Auditing Of Financial Statements: Analysis Of Wesfarmers Limited Annual Report

Compliance with Audit Independence Principles

Auditing refers to the process to examine as well as analyze the financial statements of the companies for making sure that there is not any material misstatements in them due to errors, financial fraud and others. It is on the auditors for enhancing the quality of audit report by disclosing all the information about the material aspects of the financial statements. Moreover, the auditors are responsible to communicate all the material information of the financial statements of the companies to the stakeholders in simple form and language. In the recent years, the auditing committees have undertaken several initiatives to enhance the quality of audit reports. Now, it is needed for the auditors to take into account enhanced issues in the financial reports so that the quality of audit report can be enhanced. This report aims in analyzing and evaluating the recent annual report of Wesfarmers Limited related to different aspects of auditing of the financial statements. In this case, it is required to tell that that Ernst & Young was the audit partner of Wesfarmers for the year 2017.   

It is needed for the auditors to make compliance with all the principles and standards of audit independence while providing the audit services. It implies that the auditors are needed to be independent from the audit client at the time of audit operations (Heinze, Feller and Morsch 2014). It can be seen from the Directors’ Report from the 2017 Annual Report of Wesfarmers that the auditors of Ernst & Young have not had any convention of the requirements of auditor independence according to Corporations Act 2001 in the audit processed (Prather and Rasmussen 2013). The directors of Wesfarmers have also mentioned that the auditors of EY have complied with all the applicable professional conducts and principles of required audit standards. Ernst & Young follows the rules and regulations of ‘Corporations Act 2001’ and ‘Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants’ for maintaining independence of the auditors (wesfarmers.com.au 2018).

According to the 2017 Annual Report of Wesfarmers, Ernst & Young has provided the company with some specific non-audit services in the year 2017. Ernst & Young gave Wesfarmers two specific non-audit services such as service related to tax compliance and other services; and they have paid Ernst & Young with $1,088,000 and $1,219,000 respectively for these non-audit services. Wesfarmers has made the payment of $2,307,000 in 2017 for non-audit services to Ernst & Young and this amount is the 23.1% of the total audit fees to Ernst & Young (wesfarmers.com.au 2018). At the time of receiving the non-audit services, Wesfarmers has made it sure that Ernst & Young has complied with all the required standards for providing the non-audit services; and the auditors have not compromised the compliance with general standards of Corporations Act 2001 (Jackson 2013). Apart from this, the Board of Directors of Wesfarmers has confirmed the fact the provided non-audit services do not involve the review and audit of the own works of the auditors for the process to make decisions of the management. At the same time, all the provided non-audit services are subjected to corporate governance rules and regulations adopted by the business entities. Lastly, all these do not question the auditor’s independence (Ji 2017).     

Particular	2017 ($) Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2016 ($)	Change in %
Audit Services
Financial Reports Audit and Review
Ernst & Young (Australia)	5,723,000	5,780,000	-0.99%
Ernst & Young (Overseas Network Firms)	702,000	577,000	21.66%
Services Related to Assurance
Ernst & Young ( Firms in Australia and Overseas Network)	1,272,000	2,215,000	-42.57%
Other Audit Firms	218,000	112,000	94.64%
	7,915,000	8,684,000	-8.86%
Non-Audit Services
Ernst & Young (Firms in Australia and Overseas Network)
-Tax Compliance	1,088,000	1,096,000	-0.73%
-Others	1,219,000	882,000	38.21%
	2,307,000	1,978,000	16.63%
Total Payment to Auditors	10,222,000	10,662,000	-4.13%

Table 1: Remuneration to Ernst & Young in 2017 and 2016

(Source: wesfarmers.com.au 2018)

It can also be seen that the payments of the audit services includes the businesses of Australian and overseas network firms (Asien 2015). Tax compliance and other services are the provided non-audit services. According to the above table, it can be seen that there is a 8.86 percent decrease in the payment of audit services to Ernst & Young by Wesfarmers in the year 2017 as compared to the year 2017 (Kend, Houghton and Jubb 2014). At the same time, it can also be observed that there is a 16.63 percent increase in the payment of non-audit services to Ernst & Young by Wesfarmers in the year 2017 as compared to 2017. It implies that Wesfarmers has received more non-audit services from Ernst & Young in 2017 as compared to 2016. As per the above table, on the overall basis, there is a decrease of 4.13 percent in the total payment to Ernst & Young by Wesfarmers in the year 2017 as compared to 2016 (Cohen and Leventis 2013).

As per the auditors, Key Audit Matters are considered as most important aspects in the audit of the financial reports. The presence of three key audit matters can be seen in the 2017 Annual Report of Wesfarners; they are discussed below with undertake audit procedures for their minimization along with classification:

Key Audit Matter 1: As per Ernst & Young, it was needed for Wesfarmers to determine the recoverable amount of property, plant and equipment, goodwill and other intangible assets in the presence of significant judgment (wesfarmers.com.au 2018). The auditors have noticed the fact that the recoverable value of Target is marginally more than its carrying value. This aspect leads to the rise of impairment of Target’s cash generating unit (CGU). As per the audit procedure for this matter, Ernst & Young has evaluated the used assumptions and methodologies related for determining CGU, forecast cash flows, discount rate, growth rate, comparative valuation of the industry and other market proofs. The auditors have also considered the adequacy of the financial reports related to impairment testing, assumptions and sensitivities. This procedure can be classified as analytical procedures.    

Key Audit Matter 2: The next key audit matter can be seen with the rebates of the suppliers. As per the auditors, Wesfarmers has reported suppliers rebate as rebates received from the suppliers with the retail operations (wesfarmers.com.au 2018). Ernst & Young has considered this a key audit matter because of recognition of quantum of commercial income in the year and needed judgment for exercising this related to some factors. For this matter, the undertaken audit procedures taken by Ernst & Young are gaining understanding about the nature of each commercial income; assessment of the design and effectiveness of operations of relevant controls; performing comparison of different rebate arrangements; testing a sample of suppliers rebate; analyzing the suppliers with promotional credit; inspecting sample of material new contracts; inquiring the legal councils and inquiring the business representatives. Thus, the classification of these procedures can be done as tests of controls, substantive tests of detail, substantive test of balances or analytical procedures (Knechel 2013).      

Key Audit Matters

Key Audit Matter 3: The next key audit matter can be seen in the finalization of the acquisition accounting of Homebase. Ernst & Young has considered this as a key audit matter as Wesfarmers has crossed 12 months provisional accounting period provided by AASB 3 Business Combinations on 28^th February 2017 (wesfarmers.com.au 2018). In addition, the size of the acquisition as well as involved judgment in fair value determination of the assets and liabilities are other reasons. As a part of the audit procedures for this issue, Ernst & Young assessed the acquisition accounting methodology of Wesfarmers; they do the assessment of whether there is any change in the fair value of the assets and liabilities; and Ernst & Young involved in the assessment of the recognition and valuation of the assets and liabilities. The classification of these processes can be done as test of details and analytical procedures.   

As per the 2017 Annual Report of Ernst & Young, the Board of Directors of Wesfarmers has established an Audit and Risk Committee; and this committee’s primary objectives is to monitor the internal control policies and procedures in order to defend the company’s assets and to maintain financial reporting integrity. Two non-executive members of Wesfarmers are also the part of this Audit and Risk Committee; they are D L Smith Gander and J A Westacott (wesfarmers.com.au 2018).  Some key focus areas of this committee are review and assessment of the processes to ensure financial reporting integrity, review and assess the factors for recognizing the commercial incomes, review the audit risk management framework and others (Schmidt, Wood and Grabski 2016).

In the report of independent auditors in 2017 Annual Report, the auditors of Ernst a7 Young opined that the remuneration report of Wesfarmers for the year 2017 has been prepared by complying with the principles of Corporations Act 2001 under section 300A (Habib 2013). At the same time, the auditors have also opined that that the company has prepared and presented all the financial reports of the business by complying with the regulations of Australian Accounting Standards and other required standards (wesfarmers.com.au 2018). 

It can be seen from 2017 Annual Report of Wesfarmers that there is difference between the responsibilities of the directors and the auditors in the development and presentation of financial report. It is required to tell that it is the responsibility of the directors to prepare the financial reports of the business that provide true and fair view as per the Australian Accounting Standard and the Corporations Act 2001 (wesfarmers.com.au 2018). At the time to develop the financial reports of the business, it is the responsibility of the directors to assess the ability of the company in continuing as a going concern with the use of the going concern basis of accounting. However, the responsibility of the auditors is different from the directors. The prime responsibility of the auditors can be seen in obtaining the reasonable assurance about the fact that whether financial reports of the company are free from material misstatements as a result of fraud, error or other issues that need the opinion of the auditors. Other responsibilities of the auditors towards financial reporting are identification and assessment of material misstatements risks, obtaining understanding about the internal control, evaluation of the appropriateness of accounting policies, concluding the suitability of the directors’ use of going concern basis accounting, evaluating the overall preparation and presentation of the financial reports and obtaining sufficient audit evidence (Davidson, Desai and Gerard 2013).

Role of the Audit and Risk Committee

It needs to e mentioned that there are two subsequent event for Wesfarmers for the financial year 2017. One subsequent event was the acquisition of Kmart brand name in Australian and New Zealand by Kmart in August 2017 that increases the license price increasing for $100 million. However, the auditors have not treated these event as they are expected not to have any material contact on the financial reports of Wesfarmers (Turley 2015). Declaration of dividend is the second event. Wesfarmers has declared a fully-franked ordinary dividend of 120 cents per share that contributes to a dividend of $1,361 million and the date of payment is 28^th September 2017 (wesfarmers.com.au 2018). This dividend has not been provided yet.  

From the perspective of a third party stakeholder, it can be said that the auditors of Ernst & Young have assessed the material information of Wesfarmers in the most accurate manner. In this process, the auditors have complied with all the required principles and regulations of Corporations Act 2001, Australian Auditing Standards and APES 110 and others. It can also be seen that the auditors of Ernst & Young have reported the three major key audit matters of the company along with the undertaken steps to minimize them. All these aspects show the effectiveness of the auditors in dealing with the material information (Pilcher et al. 2013).  

Based on the assessment of the 2017 Annual Report of Wesfarmers, it can be said that the auditors of Ernst & Young have taken into consideration all the material aspects as well as information that can have material collision on the financial reporting of the company. The auditors of Ernst & Young have provided the required full explanation as well as disclosure of all the information about the material factors. It indicates there is not any material information missing or partially reported (Hodgkinson et al. 2013).  

In the annual general meeting, one can ask the auditors of Ernst & Young about the initial point of their audit procedures in the company. After that, one can raise the question to the auditors about how they have determined the level of materiality in the reported three key audit matters of Wesfarmers.  

Conclusion

The above discussion indicates towards the fact that the auditors of Ernst & Young have complied with the Corporations Act 2001, APES 110 and Australia Accounting Standard for maintain auditor’s independence. It is also visible that Ernst & Young has Wesfarmers with non-audit services in the form of tax compliance and other services. The analysis of the remuneration of auditors shows that there is an overall increase in the payment of the auditors by Wesfarmers in the year 2017. The above discussion indicates towards the presence of three key audit matters in Wesfarmers those Ernst & Young have dealt with in the presence of appropriate audit procedures. It can be observed that Wesfarmers has developed an Audit and Risk Committee for managing the audit risk and this committee includes two non-executive directors. Based on the analysis, Ernst & Young has provided the opinion that all the financial reports of Wesfarmers have been developed by complying with the required standards and regulations. The above discussion also shows that there is difference between the responsibilities of the directors and the auditors for financial reports.

References

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Wesfarmers (2018).  2017 Annual Report. Retrieved 23 August 2018, from https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4