Auditing is that part of the finance subject which helps in identifying the risks and the discrepancies to which the management of the company is not aware and whose attention is attained through the means of the independent auditors report. Therefore, the audit plays a very important role and the auditor’s report serve the means for the investors and the stakeholders to give the true and fair view of the position and performance of the company. For the purpose of furtherance of this report, the company that has been selected for the purpose is Woolworths Limited and the annual report for the period ending for two thousand and seventeen has been considered. The report has been started with the details of the company that has been chosen and the details of the nature of the industry in which it operates along with the nature of business of the company. Then the detailed analysis has been made of the new auditing standard number 701. The heading of this standard is communicating the key audit matters in the auditor’s report. The analysis includes the reason as to why the same has been developed and as to what is the meaning of the key matters. Thereafter, the detailed analysis of the annual report has been made with reference to the key audit matters if any listed in the annual report and in what manner the same can put the material risk on the part of the company and also how it can have the impact on the audit. Then the report has ended with the proper conclusion and recommendation.
For the purpose of the furtherance of this report, the company that has been selected Woolworths Limited. Being the company listed in the Australia Stock Exchange and is one of the ASX lists of top hundred listed companies. The company has been into the existence from the last hundred years and since then the company has been into the retail sector.
The industry in which the company is operating is the retail sector. As per the latest index, the company is the number two company in the retail industry which has the more income. The company is operating across Australia and New Zealand. The company has its headquarters in Sydney, Australia. The industry under which the company is operating provides all the products for the home at one place and the store commonly known as the departmental store (Woolworths Limited official website, 2017). The major emphasis under which the company is operating as listed in financial report of the company is – to identify the customer preferences, to generate the higher revenues from the drinks, and then from the business of hotels and to become the best retailer of the country having the adequate systems and objectives.
The global financial crisis have been started from the mid of the year of two thousand and seven and has been persisting till the end of the year two thousand and nine ((Bajada and Trayler, 2010). These crises have been started from the collapse of the largest companies namely Lehman Brothers, One Tel and HIH Insurance. The collapses have been occurred due to the accounting fraud committed by the company and also the improper functioning of the management of the company. In case of the Lehman Brothers the accounting fraud is the adoption of the reverse repo method due to which their reported profits keep going on higher value and when the saturation point is reached then the company has been forced to provide the actual figures of the net loss which has created a wave of the shock in the industry (Xu, 2011). These collapses have provoked the standard setting bodies tom develop an auditing standard through which the stakeholders can have the idea as to what is happening in the company or any material misstatement reported by the auditor, etc (Cordos and Fülöpa, 2015). To overcome these types of crises and collapses, the new auditing standard has come into place.
The auditor is the person who acts as an agent of the company as well as the stakeholders to represent the true and fair view of the financial statements of the company (AASB, 2015). He holds the fiduciary position and is required to maintain this position forever. It is his obligation to conduct the audit in the best possible manner and to provide all the details as he seems to be sufficient and necessary for the different stakeholders of the company (Thomson, 2008). The new auditing standard has come up with the more disclosures and framework of operation. This new standard has helped in providing then information which is in addition to the general financial reporting framework and which in the view of auditor is of high significance in audit and also of the high significance for the management to have the judgment (Masytoh O, 2010). Thus, the audit matters which are of high significance shall be reported as key audit matters in the auditor report.
The auditor of the company has disclosed the key audit matters in the financial report of the company for the year ending the month of June two thousand and seventeen. The key audit matters are mentioned below:
During the period under review, it has been observed by the auditor that due to the closure of the operations of one of the segment of the company namely Home Improvement Business many components of the same are required to be checked in detail as it involves the complex accounting treatment of each and every component. Each and every component of it has different accounting as well as valuation treatment. Due to this complexity, the auditor has specified the same in the audit report.
Under this segment, the company has charged the high value of impairment amounting to thirty five million dollar which has resulted in the immediate downfall of the carrying amount of the asset so concerned. Impairment has been charged because of the fact that the carrying amount has exceeded the recoverable amount. In this the company has calculated the recoverable amount on the basis of the cash flows which the company has determined using their own estimate clubbed with the discount rate adopted by the company. Due to the management discretion of estimating the cash flows and which in turn have led to the immediate downfall of the carrying amount, the event shall be reported as the key audit matter.
Stock
In the financial statements of the company, the amount has been provided on account of the damaged inventory and that too on the premise of the estimates of the future cash flows that the company will generate out of the available stock. The company has emphasized on the provision also on account of the goods which are slow moving and the seasonal one. Thus, it is of key matter because of the fact that the forecast has been made by the management at its own discretion.
In the normal course of business, the company is in receipt of discounts from the parties who supplies the goods and accordingly the accounting of the same is required to be done effectively. The same has to be done for the rebates. The company has been receiving the rebates and discounts from the suppliers but the accounting for the same needs to be checked with the contracts if any with those parties.
It has been mentioned by the auditor that the system that the company has installed in the organization is very complex and it shall be checked in detail and due to this complexity, the item has been reported as the key audit matter.
On reading the annual report of the company along with the independent auditors report and also specifically the key audit matters as communicated by the auditors, following are the two risks that have been noticed and have the material effect on the financial position and financial performance of the company.
The new auditing standard number 701 has specified the matters which are regarded as the significant event or the transaction. In accordance with the paragraph number nine of the auditing standard 701, the auditor is required to determine the matters or the events which requires the urgent attention of the auditor while conducting the audit. These matters so identified shall be from the matters as communicated with the persons which are charged with the governance. While determining such matters, the auditor is required to consider the following:
Following are the events or the transaction which have the material impact and effect on the audit for the financial year ending two thousand and seventeen:
(McKee, 2015).
Conclusion And Recommendation
There has been collapses which have occurred in the past decade and which have further led to the financial crisis on the global basis. By following the global financial crisis the government has sought to have such standard which ensures the high transparency in the financial statements of the company so as to cater the needs of the stakeholders of the company as well as the management of the company. Due to this, the standard setting bodies has come up with the new auditing standard number 701 on communicating the key audit matters in the audit report. It has provided as to which transaction or event is required to be reported in the audit report. In this report, the analysis of the annual report of the company for the financial year ending June 2017 has been selected and the company – Woolworths Limited has been chosen. The detailed analysis have been made with respect to the key audit matters and in regard to the different type of risks mentioned. In order to conclude the report, the new auditing standard has given the path for the auditor so as to disclose all the significant transaction or event which will be helpful to the users of the financial statements.
The recommendation on high degree for the company will be to have the adoption of the clear and precise accounting policies and estimates and the procedures to enable the auditor to conduct the audit in best manner.
References
AASB, (2015), “ASA 701, Communicating Key Audit Matters in the Independents Auditors report”, available on https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf accessed at 08/05/2018.
Bajada, C. and Trayler, R., 2010. How Australia Survived the Global Financial Crisis. The Financial and Economic Crises: An International Perspective, Edward Elgar: Cheltenham, UK and Northampton, USA, pp.139-154.
Cordos, G.S. and Fülöpa, M.T., 2015. Understanding audit reporting changes: introduction of Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing critical audit matters in the auditor’s report.
Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of Modern Accounting and Auditing, Vol 6(4), pp 27-36.
McKee, D., (2015). New external audit report standards are game changing. Governance Directions, 67(4), p.222.
Thomson, J., (2008), “Five lessons from the Spectacular fall of Eddy Grooves”, available at https://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-grroves.html accessed on 08/05/2018.
Woolworths Limited official website, 2017, “Annual Report 2017” available on https://www.woolworthslimited.com.au accessed on 08/05/2018.
Xu, Y., 2011. Audit reports in Australia during the global financial crisis. Australian Accounting Review, 21(1), pp.22-31
Xu, Y., 2013. Responses by Australian auditors to the global financial crisis. Accounting & Finance, 53(1), pp.301-338.
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