Auditors are generally concerned with analyzing Company accounts and to give a report as to whether according to their analysis the reviewed information is error free and show the true state of affairs of a company opeartions.
This report will focus on Woolworths Group audited report for the period ending 25th June 2017. It will try to elaborate the key elements that are essential in an auditor’s report such as independence, any non-audit services the auditors may offer to the company, the auditors remuneration and the factors that may lead to the differences in the pay an auditor is entitled to from one year to another.
There are crucial matters that auditors pay attention to during an audit that require special assessment and treatment to avoid making wrong conclusion. The report will discuss some of this key audit matters as stated by the executive committee which is a representative of the management. It will also elaborate the distinction between the role of an auditor and the management during an audit exercise.
Subsequent events are also a crucial element in an audit exercise. The report will look into the subsequent events from Woolworths Group and try to explain whether they were adjusting or non-adjusting events.
In brief it will explain crucial elements for one to pay attention at as far as accounts auditing is concerned (Abdoli and Eftekhari, 2010).
An audit exercise is normally carried out by an independent person who is not involved in the business of the company they intend to audit. Independence calls for auditors to ensure that they don’t have an interest in the business of their clients but are solely carrying out the exercise with utmost integrity and professionalism (Mat Zain, Wahab and Foo, 2010).
The auditor of Woolworths Limited has complied with the independence requirements as seen in his declaration stating that there were no contraventions whatsoever as far as auditor’s independence requirements as given by the corporations Act 2001 is concerned and neither was there contravention of professional conduct (Sultana, Singh and Van der Zahn, 2014).
The directors’ report also confirms that the auditor did not compromise with independence requirement even in the provision of non-audit services.
According to Ra, Kim and Jeon (2016) non-audit services refer to any task that an auditor maybe involved in during an audit exercise that does not involve the review and analysis of financial statements. Such services are vital as they help identify weaknesses in operations and auditors give guidance on the appropriate measures to undertake to correct deficiencies or measures that will ensure the business enjoys competitive advantage (Malek and Saidin, 2013).
The auditors of Woolworth provide the following non audit services to their client:
From the auditors pay it is evident that the auditors provided the following non audit services:
Services in relation to regulation and compliance.
Tax adherence services.
Other services not in relation to the audit of financial statements.
This are further explained below.
a.Risk Assessment
The auditors assessed the four types of risks the business could face (Strategic, Financial, operational and compliance) and further stated how the same could be mitigated.
b.Corporate Governance analysis.
The auditors also carried out research and found out that Woolworths group had adhered with the requirements good corporate practices as far as governance is concerned throughout the period they were reporting on (Shim, Lee and Rho, 2015).
c.Analysis of board
The auditor’s report also gave an analysis if vital skills and knowledge among the members of the board that was important for the operation of the company.
It further gave the composition of the board as per gender composition as well as the composition in terms of the duration the board members have been acting in that capacity in the company (Ratzinger-Sakel and Theis, 2017).
Remuneration of an auditor is normally set in a general meeting or by the board if they are the first auditors of the company and includes the fee they are paid for carrying out the audit exercise and any other services they might offer in the process of carrying out the audit exercise which is not an audit related service.
The auditors’ remuneration for the current and prior year is as below:
There is a 21% increase in auditor’s remuneration between the two years. It should be noted that auditor’s remuneration is not normally a fixed figure but is governed by factors such as scope of work and the profit of the company. For instance from above it seems like the tax compliance services offered by the auditors in 2016 was broader in scope than the service that was offered in 2017 hence the reduced pay. The vice versa applies for other non-audited services in the two years for both auditors.
The review of financial statements pay is determined by the scope of the work as well as the profits the company has made. It can thus be said that more profits were made in 2017 as compared to 2016 and thus a high pay to the auditors for this service in the current year (Yuliarini, 2016).
These are regarded as matters which are essential in an audit exercise and require attention because errors can easily be made in their interpretation.
a.Exit of the home improvement Business
This matter had interrelated components that required consideration and estimation that was critical e.g the estimation of the value of assets and liabilities that were disposed during the business exit, treatment of the Lowe’s put option as per accounting terms etc. These activities were complex and thus termed as key (Asbahr and Ruhnke, 2017).
b.Carrying Value of Big W PPE
The auditors noted that the performance of Big W had gone down in the recent years and thus there was a risk that the balance sheet value of $514.3million could be higher that the recoverable value. This was key matter because estimation of the recoverable value required crucial estimates and judgment from the management (Bentley, Lambert and Wang, 2017).
i.Inventory Provisioning.
This was an area of focus to ensure that inventory was to be stated at lower of cost as compared to the expected value after sale.
The audit procedures that were carried out in assessing the key audit matters explained above fall in the following categories:
ii.Tests of controls
These are controls used by a client to help them detect the effectiveness of the internal controls set by a client to detect any errors, frauds or misstatements in operations. Stronger controls indicate that clients can rely on them as part of his evidence.
iii.Substantive tests of detail
These are tests that assure the auditor that the stated values in the financial statements are correct.
iv.Analytical procedures.
This procedure help an auditor to identify potential risk areas that will call for his attention to avoid wrong reporting.
Audit committee normally helps auditors to remain independent and they normally give an independent view of the operations of management and the company as a whole (Grenier, Ballou and Philip, 2011).This committee in Woolworths limited is referred to as the Audit, Risk Management and Compliance Committee.
The committee is made up ofnon-executive directors and majorities are independent non-executive directors. The committee is governed by a charter that states its structure, function and responsibilities.
Woolworths Limited charter dictates that the Audit committee should have at least 3 members who must be non-executive directors. At least a single member is required to have financial qualifications and experience which will be stated by the board. The members to the committee are appointed by the board who also determine the chairman to the committee (Klueber, Gold and Pott, 2018).
The chairman to the committee should not be the board chairman. The chairman has the responsibility to report to the board issues discussed during the meeting. He also acts as a link between the committee and other parties of interest in the company which may need information from him such as the Chief Executive Officer, the finance director, external auditors etc.
The committee meeting can only be done with at least two members. The overall Company secretary acts as the secretary to the Audit committee and takes minutes for the meeting. If the chairman is not present during the committee meeting, one of the members will be appointed to chair the meeting (Karim, Robin and Suh, 2015).
The committee is required to meet frequently and not less than 4 times in a year. The committee is also permitted to invite any other person to attend the audit committee meeting.
This can be explained as the overall conclusion an auditor give as a general view after the evaluation of the books of accounts as well as activities of the company.
For the audit report of Woolworths limited the auditor has given an unqualified opinion. This is stated in the auditor’s report where they state that the financial report gives the true state of affairs of the Company and that the company complied with Australian Accounting Standards and the Corporations Regulations 2001(Habib, 2013).
The directors and the management are charged with governance of the company. They are thus supposed to ensure that proper books of accounts are kept in accordance with the set accounting standards. They should also ensure completeness and correctness of accounting information to be audited. They also set internal controls and ensure they are effective and workable (Jaber and Abu Fadda, 2016).
The auditor on the other side has a duty to analyze or examine financial statements to ensure that they show the true state of affairs of the company and also to ascertain that they have been prepared as per the accounting provisions set. Auditors also review internal controls to determine their reliability and could give advice to the management on the level of its reliability (Hegazy and Stafford, 2016).
These are activities that may take place after the end of a reporting period of a company but before audited accounting statements have been issued.
Woolworths Ltd had one subsequent event which was the home improvement bit which was in relation with the home improvement business exit. This happened on the 26th Of June where the company entered into an agreement to sale shares with home consortium subject to the sale of Lowe’s shares. Woolworth was to assume some assets as well as responsibilities (Little et al., 2011).
Further on 4th August Lowe’s shares in Hydrox were sold by a trust with home consortium as the beneficiary in exchange for a consideration (Herda and Lavelle, 2014).
This has been treated as a non-adjusting event. It has thus not been included in the current audit exercise.
Conclusion
The auditors in their capacity have given concrete material information on their analysis and findings. The report is straight forward and leaves no loophole that raises unanswered questions.
To get more clarifications on the company operations as an interested party I would request the auditor to answer the following follow up questions in the general meeting.
References
Abdoli, M. and Eftekhari, R. (2010).Independence and Impartiality of Auditors from the Viewpoints of Independent Auditors and Investment Companies. SSRN Electronic Journal.
Asbahr, K. and Ruhnke, K. (2017).Real Effects of Reporting Key Audit Matters on Auditors’ Judgment of Accounting Estimates. SSRN Electronic Journal.
Bentley, J., Lambert, T. and Wang, E. (2017). The Effect of Increased Audit Disclosure on Managerial Decision Making: Evidence from Disclosing Critical Audit Matters. SSRN Electronic Journal.
Chu, L., Dai, J. and Zhang, P. (2010).The Impact of Auditors’ Experiences with their Clients on the Consistency and Bias in Earnings Reporting and Auditors’ Independence. SSRN Electronic Journal.
Grenier, J., Ballou, B. and Philip, S. (2011). Enhancing Audit Committee Effectiveness with a Licensed Audit Committee Member. SSRN Electronic Journal.
Habib, A. (2013). A meta?analysis of the determinants of modified audit opinion decisions. Managerial Auditing Journal, 28(3), pp.184-216.
Hay, D. (2014). Auditing, International Auditing and the International Journal of Auditing: Editorial. International Journal of Auditing, 18(1), pp.1-1.
Hegazy, K. and Stafford, A. (2016).Audit committee roles and responsibilities in two English public sector settings. Managerial Auditing Journal, 31(8/9), pp.848-870.
Herda, D. and Lavelle, J. (2014).Auditing Subsequent Events: Perspectives from the Field. Current Issues in Auditing, 8(2), pp.A10-A24.
Jaber, R. and Abu Fadda, M. (2016). Awareness Level of Professional Independence Requirements, through Assimilation of Fundamental Principles of Professional Ethics, by Jordanian CPA Auditors, in Auditing Process: Field Study. International Journal of Economics and Finance, 8(9), p.11.
Karim, K., Robin, A. and Suh, S. (2015). Board Structure and Audit Committee Monitoring. Journal of Accounting, Auditing & Finance, 31(2), pp.249-276.
Klueber, J., Gold, A. and Pott, C. (2018). Do Key Audit Matters Impact Financial Reporting Behavior?. SSRN Electronic Journal.
Little, R., Yosef, M., Nan, B. and Harlow, S. (2011). A Method for Longitudinal Prospective Evaluation of Markers for a Subsequent Event. American Journal of Epidemiology, 173(12), pp.1380-1387.
Malek, M. and Saidin, S. (2013). Audit Services Fee, Non-Audit Services and the Reliability of Earnings. International Journal of Trade, Economics and Finance, pp.259-264.
Mat Zain, M., Wahab, E. and Foo, Y. (2010).Audit Quality: Do the Audit Committee and Internal Audit Arrangements Matters?. Corporate Ownership and Control, 8(1).
Ra, H., Kim, Y. and Jeon, K. (2016). The Effects of Non-Audit Services on Audit Quality : A Focus on Auditor and Non-audit Services Type. korean management review, 45(1), p.259.
Ratzinger-Sakel, N. and Theis, J. (2017). Does Considering Key Audit Matters Affect Auditor Judgment Performance?. SSRN Electronic Journal.
Shim, Y., Lee, J. and Rho, J. (2015).Articles : Implementation of New International Standard on Audit (Communicating Key Audit Matters in the Independent Auditor`s Report) and Auditors Liability Scheme. Commercial Law Review, 34(3), pp.367-406.
Sultana, N., Singh, H. and Van der Zahn, J. (2014). Audit Committee Characteristics and Audit Report Lag. International Journal of Auditing, 19(2), pp.72-87.
Yuliarini, S. (2016). Remuneration and Management Behavior Evaluation: A Critical Review. Archives of Business Research, 4(6).
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