perkins, D. 2011. Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing; Sarasota 30 (4), pp. 273-283.
Plessis, J., McConvill, J. and Bagaric, M. 2005. Principles of Contemporary Corporate Governance. Cambridge University Press.
Putra, L. 2010. The Use Of Analytical Procedures In Auditing. [Online]. Available at: https://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/ [Accessed on: 29 April, 2018].
Strategy and objectives. 2018. Woolworths Group. [Online]. Available at: https://www.woolworthsgroup.com.au/page/about-us/our-approach/strategy-and-objectives [Accessed on: 29 April, 2018].
Woolworths Group. 2017. Annual Report. [Online]. Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed on: 29 April, 2018].
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