The present study is related to the Dick Smith Electronic Ltd, which was collapsed in the year 2016. In this study, the history of the company along with the reason for shutting down is evaluated. There are some factors which give an indication about the going concern capability of the organization are also stated. This study also provides the analysis about evidence which leads to the doubt on the going concern of the company based on the annual report of 2014/15. Moreover, the legal liability of the auditor is also evaluated in the present case.
Audit analysis of Dick Smith Electronics Ltd.
History of Dick Smith Electronics Ltd
Dick Smith Electronics Ltd was founded by the Dick Smith in 1968. The company is one of the leading retail suppliers who deals in mainly electronic items, parts of the electronic goods, electronic project kits, and many other things. The company expanded its operations in several other countries also but did not achieve success (Dick Smith, 2018). However, in Australia, the company conducted its operation in very well manner as it has around 377 outlets across Australia and New Zealand.
However, the company was collapsed in the year 2016. The main reason for the shutting down of the company was lack of proper management. Further, the market of the electronics was very competitive, and the company was not able to cope up with the changing market trends. The company has many stores as compared with its competitors; this leads to higher cost of managing the stores. Since the company did not change its goods as per the demand of the consumer, therefore, the invested cost was not recovered (Business Insider, 2016).
Along with this, the sales of the company was decreased and due to which the market share of the company fallen and also the value of the shares got reduced. The strategy regarding the inventory management of the company was not according to the pattern of consumer behaviour. Moreover, the company was not able to get the proper credit period from its creditors so that the cost of finance was very high and also it had affected the stock level and product mix adversely. All the above reasons lead to the closed down of the company.
Australian accounting standard
The directors of the company are responsible for following the proper accounting policies and procedures of the company. The Australian Accounting Standard Board approved the accounting standards, and all the listed companies of Australia has to comply with all accounting standards. In the case of the Dick Smith Electronic Ltd, the company inflated its profit through the rebate maximization strategy, by which the company making the purchase on the basis of the rebate instead of the demand of the consumer.
Therefore the director of the company breached the duty as they follow the buying policy based on a rebate. Although the company was facing the problem related with the Bad Stock, but also the board of director of the company and the officer fails to obtain the adequate policies and procedure to identify and record the purchase and impairment of inventory.
As per the Australian accounting standards the inventory is valued at the lower of cost or the net realisable value on the item basis. If the carrying amount of the inventory is less than the net realisable value of the inventory, then the carrying amount should be written down to the net realisable value of the inventory.
Therefore in the present case, the director of the company although follow the all the accounting standard but did not exercise the reasonable care for valuing the net realisable value of the inventory by which the inventory which was recorded in the financial statement was overvalued.
An indication of going concern problem in an entity
Going concern is an assumption that the entity will conduct the business in the future. The financial statement of the company is prepared on the basis of the going concern (Grenier, Pomeroy, & Stern, 2015). Management of the company has to identify the capacity of the entity to continue as a going concern. Any uncertainty which impact the going concern of the company then it is the responsibility of the management to disclose the conditions in the financial statement. Moreover, if the financial statement is not prepared according to the going concern basis, then the fact and reason must be disclosed.
The auditor of the company generally assumes that the entity as a going concern unless the auditor gets the evidence that may cast doubt on the going concern ability of the company. However, at the time of analysis of the financial statement by the auditor, it is the duty of the auditor to identify whether any evidence or transaction affects the going concern assumption (AASB Standard, 2015). There are some indicators by which the auditor can identify the problem related to the going concern, which is stated below-
All above indicator assist in the doubt on the going concern ability of the entity. If any indicator is observed by the auditor, then it is the responsibility of the auditor to investigate the reason and also make the discussion with the manager and key managerial person of the company (Krishnan & Wang, 2014).
A brief analysis of the 2014/15 Annual Report
On the basis of the annual report, it has been seen that portion of the inventory in the total current asset was very significant in the year 2014 as well as in the year 2015. The excess inventory level maintained by the company was questionable. The high inventory leads to the bad stock in the company because the increment in the sales of the company was also very low. Along with this, the working capital cycle also got increased due to the inventory level, by which the company convert the stock in the cash in a very long period of time. The high level of inventory gave an indication of the adverse liquidity position in the company. Therefore the auditor has to identify the reason behind the maintenance of the significant inventory in the company.
Further, the reduction in marketing expenses such as an advertisement, offering discount for achieving the short run business, and the excess production leads to the reduction in the cost of goods sale. Initially the strategy seems profitable, but actually, it made a negative impact on the company.
Unmodified audit opinion by the auditor for the financial year ended 30 June 2015
Auditor gives the unmodified opinion on the financial statement if in the opinion of the auditor financial statement of the company is presented according to the applicable financial reporting framework (Czerney, Schmidt, & Thompson, 2014). Director of the company is responsible for the preparation of the financial statement in accordance with the Australian accounting standard board (Brasel & et al. 2016).
In the case of the Dick Smith Electronic Ltd, the directors of the company in the annual report declare that the company can meet its debt liability as and when it became due. Further the financial statement also prepared by the company as per the applicable accounting standard. Apart from this the auditors also obtain the sufficient appropriate audit evidence which did not cast doubt on the going concern ability of the company.
Further up to June 2015, there was no indication that the company will become collapsed in the near future. The financial report of the year 2015 did not raise any significant issue with the accounting treatment related to the rebate given by the supplier or the control related to the inventory.
The auditor of the company obtains the audit evidence related to the amount disclosed in the financial statement and designs their audit procedure based on the circumstance (Gimbar, Hansen, & Ozlanski, 2016). By complying all the requirement of the audit procedure, in the opinion of the auditor, the financial statement gives the true and fair view of the company. Therefore the auditor of the company gave the unmodified opinion on the financial statement of the year ended 2016.
Auditors’ legal liability
In the year 2016, the Dick Smith Electronic Ltd stared for shutting down. The auditor of the company named Deloitte; express the unmodified opinion on the financial statement for the year ended 2015. It may lead to the doubt on the proficiency as how it is possible that within the short period of time the company started closing down its operation and not able to pay its debt. The auditor has the responsibility to express the unmodified opinion on the financial statement only when they show the true and fair view of the company.
although it is not expected from the auditor that on each and every amount he/she gets detailed investigation but if any material indicator by which the fraud/error or the going concern of the entity gets affected then he/she must investigate the matter in detail and also discuss with the manager and the executives of the company. Since the opinion of the auditor on the financial statement plays a important role because the stakeholders get to know authenticity about the information presented in the financial statement presented by the company.
In the present study Dick Smith Electronic Ltd, in the financial year 2015, reversed the provision which was made for the inventory as the manager thinks that it was not more required. However, in September or October, the company write down its inventory as the company carried too much obsolete inventory. The accounting standard related to the inventory contained that the inventory should be realized at the lower of the cost or its net realisable value.
The auditor of the company Dick Smith Electronic Ltd fails to obtain the evidence that whether the company bring down the inventory to its net realisable value. Along with this, the company also held a significant level of inventory, the auditor must discuss with the board of director of the company reason behind the maintenance of the too much inventory in the company. Even if the inventory was overvalued, expression of unmodified opinion by the auditor was not viable. Further, the sale figure also inflated through the rebate, it is the indication of the weak management control system in the entity.
Therefore the auditor has to answer for providing the unmodified opinion on the financial statement ended 30 June 2015 because after a few months the company closed down.
Conclusion
On the basis of the above study, it has been seen that the company has to comply with the accounting standards which were approved by the Australian accounting standard board at the time of preparation of the financial statement. The board of director of the company has a duty to prepare the financial statement as per the applicable financial reporting framework. Generally, the auditor assumed that the company is going concern that means the company is able to meet its liability until the auditor gets to know about the significant material event which makes the doubt on the going concern capability.
In the present study, it has been analysed that the auditor expresses the unmodified opinion on the financial statement ended on 2015 and after the sometimes the company closed down. The reason behind the unmodified opinion by the auditor was that the auditor did not get any information which leads to the doubt on the continuity of the operations by the company. Along with this, and manager of the company should prepare the financial statement by applying the reasonable care and due diligence but directors of considered company failed to apply the same.
References
AASB Standard, 2015. Presentation of Financial Statements. Retrieved from < https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf>.
Brasel, K., Doxey, M. M., Grenier, J. H., & Reffett, A. (2016). Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), 1345-1362.
Business Insider, (2016). The 8 causes of Dick Smith’s collapse. Retrieved from < https://www.businessinsider.com/the-8-causes-of-dick-smiths-collapse-2016-7?IR=T>.
Czerney, K., Schmidt, J. J., & Thompson, A. M. (2014). Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?. The Accounting Review, 89(6), 2115-2149.
Dick Smith, 2018. About Dick Smith Retrieved from < https://www.dicksmith.com.au/da/about/>.
Eutsler, J., Nickell, E. B., & Robb, S. W. (2016). Fraud risk awareness and the likelihood of audit enforcement action. Accounting Horizons, 30(3), 379-392.
Gimbar, C., Hansen, B., & Ozlanski, M. E. (2016). The effects of critical audit matter paragraphs and accounting standard precision on auditor liability. The Accounting Review, 91(6), 1629-1646.
Grenier, J. H., Pomeroy, B., & Stern, M. T. (2015). The effects of accounting standard precision, auditor task expertise, and judgment frameworks on audit firm litigation exposure. Contemporary Accounting Research, 32(1), 336-357.
Kachelmeier, S. J., Schmidt, J. J., & Valentine, K. (2017). The disclaimer effect of disclosing critical audit matters in the auditor’s report. Sage.
Krishnan, G. V., & Wang, C. (2014). The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), 139-160.
Myers, L. A., Shipman, J. E., Swanquist, Q. T., & Whited, R. L. (2018). Measuring the market response to going concern modifications: the importance of disclosure timing. Review of Accounting Studies, 23(4), 1512-1542.
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