Audit Of JBH: Inherent Risk Factors And Key Matters To Consider

About JBH

JBH is one of the largest company in Australia that deals in consumer retail products and specializes in video games, mobile phones, electronics etc.  The company was formed in 1974 and the company has expanded to other parts of the world also. The main headquarter of the company is in Melbourne. The company initially started with selling Hi-Fi equipment and thus the name came from there and later the company expanded its operations to other products that were mostly consumer electronics. The aim of the company in the long run is to expand its operations and deal in more variety of products (Abdullah & Said, 2017). Audit is an independent examination of the books and the financial statements of the company to comment whether they are free from all kind of errors and misstatements. In this assignment we shall discuss various inherent risk factors that might affect the audit of JBH, the key matters which they should take into consideration and methods by which they can provide a correct opinion. The stakeholders depends on the audit report to take important decision regarding the company and its operation and thus it is important that it must be free from errors. Various details regarding the company, its policies and its competitors is discussed hereunder.

1. JBH conducts its operations in various sectors that are mostly related to electronics that are consumer retail products like mobile phones, CDs, Blue-ray, software and hardware products. They initially started with selling Hi-Fi products and then moved to products like CDs and Blue rays(Boghossian, 2017). Their main point of selling lies in CDs and then in computer games, televisions and car stereos. The company is having 184 stores across Australia and has now also expanded their operations to New Zealand. It is the seventh largest electronics and home appliance consumer in the world, based on its overall revenue.
2. The four primary competitors of JB Hi-Fi in Australia are –

• Best Buy
• Ceconomy
• Gome
• M video

All these companies operate in the same business line of retail distribution and consumer supplies. Few of the companies are doing better than JBH and few are doing less.

1. JB Hi- Fi is operating in the Australian Region and there are various rules and regulations that affects the operations of the company. Few of these rules apart from the standard rules and regulations are stated below:

• Australian Securities Exchange Listing Rules– The company is listed on the stock exchange of Australia and to issue any new shares or any kind of activities related to the shares the company needs to follow the rules of the listing agreement that has been issued by the Stock Exchange. In case the management fails, the shares can be suspended and the company must bear heavy losses (Bouret, 2017).
• Fair Trading Act Australia– The aim of this is that the consumers are protected and they have the correct information about the products and services that they are availing from the retail market. The Fair-Trading Act Australia is related to the Australian Federal and State laws and aims to provide the consumers protection from unfair trade practices. And hence it affects the operations of JBH.
• International Taxation laws– Given the fact that JBH has operations even in New Zealand. The company must abide by the international taxation laws, to avoid double taxation and maintaining the rules and regulations that are related to import and export. The company needs to abide by the rules of the international tax laws and regulations of New Zealand when they indulge in business in their area.
• Australian Banking Regulation Act– The rules of these laws also extend to Retail companies in Australia as companies must deal with banks and most of the transactions are initiated through that. Also, the company has raised loans from financial institutions thus that is also applicable to the company on how they are managing the terms and agreement of loans with other financial parties (Delone & Mclean, 2004).

1. Four key inherent risk factors that can affect the operations of the company are stated below. These risk factors are due to the operational strategies and other elements that affects the growth of the company. To mitigate these risk factors, it is important that the management of the company is having proper internal controls in place. Few of these material inherent risk factors are stated below:

• Competition– The overall competition in the market in which the group operates is huge. This increased competition often leads to decrease in the overall sales and profitability for the company. There is also a chance that the auditors end up sharing the confidential information of the company with the outsider and that might affect the company badly. Thus the best away company can deal with this kind of risk by providing better competitive advantages that would help them in maintaining the position of a top player in the market.
• Loss and erosion of reputation– The groups business have been affected by the increased claims for price leadership and the services that are provided to the consumers. This can be mitigated by making sure that the activities of the management is properly monitored when it comes to price fixation and price claiming, also the steps that are taken by the competitors of the company in this regards should be carefully studied (Durtschi, 2004). The company should see that proper controls are in place that would help in analyzing those factors that are responsible for fixing of prices. The auditor also needs to see that there is no loss of information of the company due to fault in the system and the IT management. This can be very detrimental as competitors can undue advantage in case they get any information. Thus having proper controls in place is important fro safeguarding the reputation of the company and the auditor needs to check that.
• Key Supplier Relationship– Suppliers are the people who are one of the main asset of the company and any failure to maintain cordial relations with them can affect the performance of the company and can also be considered as an inherent risk to the audit that is been conducted. Given the fact that there are many companies that are competing in the market and each one wants to tap in the suppliers. Thus suppliers would deal with only those companies that would give them best resources and best terms on which they can sale off their goods (Iggers, 2018). Thus the auditor needs to see what is the overall position of the suppliers in the company, what are the credit rates at which the products are bought and what are the competitors take on this.
• Leasing Arrangements– It is important for the growth of the company that they are able to establish leasing negotiations and sutiable sites that can support their business operations. It is important for the financial success of the company. It is the responsibility of the senior management to look in that matter and see that proper terms are there. This is an inherent risk in auditing and the auditors needs to understand that they are managing that in a correct manner and are checking all the aspects beforehand. There are also chances that management might fraud with this item and indulge in activities that can affect their position for their own self interest (Shimamoto, 2018).

1. There are certain accounts in a financial statement that are of significant risk and it is the responsibility of the auditor to check that and make proper opinion on that. The annual report of JBH has been downloaded and key points have been discussed hereunder about five accounts that are significant to the company.

• Acquisition of the Good Guys –

The company had acquired 100% of the Good Guys in November for cash consideration of $860 million. The overall accounting related to this matter was complex and the company had kept certain amount of assets and liabilities that was attributable to the company in provision. The key assertion in this regard was the valuation of the overall assets and liabilities of the company at their fair value. And the allocation of the purchase consideration to the key identifiable intangible assets of the company. The size of the transaction was huge and the overall judgement involved was also very complex (Wellmer, 2018).  Thus, this was an important account for the auditors and they can deal with it be checking whether the terms of the sale agreement were proper or not. The overall steps taken by the management in the finalizing of the value of the assets and liabilities that was undertaken by them should be analyzed by the auditor of the company.

Inherent risk factors affecting the audit of JBH

During the year, the company had impaired goodwill of $14.7 million and PPE OF $1.1 million, that is attributable to the cash generating Units. The management has assessed the value of the CGU and have incorporated the various judgements about the future growth rate. The main aim of the auditor would be to check the financial performance of the company in New Zealand CGU and making judgement regarding future cash flows and main assumptions of the company. The main audit procedure would involve making and analyzing the key management steps that they have taken, the overall carrying value of the assets of the company and accessing the accuracy of the value-in use model. It is also important to verify the appropriateness of the disclosures of the notes to the financial report (Webster, 2017).

• Remuneration Provided to the executive

This is an important account that the auditor needs to value because there are high chances that the management of the company can falsify this account for their own self benefit. There are various components in the remuneration structure that includes fixed remuneration and variable remuneration. A snapshot of the remuneration structure of the company is given below

The main step should be to check whether the overall policies related to the remuneration structure are correct or not. The terms and conditions of the variable pay should also be checked and in case there are any loopholes then that should also be stated by the auditor. The main step should be to check that whether the company has defaulted in that and the management has not misappropriated the accounts for their own benefit (Wang, et al., 2018). There are two types of bonus that the company is giving qualitative and quantitative bonus and that should also be checked. Different remuneration is given to different executives and also auditors are given different remuneration so all that components should be checked by the auditor. They should see what is the standard payment as per the market and whether the management of the company is doing the same and in case there is any discripancies than that should also be checked.

• Carrying value of the inventories and PPE– Valuation of the property plant and equipment is the chife account that the auditor should check. They form an important part of the financial statements of the company and the aim should be to check that the fair market value and the carrying value of these assets are properly calculated. Also they should see what are the overall accounting policies that have been applied by the company in calculation of the depreciation and other expenses that are affecting the assets. The total amount of PPE as per the financial statements are $208.2 million

In case of inventory they are valued at cost or market price which ever is lower. Thus it should be checked that proper valuation is done and there should not be any discripancies on part of the management in their valuation. The key audit assertion would be to check that all the assets are properly valued and there is no over or under valuation as that would affect the financial position of the company largely. Experts opinion should be taken and valuation specialists can be considered when it is required. All the policies of the management should be double checked and in case there is any issue then they should be informed. The total amount of inventories as per the balance sheet is $859.9million (Cayon, et al., 2017).

• Recognition of Dividends– This is also an important account that the auditors needs to check. Dividends are the returns that the shareholders of the company gets from the company and it is important that the overall terms of payment of dividend should be properly checked. There are high chances that the dividend payment may not be on correct grounds and the company is falsification of the same. All the legislative rules and regulations for measurement of dividend and their reporting should be followed by the company. The key audit assertion in this regard would be to check whether the dividend payment is as per the decided terms and the company is not defaulting in the same. There are two types of dividend reporting done in this company- recognized and unrecognized dividend.

Acquisition of Good Guys

6.Corporate Governance is an important aspect for the functioning of any company. It is important that management of the company should adopt such policies and programs that would help in the corporate governance (Chron, 2017). They should see that they are managing the affairs of the business ethically and there is no mismanagement in that. As per the corporate Governance Statement of JBH, following assurance has been provided :

• The policies and programs of the board in all material aspect should comply with the ASX Corporate Governance Principles and in 2017 they have embodied the spirit of corporate governance in their overall policies and programs that has been stated by the ASX board.

The corporate governance statement has been approved by the board and was effective from 14^th August 2017.

There should be effective realiance on the control environment because the company is in an expanding state and there are increasing their operations to other areas, and thus it becomes important that they are abiding by the rules and regulations that have been framed by the audthorities. In 2017 the company has acquired Good Guys and that accqusition was very crucial for the success of the company as a whole and thus they need to see that there is no mismanagement in that. It is also one of the key audit matters  that has been stated by the auditors of the company (Durtschi, 2004). Moreover secondly, corporate governance helps in ensuring that the business of the company is moving on ethical terms and there are no misstatements in that. JBH is a consumer based company and the aim of the company should be to see that the cosumer is getting their dues and there is no falsification for them. Independence is also an important factor that the company and its auditor needs to be aware of for good corporate governance (Lane & Ferretti, 2017). There should be no self interest involved in any steps that is taken by the management of the company and they should make sure that there are should not be no biasness (Ghofiqi, 2018). Control environment are important as they help in reducing the chances of risk and any kind of inherent risk that might be there in case of audit of the company. They help in keeping the information of the company safe and also helps in keeping the management of the company functional as per the legal and ethical terms and conditions. Thus it is important that proper resliance must be given on control environment and companies should follow the same in all cases. Corporate Governance should be incorporated from the various basic start of the company and then should be moved to higher level (Gullet, et al., 2018).

Impairment of goodwill and PPE

Conclusion

Based on the overall analysis it can be said that JBH has been doing very well in terms of their overall market position and has been able to establish a firm ground for themselves. In case there are need for some changes with repsect to more focus on certain areas of control and management and that the company can easily do. Overall it is the duty of the auditor to make sure that the financial statements are free from any kind of misconduct and there are no falsification and they should give an unbiased audit opinion that is useful for the stakeholders of the company.

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