Enhanced audit report is not fundamentally different from the conventional form of audit report. It only places more importance on disclosures that are detailed and issues that are material. This decade as seen a lot of incidents where companies have manipulated their financial statements to quench their own greed of profit maximization or growth. Therefore, there is an urgent need of introducing improvements in the quality of audit reporting. The differential factor of enhanced reporting is the introduction of Key Audit Matters (Bachmann, 2018). This was introduced by the Auditing and Assurance Standards Board for reporting periods ending on or after 15th December, 2016. The Annual Report that has been studied and analysed for the purpose of this assignment belongs to the accounting period ended 25th June, 2017. It has also been kept in mind that the report has been assessed only on the basis of such criteria that makes an audit report an enhanced audit report.
The principle of “independence” is said to be met when the auditor conducts the audit in a manner that is free from the undue influence of any party, external or internal. This may include the company with which the audit engagement has been entered into or any supplier of materials. The Auditor has to put to use his own judgment and professional skills to reach a conclusion. It is only on the basis of this conclusion that the audit opinion will be formed. Therefore this conclusion needs to be unbiased (Alexander, 2016).
The independence declaration has been given by the partners of Deloitte Touché Tohmatsu, who are the auditors of the company. This declaration is in accordance with the specification of Section 307C of the Corporations Act 2001 which requires the Auditors to expressly declare that there has been no contravention of the Act with respect to the requirement of independence. Further, there is not any deviation from the ethical code of professional conduct, as applicable to them (Bizfluent, 2017).
Apart from the audit service, some non-audit related services has also been provided to the company. These services are clearly disclosed under the head ‘Auditor’s Remuneration’ along with the amounts paid for it. The non audit service has been categorised into sub heads which includes services in the nature of assistance in accounting and accounting related matters, due diligence in financial matters, assurance services in the field of debt raisings, regulatory reviews, tax compliance and other miscellaneous and sundry services. These services has been provided to the other companies of the group as well (Das, 2017). Infect such services has been made available through the international associates of Deloitte Touché Tohmatsu Australia.
|
Particulars |
2017 |
2016 |
Difference |
Percentage Change |
Remarks |
|
Audit or Review of the financial report |
3254 |
2748 |
506 |
18.41 |
Increase |
|
Regulatory and Compliance Related Services |
129 |
239 |
-110 |
46.03 |
Decrease |
|
421 |
173 |
248 |
143.35 |
Increase |
|
|
Tax compliance Services |
108 |
113 |
-5 |
4.42 |
Decrease |
|
Total |
3912 |
3273 |
639 |
19.52 |
Increase |
As shown in the tabular representation, the overall audit remuneration has increased by 19.52 percent from the previous year, whereas the individual constituents do not show a definite pattern. Some services has seen a decline while some others has seen a sharp increase. Amount paid for tax compliance services had decreased by 4.42% (Farmer, 2018). This might have happened because of the company’s adoption of an improved strategy for compliance with taxation laws and rules. The increase in non-audit related matters, which amounts to 143.35 percent raises a possibility of matters involving assistance and advisory service.
Key audit matters are those matters the auditor perceives as matters that are of utmost significance to the financial statements. The key Audit matters of Woolworths are discussed in brief in the forthcoming paragraphs (Mahapatra, et al., 2017).
? Carrying value of BIG W property, plant and equipment: The consolidated financial statement includes property, plant and equipment of BIG W. These assets are carried on the balance sheet at a value of $514.3 million. The auditor’s focused on this area because the determination of the net recoverable value involved a lot of judgments, estimates and forecasts on the part of the management. Resultantly there exists a certain level of a risk that the carrying value of stores and related property, plant and equipment and other non-current assets may be higher than the amount that can be recovered from those. The audit procedure adopted to respond to this matter was not limited to a single procedure but involved a mix. Understanding the methodologies involved test of details, whereas evaluation of the Group’s assumption and estimates was analytical in nature (Werner, 2017). Similarly, verifying the mathematical accuracy of the cash flow models was a test of balances. Test of controls was also carried out to understand the assessment of carrying values of the said assets.
? Inventory provisioning: the accounting policy followed by the Group is to carry inventory at an amount which is lower of the cost or net realizable value. As disclosed in the financial statements, the group had inventories amounting to $4,080.4 million. Since there are a lot of factors like historical trends obsolesce, sales assumptions, the auditor put emphasis on assessing the fairness of the same (Visinescu, et al., 2017). The audit procedure adopted in this case is primarily test of controls. However, testing the value on a sample is test of balances. Analytical procedures were adopted to review the historical accuracy of making provisions.
? accounting for rebates: Due to the size and volume of transactions The Group receives significant amount of incentives, discounts and rebates from its suppliers and other parties. The company usually records these items by reducing the value of inventory or by lowering the cost of sales, as the case may be. Understanding the logic behind recognizing these items, and their timing, is extremely complex and sometimes difficult. It calls for an in depth understanding of the terms and conditions of the contracts and agreements between the two parties. It is because of these reasons that the accounting of rebates forms a key audit matter. While responding to this matter, the auditor chose to apply the technique of test of controls and analytical procedures (Dumay & Baard, 2017). By the test of controls technique, the auditor examined the strength of the controls in place, by which the management monitors these items, whether manually or automated.
? IT Systems: The IT systems throughout the Group are multitier and there are varying levels of integration between them. These systems are important for the ongoing operations of the business (Félix, 2017). The assessment of the information technology system therefore forms a vital component of the audit. If we look closely, all the other areas of audit are somehow, and to a large extent, dependent on the IT system. The audit procedure involved discussion with the management, at appropriate levels, an understanding the key financial processes so that the dependence of the process of financial reporting on the IT system can be established. Testing the design of the Key IT tools was a substantive test of detail as well as a test of controls.
Yes, the Woolworths’ group has an audit committee which comprises of five members, including Michael Elmer, who is also the Chairman. All the members of the audit committee are non-executive directors, namely, Gordon Cairns, Jillian Broadbent, Siobhan McKenna and Scott Perkins (Saeidi, 2012).
The company has a charter for the audit committee which aims to streamline the behaviour, roles and responsibilities, and duties of the members. This is done by explaining the actions or behaviour that is expected from the committee members. The main point of the charter is summarized under the following categories.
The committee should evaluate and monitor the important corporate policies, including the Company’s Delegations of Authority.
It should periodically review the Company’s corporate governance framework and give suggestions for improvement (Knechel & Salterio, 2016).
Selection, appointment and reappointment of external auditors shall be suggested by the Committee to the Board. The committee should also hold a discussion with the external auditor about the scope of the audit and the audit fees for that particular engagement.
The committee shall also act as a bridge to coordinate the programmes of the internal and the external auditor.
It shall also review the quality and effectiveness of the audit. The committee shall, annually, assess the performance of the auditor.
It shall discuss and resolve the issues raised by the auditor in his report.
It shall also review the ability and effectiveness of the policies to foresee risks.
Other areas of responsibilities are transactions with the related parties, continuous disclosure and internal audit (Charter Audit, Risk Management and Compliance Committee, 2015).
In the opinion of the Auditors, the financial statements are prepared and presented in a way that gives a true and fair view of the affairs of the entity. The financial report are in compliance with the Australian Accounting Standards and the Corporations Regulations 2001.
Directors’ and Management’s responsibilities
The responsibility of the directors and the management is restricted to the preparation of the financial report in a true and fair view. The preparation of this report, in accordance with the specifications of the Australian Accounting Standards and the Corporations Act 2001 is also the responsibility of the directors. The directors have to determine the level of internal controls which is necessary to support the preparation of the financial report. In preparing the financial report, the directors are also responsible for assessing the ability of the entity to continue as a going concern (Grenier, 2017).
The responsibility of the auditor is limited to expressing an opinion on the financial reports. He expresses an opinion after obtaining sufficient assurance that the reports reflect a true and fair view in reality. The auditor’s aim is to gather conclusive evidence that the financial report as a whole is free from material misstatement, whether due to fraud or error. Thereafter the auditor is responsible to issue an auditor’s report which he addresses to the shareholders of the company. It is to be understood here that reasonable assurance is clearly different from a guarantee; it is only an opinion based on professional knowledge and judgment.
After the closing of the reporting date, the following subsequent events has taken place, which is in relation to the Company’s exit from the Home Improvement business.
As a consequence to sell Hydrox, huge Capital losses were incurred after the balance sheet date. It is estimated that after the completion of transaction with Home Consortium, the capital losses would come to $1.8 billion. It is also estimated that there will be enough capital gains in the near future, against which these capital losses would gradually be adjusted. This is the reason that the group has not recognized any deferred tax asset in its books (Annual Report 2017, 2017).
As an interested third party stakeholder, assessment of the effectiveness of the material information reported by the Auditor:
The material information given by the Auditor of Woolworth’s Group would enable any stakeholder to make a sound financial decision. I personally feel that the data provided in the report is immensely informative, especially the part on key audit matters. The disclosure about subsequent events too gives a helpful understanding of the affairs of the company. The segment wise performance and other incidental information, gives out material information as to how each segment is actually performing (Goldmann, 2016). An assessment of the same enables me to actually understand which segment is getting more revenue for the Group, and which is larger in terms of volume of sales. Correlations can also be established, of the segment performance with the economic situation of the respective sector. Footnotes on critical accounting estimates were valuable too. Financial Risk management, which was further divided into market risk, credit risk and liquidity risk helps in decision making.
Material information which could be missing, under-reported and/or not fully explained or disclosed in an effective way for the intended users.
The estimates and forecasts made for arriving at the carrying amount of specific assets including property, plant and equipment could have been given a more detailed explanation. Similarly a proper disclosure about the assumptions underlying the provisions for inventory would have been welcomed.
The audit report gives out all the information that it is required to by the legislation and the regulatory body. However there are few questions that I would like to ask to the auditor.
? “Was there any matter that could have been considered as insider trading, had the magnitude be a little more? Was there an activity by the whistle-blower? If so, what was it about, how did the entity conduct an internal investigation and what was the outcome of such an investigation?”
? “Was there any deficiency in the reports of the internal audit department? If yes, did you discuss it with the Audit Committee? Was there any weakness in the internal control system? Did you discuss with the management? Why are they not considered material?”
Conclusion
The analysis of the audit report, affirms a belief that the annual report has performed well on the measures of enhanced audit reporting. All information that can be considered material were adequately given. The notes and explanations that formed part of the financial statements were self-explanatory (Sonu, et al., 2017). Moreover, the auditor’s proper reporting techniques makes even complex issues crystal clear. The report certainly meets the required standards of performance. The objective of transparency and information value has been met excellently. However there’s still a long way to go before the highest standards of excellence are met.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Bachmann, R. E. G. a. R. D., 2018. Firms and Collective Reputation: The Volkswagen Emission Scandal as a Case Study..
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Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
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Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge Companion to Qualitative Accounting Research Methods, p. 265.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.
Mahapatra, S., Levental, S. & Narasimhan, R., 2017. Market price uncertainty, risk aversion and procurement: Combining contracts and open market sourcing alternatives. International Journal of Production Economics, pp. 34-51.
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Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the financial crisis of 2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), pp. 127-144.
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