Analysis Of Key Audit Matters In The Independent Auditor’s Report For Retail Industry In ASX Top 100 Listed Companies

Industry Information and Its Operated Companies

The auditing concept has gained the importance when the incident of the global financial crisis have happened which have occurred in the middle of the 2007 and has been ended in the year of 2009 but has the after effects for so many years. Earlier the auditor was not bound in any manner for the reporting of the matters that can have the significant impact on the reporting of the financial statements have now been bound with the introduction of the new auditing and assurance standard on communicating the key audit matters with the client having the number of 701. In this report, the importance of this new auditing standard has been detailed. For the purpose of furtherance of this report, the industry that has been selected is the retail industry and from those industry three companies has been chosen from the list of the ASX 100 companies which are Woolworths Limited, Wesfarmers Limited and Grain Crops Limited (ASX, 2017).

The report has started with the description of the industry and the company chosen therein and then the details of the new auditing standard have been given with regard to its disclosures and the requirements. With respect to the companies so chosen, the annual report of each company has been deeply analyzed and in case any key audit matter has been mentioned then the same has been analyzed in detail in the report and the appropriate considerations have been mentioned. The report has then summed up with the concluding paragraph along with the proper recommendation. 

Industry Detail

For the furtherance of the study, the industry which has been chosen is the retail industry. Although there have been many industries like mining and finance industry, but this have been chosen only because of the fact that the due to number of the goods and services, the industry will be having more areas to study. Also the sector of retail is the classification sector. The industry which has been selected in normal course of business deals with the goods which are the needs of every house which includes the food, fruits and other dairy products and other similar items. As this sector belongs to the daily food items it is therefore considered as the major sector by the investors and the other stakeholders to invest in the companies operating in that industry. Therefore, the role of the new auditing standard 701 can be understood and discussed under this industry in true and fair manner.  

Operated Companies selected from industry  

The companies from the Retail industry under consumer staple sections are six as per the list of Top 100 ASX listed companies. Among this three companies- Wesfarmers Limited, Woolworths Limited and Grain Corp Limited has been selected for meaningful preparation of the report.

1. Wesfarmers Limited – Largest retail Sector Company since 1914 involved in super markets and home improvements of daily needs.
2. Woolworths Limited – Second largest company working in Australia and New Zealand in consumer staple sector
3. Grain Corp Limited – Operating since 1917 in Malt, Marketing, Oils, Storage and Logistics of Food grain under retail industry.

Why ASA 701?

All across the Globe, in 2007 crisis has happen in corporate sector which continues till 2008 in which all major corporate of the world become insolvent and the respective government of different countries was not able to prevent its economy to fall. The global crisis made major player of Australia like HIH Insurance, Lehman Brother, One Tel to fallback and hamper the financial condition of people and the country (Bajada and Trayler, 2010). The major reason behind the crisis has been analyzed as non reporting of significant events by auditor as there was no guideline that can bound the report to report any matter apart from giving opinion which may been clean, modified and qualified. It has been seen from the crisis analysis that auditor had also involved in manipulation of the treatments of items by the company by not reporting the same. For instance, in HIH insurance the company has done major investments in Fire and Marine insurance which are highly risky insurance and claims of these insurance created the shortfall of funds in the company which has been manipulated by the company by recording the liability as income and the auditor has not reported the fact. When the auditor has caught then auditor has safeguard himself by saying that there is no such law which bound auditor to report the matter (Xu, 2011). This situation of auditor open eye of auditing standard creation board eyes and the birth of new auditing standard 701 has taken place. This new standard help the authorities to bound the auditor to report the significant event (Cordos and Fülöpa, 2015).

Auditing Standard – ASA 701

According to the judgment in professional terms of the auditor, all the events or transactions creating significant influence on the financial reports of the company are termed as Key Audit Matter (AASB, 2015). The auditor has to show these events in their independent auditor’s report so that it can come in knowledge of person those charged with governance. The following areas as per ASA 701 are generally classified as Key audit matter:-

• Areas of high risk as per ASA 315 and requires auditor to put his professional judgment (Thomson, 2008).
• Areas in which substantive detailed evidences cannot be obtained due to deficiency in company’s process.
• Areas where the internal control systems failed and corrective measures not taken by the company (Masytoh O, 2010).

Auditor has to comply with the requirements laid in the Australian Auditing Standard 701, to show all significant events which can impact the decisions of users of financial statements. The compliance of ASA 701 in retail industry has been analyzed using the annual report of the companies operated in this industry. The following are the different key matters reported by the auditor in the annual reports of the companies operated in retail business along with the audit procedures which has been performed by auditor to consider the particular event as key audit matter:-

Key Audit Matters in Annual Report

Following are the matters regarded as Key Audit Matters which has been reported by auditor in annual report for the company for the period ended in June, 2017:-

1. The first key matter reported by auditor is assessment of impairment of non currents including intangible assets. The calculation of recoverable amount involves high professional judgment by the management of the company making it as significant event for auditor. No material impairment has been recognized during 2017 but the amount of investment involve in Property, Plant and Equipment making the impairment testing as key audit matter.
2. Second key audit matter is supplier rebates received by the company and recorded as commercial income in statement of profit or loss. It is the amount received from suppliers which are connected with retail operations of the company. It is considered as key event by auditor because of the high amount which is recognized as income and which involves judgment on the part of the company’s management.
3. Acquisition of Homebase by entering into the business combination agreement with Hampden Group Limited. The company has not fulfilled the provision of AASB 3 of initial recognition of identifiable assets and liabilities within 12 months of acquisition date. The auditor includes it as key audit matter as it requires attention of stakeholders and huge judgment is involved on the part of company.

Following are the audit procedures taken auditor for above mentioned Key Audit Matters:-

1. The auditor has taken the help of valuation specialist to check the validity of discount rate, growth rate, future cash flows, currency exchange rate, and commodity rate used in calculation of recoverable amount. Also auditor has done assessment on cash generating unit selection by company’s management.
2. Auditor has checked in detail all the agreements which had been entered by the company in regard to commercial income. Comparison of current rebate income with budget and if there was any material difference then detail evidence has been obtained by the auditor and his team (Wesfarmers Limited, 2017).

Key Audit Matters in Annual Report

Following are the matters regarded as Key Audit Matters which has been reported by auditor in annual report for the company for the period ended in June, 2017:-

1. The first important matter reported in Auditor’s report was exit of Home Improvements line by the company. The discontinued operations of Home improvements during the financial year results in many subsequent events which can affect financial assets and liabilities of the company in future and very complex in nature. The closure of put option and sale of Home consortium transactions results in financial loss to the company. It is regarded as key matter because of the complexities involved in recording the interrelated components for Home Improvements (McKee, 2015).
2. The next key audit matter reported in annual report is about the BIG W division of the company and its related Property, Plant and Equipment. The working of the company’s unit in terms contribution towards profitability has been decreasing from past few years resulting in decreased value of technologies used in BIG W unit. The auditor was in the opinion that carrying value of Property, Plant and Equipment of BIG W unit was less than its recoverable amount. The impairment calculation involves huge amount judgment in relation to future cash flows and discount rate taken for calculation of recoverable amount of BIG W unit of the company making this event as key audit matter (Kachelmeier, Schmidt and Valentine, 2016).

Following are the audit procedures taken auditor for above mentioned Key Audit Matters:-

1. Audit procedures include assessment of sale of assets of Home Improvement unit with their sale agreements. Evaluation of terms and conditions of Inventory master also accounting treatment of revenue and cost of sales by liquidator. Assessing the tax treatments done are appropriate and all the material disclosures has been done by company’s management.
2. Assessment of Board and management methodologies in terms of controls and assumptions taken in calculation of carrying amount of BIG W PPE. Tested the cash flows calculation on sample basis and perform sensitivity analysis (Xu, 2013).

Key Audit Matters in Annual Report

Following are the matters regarded as Key Audit Matters which has been reported by auditor in annual report for the company for the period ended in June, 2017:-

1. The first and major key audit matter reported was adequacy of provision for customer claims. As the company is involved in storing and transporting of grains on behalf of its customers, customer claims arises when there is loss or tear of grains or its quality at the time of storage or transportation to customers location. It was regarded a key audit matter as the provision was created for the future potential purchases for covering the claims was on purely estimate basis.
2. The second key matter was Assessment of Impairment of Goodwill. The company has huge amount of Goodwill worth $ 427.2 on 30^th September, 2017 lying in the books. It is regarded as Key Audit matter because of involvement of estimation of future cash flow, calculation of discount rate. The impairment has been tested annually by company of the identified cash generating units.
3. The third key audit matter relates to reporting of Retirement Benefit Plan which involves plan assets worth $ 167.1 million and present value of pension worth $ 193.9 million comprises of significant amount in terms of financial position of the company. It is consider a key audit matter because of involvement of size of financial balances and high judgment involvement in the calculation of these balances.

Following are the audit procedures taken auditor for above mentioned Key Audit Matters:-

1. Examination of location of physical customer and volume of customer’s ownership which has been used in provision calculation as major. Also, by doing physical stock counts to justify the basis for calculating provision and checked all the documents including estimated transportation costs.
2. The main audit procedures done by auditor were comparison of the expected cash flows with per approved management budgets so that intention of the manipulation can be checked. Evaluation of discount rate models with helps of external experts from PWC.
3. Assessed the balances of the plans with the help of actuarial experts and obtained third part confirmations for pension plan assets (Grain Corp limited, 2017).  

Auditor’s report as a part of annual report of any entity will provide the judgment and thinking which the auditor has framed after auditing the financial statements. Auditor’s Report is considered as base by different internal and external stakeholders of an entity for making effective and meaningful decisions or opinion about the company and the auditor’s report is always considered to be issued after fulfilling all the requirements of auditing standards as laid by Australian Auditing Standard Committee governing the actions of the auditor. For providing transparent and important information, Australian Auditing Standard- 701 is formed after Global Crisis. In this study, Retail Industry containing Consumer Staple sector and companies operated in this industry listed in ASX Top 100 list has been analyzed to assess the requirements of New Auditing standard has been fulfilled by the auditor along with reason for inclusion of particular matter as Key Audit Matter. It can be concluded from the study that after introduction of Australian Auditing Standard – ASA 701, the disclosures in audit report of the companies include Key Audit Matters which in turn helps the stakeholders in getting full and correct information.

Major recommendation from study is that every auditor should performs audit procedures which are necessary for inclusion of all relevant Key Audit Matters in their independent auditor’s report so that government and those charged with governance will able to identify future risks and take preventive actions to safeguard the entity or industry from crisis.  

AASB, (2015), “ASA 701, Communicating Key Audit Matters in the Independents Auditors report”, available on https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf accessed at 08/05/2018.

ASX Website, 2017, List of Top 100 ASX listed Companies online available at https://www.asx100list.com/ accessed on 19-05-2018.

Bajada, C. and Trayler, R., 2010. How Australia Survived the Global Financial Crisis. The Financial and Economic Crises: An International Perspective, Edward Elgar: Cheltenham, UK and Northampton, USA, pp.139-154.

Cordos, G.S. and Fülöpa, M.T., 2015. Understanding audit reporting changes: introduction of Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128

Grain Corp Limited official website, 2017, “Annual Report 2017” available on https://www.graincorp.com.au accessed on 08/05/2018

Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing critical audit matters in the auditor’s report.

Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of Modern Accounting and Auditing, Vol 6(4), pp 27-36

McKee, D., (2015). New external audit report standards are game changing. Governance Directions, 67(4), p.222

Thomson, J., (2008), “Five lessons from the Spectacular fall of Eddy Grooves”, available at https://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-grroves.html    accessed on 08/05/2018

Woolworths Limited official website, 2017, “Annual Report 2017” available on https://www.woolworthslimited.com.au accessed on 08/05/2018.

Wesfarmers Limited official website, 2017, “Annual Report 2017” available on https://www.wesfarmerslimited.com.au accessed on 08/05/2018.

Xu, Y., 2011. Audit reports in Australia during the global financial crisis. Australian Accounting Review, 21(1), pp.22-31

Xu, Y., 2013. Responses by Australian auditors to the global financial crisis, Accounting & Finance, 53(1), pp.301-338