The influence of global financial crisis reverberated the entire world that has resulted in the introduction of new accounting standards. The accounting standard related to financial instruments lacked the urgent and revision on the part of IASB. This is the reason why revision in accounting standards was held quite remarkable given that many companies were just getting accustomed to business reporting in the context of present standards (Moroney & Trotman, 2016). Moreover, the past standards were faced with an issue of significant decrement in earnings owing to extensive losses being identified on the fair value remeasurement of derivative instruments.
Furthermore, the aftermath of such global financial crisis can also be observable till date and the reason behind this can be attributed to the inefficacies prevalent in the past accounting standards. Therefore, new accounting standards like ASA 701 and ASA 570 have been introduced by the IASB that played a major role in eradicating such issues (Petty et. al, 2012). Besides, key audit matters remained unreported in the prior years, thereby costing huge amounts to the investors. Nonetheless, with the assistance of this report, annual report of Wesfarmers will be studies wherein the reasons for revising these standards will be highlighted. This will be followed by directors and auditors’ concerns regarding the same and lastly, the disadvantages and advantages of ASA 701 will also be discussed.
Reasons for revising ASA 570
The emergence of global financial crisis paved a path for various disturbances in the entire economy that affected many stakeholders. It emerged in the year 2008 and created mass destructions throughout the world. The reason behind this can be attributed to inappropriate disclosures in association to financial issues of an organization’s capability to continue as a going concern (AUASB, 2015). Nevertheless, the revision of such standard assisted in eradicating many issues like simplifying the scenarios that can impact the assumptions of going concern. However, this term has been substituted by going concern basis of accounting in the current phase but the auditors’ base approach has not been changed (Parrino et. al, 2012).
Major concepts of ASA 701 in the independent report of auditors
This standard was first issued by the AUASB in the independent auditors’ report in the year 2015. Further, such standard has regulatory power under section 336 of the Corporations Act that assisted in framing proper auditing standards. In addition, such standard is primarily based upon the ISA 701 that signifies communication of key audit matters in the independent auditors’ report. Moreover, this standard can be implemented for financial reporting tenures ending on or after December 15, 2016.
Key audit matters are the major concept or approach of this standard as these are accounted by the auditors based on their professional judgement while undertaking audit processes. Hence, the professional judgement of auditors is important to ascertain such KAM’s. Further, communication on the part of auditors is also necessary for identification of these KAM’s (Hoffelder, 2012).
Related matters for auditors and directors
Directors pursue best knowledge of the key audit matters and it is their responsibility to convey or communicate these to the auditors. Moreover, it is notable that often few information may be useful to the financial position and overall health of a company and therefore, directors may hesitate in revealing such details. Hence, in these situations, the role of auditors plays a very significant part as he requires vouching for such key audit matters and thereafter, report the same. Besides, paragraph nine of the standard highlights that it is the auditors’ duty to ascertain such key audit matters (AUASB, 2015).
Further, paragraph eleven states that the auditors must endeavour in describing these key audit matters under proper subheadings so that the same can be aligned with the disclosures prevalent in the financial statements. Nevertheless, the auditors must be very careful in restricting himself from disclosing sensitive or confidential details to unwanted parties. Nevertheless, under few situations, the auditor may also decide not to disclose specific key audit matters owing to legal boundaries or requirements of public interest (Dauber, 2009).
Disadvantages and advantages of ASA 701 standard
The introduction of new ASA 701 standard played a key role in enhancing the transparency of financial reporting. This is because it facilitates in offering insight into various key audit matters that can pave a path for decision-usefulness of auditing and financial reporting. Therefore, in this way, stakeholders can be offered benefits on a whole.
Furthermore, it can also be feasible that the auditors’ liabilities are increased owing to the emergence of such standard (Knechel, 2017). Besides, it is also feasible that the auditors offer relevant disclosures only to address the requirements of the standard, thereby defeating or surpassing the very sole objective of the standard. Nevertheless, these feasibilities are very remote in nature and auditors being from a self-monitored profession must adhere to the standard in true sense.
Review of the company’s annual report and focus on Consumer Staples Sector
In relation to Wesfarmers Ltd, the same is regarded as the top companies of the Australian Stock Exchange and thus, been selected for attaining the objectives of this report. In page number 123 of the company’s annual report, the report of independent auditors has been presented or reflected in appendix one. Moreover, the auditors of the company are Ernst and Young. However, it is notable that the company has not adopted the ASA 701 standard within its framework in advance and therefore, no key audit matters have been effectively communicated in the auditors’ report. Nonetheless, a brief discussion on the company’s financial statements, notes to financials, and the overall annual report can assist in attaining various aspects regarding this context (Dauber, 2009). Firstly, is the rebate through suppliers, secondly is the impairment of non-current assets that also comprises of intangibles, and lastly is the finalization of the company’s acquisition accounting of Homebase
Rebates through suppliers
Rebate through suppliers is a major KAM and that is observed in the industry of consumer staples. This may be the first feasible key audit matter present in the company’s annual report because it purchases various products and services from suppliers and sometimes, it also offers volume rebates to such suppliers under several types of schemes. This can be a major KAM as these are identified in the company’s financial statements as income and any alteration in the key assumptions can also alter the company’s income in a relevant way. The top companies in the ASX 100 Woolworths, The A2 Milk company, Graincorp Limited, Coca Cola are considered in this scenario. Further, the quantity of such rebates is also on a higher scale that makes it important to consider as a key audit matter. Nevertheless, the amount of such rebate relies on various factors like recognition time, commercial terms of the suppliers’ contract, nature of rebate, etc.
The previously mentioned disclosure associated to rebates from suppliers have been disclosed in note 6 of the company’s financial statements. Overall, few suggested approaches that can check such key audit matter consists of:
Impairment of the company’s non-current assets that also included intangibles
The first feasible key audit matter can be impairment of the company’s non-current assets that also consisted of intangible assets. The reason why this matter can be regarded as a significant KAM is attributable to the fact that it can easily affect the company’s financial performance of the consumer staples. Further, it can be noted that the impairment loss in relation to this context is a deductible cost and therefore, it can minimize the company’s profitability. Moreover, if such companies intend to attain higher profits, it can easily conceal its impairment losses.
Therefore, it is vital for the auditors to exert due care while accounting for the efficacy of such impairment losses (Geoffrey et. al, 2016). Nevertheless, it is also notable that based on the accounting standards especially AASB 136 (impairment loss), the company must compute all its impairment losses at the termination of every reporting period. This also comprise of testing or verifying all non-current assets comprising goodwill for impairment losses. Overall, an evaluation of the company’s annual report and financials play a key role in reflecting that there is no material default or flaw in relation to impairment losses (Cooper & Coram, 2015).
The previously mentioned disclosure can be attained or witnessed in note 17 of the company’s annual report. Further, it also offers key assumptions in relation to the impairment of the company’s non-financial assets. Moreover, the primary cash-generating units of the company are Curragh and Target and if there exist minimal variations in such assumptions associated with the computation of impairment losses, then these may depict impairment loss on a whole (Needles & Powers, 2013). Overall, the recommended auditing approaches in relation to the same comprise of assessing the appropriateness of financial disclosures of the company’s reporting, assessing the assumptions that are associated with the rate of growth, discounting rate, and ascertainment of cash-generating units (CGU’s), and evaluation of the assumptions that are associated with the flow of cash.
Finalization of the acquisition accounting of Homebase
This may be considered as the third feasible key audit matter that is prevalent in the annual report of the company. In relation to this, the company has procured Hampden Group (Homebase) based on the principles laid under AASB 3 (business combination).
The previously mentioned disclosure can be witnessed from note 20 of the annual report of the company. Moreover, this can be a feasible key audit matter owing to the massive acquisition size and its influence on the company’s balance sheet. Nonetheless, the total acquisition value is $665 million and therefore, it may be an enormous amount. Besides, it is notable that proper judgement is needed during determination of assets fair value and acquired liabilities and therefore, changes in the assumption may also change the net fair value of recognizable liabilities and assets (Porter & Norton, 2014).
Overall, the recommended measures for encountering this key audit matter are:
Conclusion
The company must be adopting the standard (ASA 701) from the financial period ending June 30, 2017. Therefore, the judgement on the part of auditors for choosing the KAM’s may be observable at that time itself. Besides, at present, this report assists in suggesting few KAM’s.
Further, the choice of three key audit matters primarily relies on the evaluation of the company’s annual report that is assisted by both non-financial and financial reasons. Further, the reasons for selecting these key audit matters can be attributed to the fact that these are logical as they form part of the auditors’ report, thereby facilitating in enhanced decision-making on the part of users of financial statements. Besides, such users become aware of the reasons why such KAM has been opted by the auditors.
Moreover, it is not only about the primary reasons for selecting the key audit matters but also the methodology of audit selected by the auditor together with his observations and reservations. Nevertheless, the auditor must offer in brief the auditing measures and processes undertaken by him for such key audit matters (Arens et. al, 2016). The first possible KAM was associated to supplier’s rebate and the reason why auditors chose this is because such rebates are identified as income and any variation in the assumption can possess a material influence on the company’s income statement. The second possible key audit matter is related to the impairment of the company’s non-current assets that also comprised of intangible assets.
The reason behind this can be attributed to the fact that these transactions possess greater sensitivity towards impairment losses (Arens et. al, 2016). Besides, effective auditing processes can assist in catering to the problems of such key audit matter. The third possible KAM was associated with acquisition of Homebase that was a primary procurement and auditors have vouched for the effectiveness of the accounting transactions associated with this procurement. Further, the auditors must also have consulted with various experts to make sure that the transactions are based on proper accounting standards.
Therefore, it is significant that these auditing measures or approaches must be accounted for catering to key audit matters for the consumer staples. Furthermore, it must be noted that auditing processes are a major portion of regular auditing and therefore, enhanced implementation is significant. In relation to this, the standard of ASA 701 can assist in offering a framework that can enable disclosure of key audit matters and therefore, an extra duty is cast upon the company’s auditors. Overall, in the current scenario, these aspects are being given due weightage and with due passage of time, the same will increase in the future, thereby paving a path for assisting stakeholders and investors in their decision-making procedures.
References
Arens, AA., Best, P.J., Shailer, GEP., and Loebbechke. (2016) Auditing Assurance and ethics in Australia. Pearson Australia
AUASB. (2015) Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report[Online].
Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
[Accessed 22 May 2018].
CAANZ. (2016) Auditing, and Assurance Handbook 2016 Australia. Australia: John Wiley & Sons.
Cooper , B. and Coram, P. (2015) Modern Auditing & Assurance Services. 6th ed. Australia: Wiley.
Dauber, N. (2009) Wiley The Complete Guide to Auditing Standards, and Other Professional Standards for Accountants. NY: John Wiley & Sons.
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors [online]. Accounting Horizons, 30(1), p.143-156. Available from https://doi.org/10.2308/acch-51309 [Accessed 21 April 2018]
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Knechel, W.R. (2017) Auditing Assurance and risk. Routledge: New York
Moroney, R., and Trotman, K.T. (2016) Differences in Auditors’ Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research. [online]. 33(2), p.551-575. Available from: https://doi.org/10.1111/1911-3846.12162 [Accessed 22 May 2018]
Needles, B.E. and Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning
Wesfarmer. (2017). Wesfarmer annual report and accounts 2017 [online]. Available from: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 21 May 2018].
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download