Audit Report And Audit Function At Wesfarmers

Compliance with Independent Requirements

Audit report and audit function is the need of the hour because it denotes the authenticity of the company’s performance. Wesfarmers has provided a true and fair view of the state of affairs of the company. This is by dint of strong audit planning and control. Further, the compliance with the accounting standard and the Corporation regulation 2001 has ensured an effective mechanism (Wesfarmer, 2017). The report will reflect the functioning of the company together with a strong emphasis on various areas such as audit control, remuneration, and key audit matters, etc.

Compliance with the independent requirements

From the annual report it is noted that the audit was done in tune to the Australian Accounting Standards.  The independent requirements are followed and the same has been stated in the Audit report. The auditor independence requirement was followed as per the needs of the Corporation Act 2001 and the ethical needs that has been stated by the Professional and Ethical Standard Board APES 110 code of Ethics for Professional Accountants that are necessary for the audit of the financial report. All other responsibilities has been fulfilled that are in tune to the code (Wesfarmer, 2017).

Non audit services

The audit and this committee of Wesfarmers Limited have provided the board with legal advice for the non-audit services provided by it in a written form so as to comply with the passing of the resolution for a committee. The advice of the risk committee has been considered by the board and they are clearly satisfied with the thought of compatibility of the decision of the non-audit services that will be provided to them (Wesfarmer, 2017). There are various types of standards that are needed to be accepted by an auditor in order to make such decisions which are stated under the corporation’s act 2001:

The auditor will not be allowed to review any work or acting in a management that has been conducted by him and thus he is not going to provide any type of review on the non-audit services.

The audit and the committee of the organization have clearly reviewed all the non-audit services for their structural integrity and objectivity towards the organization so that they do not harm any corporate governance procedures or policies that have been adopted by the company. The integrity of the auditor’s independence should not be questioned because the declaration is already provided.

Non-audit Services

Analysis of the Auditor remuneration

Auditor fees	2017	2016	%	%
Audit and review of financial reports
Ernst & Young (Australia)	5723	5780	72.30575	66.55919
Ernst & Young (Overseas network firms	702	577	8.869236	6.644404
Services of Assurance
Ernst & Young	1272	2215	16.07075	25.50668
Other audit firms	218	112	2.754264	1.289728
Total	7915	8684
Non-audit services
Ernst & Young (Australian & overseas network firms):
– tax compliance	1088	1096	47.16081	55.4095
others	1219	882	52.83919	44.5905
Total	2307	1978
Payment to auditors	10222	10662

Nature of the audit services

Wesfarmers is about to be associated with a consolidate company to which the auditor has provided the non-audit services and for the same, various amount is due and about to be received. The non-audit services that were provided and the amount to be received stands at  $2307 thousand that figures 23.1 percent of the total amount of fees that is paid to the company for the year ending 30^th June 2017.

Key Audit matters

As per the annual report, it is witnessed that Wesfarmers have utilized different processes and mechanism so that audit plan can be evaluated and assumptions can be done. The methodologies are used to ascertain the audit plan that determines the rate of growth, valuation multiples, cash flow forecast. The company managed various type of input that resembles relevancy for the impairment test. The key factors in this area are:

Discount rates

Terminal growth rates

Assumptions of Long-term inflation and growth rate

Assumptions of the price of the commodity

Market evidence of industry revenues valuation multiples

Forecast exchange rate assumptions

The preparation of the financial report has been done in accordance as per the guidelines and has been projected by the testing approach of impairment, key assumptions and the sensitivities.

The company also followed the various types of auditory tasks in order to respect the commercial income that has been earned by them. Some of them are: Assessment of each and every type of material that has helped in order to produce commercial income has been made including the signed agreements that have taken place during the year (Matthew, 2015). The company has also tried to regulate corporate and design an effective and relevant control system in which it can try to relate places with the help of recognition and measurement of the different discounted amount (Geoffrey et. al, 2016).

Wesfarmers Limited have also tried to compare various discounted arrangements after learning from the previous year’s budget which has helped them to include analysis of aging profiles and various material variances with the help of supporting evidence.

The supporting documents to the discount provided to suppliers were also sent for tests. An analysis was made on the suppliers and different promotional credits strategies so that the supporting documentation can be processed (Niemi & Sundgren, 2012).

The company have also tried to implement many new material contracts both before and after the balancing of the statements which clearly states that an assessment should be made in relation to the treatment that has been adopted by the group. Also, the appropriateness of this statement should be analyzed (Livne, 2015).

Auditor Remuneration

A legal counsel was also enquired to find out any other terms for a condition that have been existed other than the rebate contracts or any unusual contract in which the company has taken part.

Further, inquiry was even done on the various facts of the business that contains products, merchandise, supply chain, staff so that the existence of nonstandard agreement can be satisfied where the company contains its name.

All these or matters should be clearly analyzed by the company and actions should be processed by them in order to correct these problems in time.

Difference in management’s responsibilities from that of the auditors

In relation to Wesfarmers’ financial report, management of the same is the primary duty of the directors or management but expressing an opinion on the same is the auditor’s task. The auditor’s task is to perform and undertake the audit process to attain reasonable assurance about whether the company’s financials are free from any material misstatements.

In contrast to this, when it comes to the directors and management of the company, it is their task to adopt sound and effective accounting estimates and polices, thereby facilitating in the establishment of internal control functions that can in turn assist in recording, initiating, processing, and reporting transactions in alignment with their assertions declared in the financial report (Viney, 2010). Furthermore, the company’s transactions and their associated assets or liabilities together with the equities are within the direct purview and control of the management. Besides, the knowledge of auditor’s regarding these matters and internal control mechanisms are limited to that procured through the process of audit (Wesfarmers, 2017).

Nevertheless, the fair representation of financial reports in alignment with the relevant accounting principles is a significant and implicit responsibility of the management. In contrast to this, the auditor may also take significant suggestions about the content or form of such financial report, or draft them, in part or whole by depending on the information procured from the management during audit procedure. Furthermore, the auditor’s duty for such financial report he or she has undertaken is totally confined to the presentation or assertation of his or her opinion on the same (Gay & Simnet, 2015).

Moreover, the auditor of Wesfarmers clearly does not have any kind of responsibility to perform and plan the audit to procure reasonable assurance that the material misstatements whether caused by frauds or errors are detected or identified. Therefore, the directors’ and managements’ responsibilities are clearly distinct from that of the auditors when it comes to financial reporting (Wesfarmers, 2017).

Key Audit Matters

Material subsequent events

It can be observed from the annual report of Wesfarmers that there are only two material subsequent events that the company had experienced and that could have resulted in a big impact on its financials. In tune to this, it should be recognized that the material subsequent events are those that happens after the reporting date but before the financials for the period of the issuance. The most vital event is observed in the annual report of the company where it is seen that a fully franked and final ordinary dividend is paid after the period of reporting. Moreover, payment of dividend is a potential factor that can easily affect the company’s financial statements and overall performance on a whole (Wesfarmers, 2017).

The main factor behind such a matter  can be attributed to the fact that the payment of dividend reflects the ability of the company to attain prescribed EPS and ROI that helps the company to pay a portion of the profit in terms of dividend. Therefore, since the company had paid a dividend of 120 cents per share in the year 2017 after the reporting period, the same could have affected its financial performance if it had occurred prior to the reporting period. Nevertheless, it has paid a dividend of $1361 million that was declared for the payment date of September 2017. Furthermore, the company had not paid dividend for the year 2017 that may have affected its financials in a negative way. Further, Kmart which is known as the department store acquired the brand in New Zealand and Australia..

This event can be regarded as material in nature because Wesfarmers utilized such departmental store under a licence-agreement that was long-term in nature and costed around hundred million dollars to it (Wesfarmers, 2017). Even though based on the company’s statement, such transaction could not possess a material impact on the earnings of Kmart, yet it could have affected the share prices and earnings if the same occurred before the reporting date.

Effectiveness of auditor’s material information

It is observable from the auditor’s report of Wesfarmers that even though the auditors have asserted that they audited the financial report of the company and it has complied with the Corporations Act 2001 and AAS, yet the effectiveness of such material information cannot be entirely seen. The primary reason behind this can be attributed to the fact that auditors have only reflected few key audit matters in their report and have highlighted the process of how they have undertaken the audit in relation to addressing such key audit matters. In addition, such key audit matters are not properly described or explained by them and instead, only why this key matter has been accounted for, has been portrayed (Wesfarmers, 2017).

Difference in Management’s Responsibilities from that of the Auditors

Therefore, if the key audit matters are not explained effectively, it will become complicated for the users to determine the nature of such matter, thereby resulting in improper decision-making on their part. However, they have effectively disclosed the process on how such matter has been taken into consideration that is a positive indicator on the part of users. Furthermore, when it comes to an interested third-party stakeholder, it must be noted that highlighting any issue as material information also necessitates proper and adequate details regarding the same (Kaplan, 2011).

However, the same is absent from the auditors’ report that is a problematic scenario as users may face problems while making decisions (Wesfarmers, 2017). Nonetheless, the auditors have not provided complete information in relation to such key audit matters, yet they have disclosed details of footnotes and notes wherein information regarding the same can be found. Overall, the effectiveness of auditor’s material information can be considered risky in nature and any third-party stakeholder may not rely upon such details to make appropriate decisions.

Whether material information is missing/under-reported

Furthermore, there are various things that had to be disclosed by the company but it failed to do so. Moreover, absence of such information can result in complications on the part of users in effective decision-making. For instance, it can be seen from the financial statements of the company that there are no footnotes to such financial statements that may create an issue for users to ascertain the relation of any transaction. However, there are notes to financial statements that have been properly addressed by the company and that is a positive step on its part but absence of adequate footnotes to the financials are not appropriate for the intended users (Wesfarmers, 2017).

Furthermore, other material information like sustainability, corporate governance, risk factors, etc are adequately disclosed by the company that can facilitate in proper decisions on the part of intended users. In addition to these, there are few details that are under-reported by the company. For instance, when it comes to the principal affairs of entities within the consolidated group, the company has not disclosed adequate information (Hoffelder, 2012).

It has only mentioned slight details of the activities that are not enough in nature because users demand proper disclosure for undertaking decision-making processes. In addition, material information regarding the company’s diversity is also not prevalent in the annual report and the same has been disclosed separately on the website that may result in absence of material information (Rezaee &Kedia, 2012).

Material Subsequent Events

Apart from these issues, only the key audit matters are inaccurately disclosed by the auditors that can have a material impact on the financials of the company. If the auditors had provided more information regarding their key audit matters rather than focusing on why such information was significant, then it may have resulted in more effectiveness. Nevertheless, compliance with the AAS and generally accepted accounting principles shed light on the fact that the company has been consistent in its duties to attain intended objectives (Baldwin, 2010). However, if these facts were given due consideration, the annual report would become more beneficial to the entire group of stakeholders.

Conclusion

Form the overall report, it comes to the conclusion that the audit report and the audit function of Wesfarmers is placed in an effective manner. It signifies the fact that the company has complied with the Corporation Act 2001 and the Professional and Ethical Standard Board APES 110. Hence, the audit structure of the company has been highly effective. All the responsibilities in the Auditor Responsibilities has been fulfilled and the audit is designed in a manner that responds to the risk assessment and misstatement in the financial report. Overall, the company has projected a strong audit report and it is by dint of proper planning and adherence to the regulations.

References

Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.

Gay, G. and Simnet, R. (2015)  Auditing and Assurance Services. McGraw Hill

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. 

Hoffelder, K. (2012)  New Audit Standard Encourages More Talking. Harvard Press.

Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and practice. The Accounting Review [online]. 86(2), pp. 367–383. 

Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management. [online]. 9(3), pp. 291-292. 

Livne, G. (2015)  Threats to Auditor Independence and Possible Remedies. 

Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527.

Pilbeam, K. (2009) Finance and Financial Markets. Palgrave Macmillan

Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing and Detecting Financial Statement Fraud.  Journal of Forensic & Investigative Accounting. [online]. 4(2), pp. 176-205. Available from: doi: 10.1016/j.sbspro.2014.06.041 [Accessed 4 August 2018]

Viney, C. (2010)  McGrath’s Financial Institutions, Instruments and Markets, Sydney

Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), p. 767-796. 

Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.

Wesfarmer. (2017) Wesfarmer annual report and accounts 2017.