How Enhanced Auditor Reporting Is Embraced In Australia: An Analysis Of Audit Practices And Key Audit Matters

Background and Overview

Business industry of Australia is very diverse and there are various big organisations that are working globally. It is important for these organisations to conduct audit of the financial statements because there are various stakeholders that a substantial amount of interest in business organisation. There are various stakeholders that cannot understand financial statements prepared by the company due to lack of knowledge in relation to finance and economics. Main objective of conducting an audit is to check accuracy of financial statement prepared by the company and representation of financial position by evaluating financial statements (Knechel and Salterio, 2016). This report will evaluate the audit function performed by auditor of the company in Wesfarmers Limited for the year ending 2017. This report will conduct deep analysis of roles and responsibilities of an auditor and actual auditing functions performed in the company during this financial year. In addition to that audit committee maintained by the company will also be evaluated on the basis of roles and responsibilities defined in charter of the company. Wesfarmers is one of the largest retail sector company in Australia with highest number of customers and market share capital. It is also a public company which shows that there is a substantial amount of public interest in the company. Therefore it can be said that it is important to conduct an audit procedures in the company due to high level of interest from public and other stakeholders.

Declaration of auditor’s independence

Audit for the year 2017 was conducted by Ernst and Young (EY) because one of the most reputed audit firms in the world. It is essential for any auditor to perform independent audit to express Independent and unbiased opinion on financial statements of the company. According to the code of conduct prepared for auditors of the company in Australia, an auditor should be independent and sceptic during its role as auditor in an organisation (DeZoort and Taylor, 2015). It is general practice for any business organisation to obtain a declaration of independence from auditor of the company. Same rule has been followed in case of Wesfarmers Limited. Along with audit report, Ernst and young is also provided auditors Independence declaration report which is addressed to Board of directors of the company.

According to this statement auditor of the company has performed all its functions according to code of conduct issued in relation to external audit functions by Australian audit board that is a governing body for all the audit functions performed in Australia (Tepalagul and Lin, 2015). In addition to that auditor of the company has also stated that there has been no contraventions of rule of independence of auditor mentioned in Corporation Act 2001 (Adams, Krishnan and Krishnan, 2017). Therefore it can be said that auditor has complied with all for independence requirements while conducting audit of Wesfarmers Limited.

Audit Function and Non-Audit Services at Wesfarmers Limited

In Australian Corporation Act 2001, there are specific requirement from an auditor that are providing non audit services in addition to External Audit services provided in a particular business organisation. According to this rule the total fees paid by management of the company in relation to non-audit services should not exceed 70% of total average audit fees paid in last three financial years (Bell, Causholli and Knechel, 2015).

For the year ending 2017, Ernest and young has provided non audit services to the company for various purposes. All of these services are within the permitted services allowed under the Corporation Act 2001. Majority of the non-audit services provided by the company include consultancy in relation to tax compliances. In addition to that assurance related services are also provided to the company which are generally considered under audit services (Blay and Geiger, 2013). Total worth of non-audit services provided in the year 2017 was $2307 which is around 32.2% total fees paid to Ernst and young for audit services provided during the year.

from the above description of audit fees payable to the auditor, it can be identified that total fees paid to auditor in relation to external audit of the company has increased by 32% in the year 2016. Whereas same fees has decreased by 10% in financial year 2017 as compared to 2016. Auditor of the company should assess the changes or neither of audit services that are provided in the year 2017 that has resulted and decrease in audit fees (Causholli, Chambers and Payne, 2014). In addition to that rate of increase in non-audit fees payable to auditor of the company has also decrease in 2017 as compared to 2016. A detailed examination should also be conducted by auditor in relation to non-audit services provided by Ernest and Young in financial year 2015, 2016 and 2017. 

There are certain matters in auditing that requires more attention as compared to other matters. This is totally dependent on scale and experience of auditor to identify this matters and discuss them with those charged with governance in the business organisation. It is essential requirement according to roles and responsibilities of an auditor under professional duties to describe these matters in audit report of the company. Following are all the key audit matters that are explained by Auditor in audit report of the company along with audit procedures conducted to verify these matters.

Analysis of Audit Fees and Non-Audit Fees

It is important for a business organisation to record they are non-current assets at historical cost value. But if there is any permanent damage or decline in value of a particular non-current assets then it is essential to devaluate search assets. The company has examined all the policies and procedures used by management of the company in order to value the non-current assets and record impairment of assets in financial statements of the company (Sirois, Bédard and Bera, 2018). These assets include intangible assets recorded in the balance sheet. There are various assumptions that are made in determining impairment of non-current assets. Auditor of the company has evaluated all these factors of assumptions such as discount rate, terminal growth rates, earning valuation multiples, inflation rate, forecast exchange rate assumptions etc.  

During the financial year under consideration, company has recorded substantial amount of commercial income in respect to rebate received from suppliers. This is not very common practice for organisations to receive such an amount of prepared from suppliers and this is the reason that it is included in key audit matters. Auditor of the company has examined each and every nature of rebate received from the suppliers. Supporting documents are also examined on sample basis to check integrity of these rebates. External confirmation are also received from suppliers of the company in order to check accuracy and integrity (Kachelmeier, Schmidt and Valentine, 2017). Supply chain managers, product category merchandisers and procurement staff are also interviewed in relation to rebates received by company.

During the year under consideration company also finalized acquisition of Hampden group Limited. This is considered in key audit matters because it is very important decision on part of the company from financial and operational perspective. It will increase of profitability of the company and operational capacity of the company in future (Bédard, Gonthier-Besacier and Schatt, 2014). Auditor of the company has examined the methodology used by management of the company in the process of acquisition and accounting for acquisition. Auditor of the company has also examine that if any changes are made in fair valuation of assets in current financial year as compared to initiation of acquisition process. Taxation policies in relation to acquisition and Merger are also evaluated by the auditor.

Modern organisations has over dependence on Technology used in business organisation. Majority of business activity is performed by the company involved use of information technology from operational level to Executive level. Therefore it is important that examination of IT infrastructure is included in key audit matters that will be discussed with those charged with governance (Brasel et.al, 2016). Audit procedures applied by auditor to examine IT infrastructure is focused on internal control implemented by management to protect IT infrastructure from various internal and external threats.

Key Audit Matters and Audit Procedures

There are specific organizations that are required to establish Audit and risk committee as a part of management of the company. Wesfarmers Limited is one of these organisation and it established Audit and risk committee in the organisation. There are specific rules and regulations that are implemented by organisation for inclusion of a particular director in Audit and risk committee. Following are the highlights of composition and structure of the committee-

1. Minimum number of members in audit and risk committee should be 3.
2. All the members of the community should have expert knowledge in the field of finance.
3. More than 50% of the members should be independent and non-executive directors
4. Chairman of the committee and chairman of BOD should not be the same person.

Three members in Audit and risk committee of the company are Tony Howarth, Diane Smith-Gander and Jennifer Westacott. Tony Howarth is the chairperson of the committee. All the members are independent and non-executive directors (Martinov-Bennie, Soh and Tweedie, 2015).

Main function of the sum of audit committee is to facilities and Auditor in conducting the process of audit independently. This audit committee is also responsible for examination of financial statements prepared by management of the company and to follow all the guidelines of financial frameworks applicable on the company according to AASB.  

Main function of External Audit conducted by auditor is to provide independent opinion on financial statements of the company. For the year ending 2017, auditor of the company has opined that financial statements are providing true and fair view of financial position of the company in market (Modum, Ugwoke and Onyeanu, 2013). It means that all financial data provided in the financial statement are accurate and relevant to business organisation. In addition to that auditor of the company has also stated that all the Accounting Principles has been properly followed by the company in order to prepare financial statements. Management of the company has also followed all rules and regulations given in Corporation Act 2001.

Director of the company is responsible for working in favour of management and shareholders of the company. Any action taken by directors should not be in violation of best interest of the company. It is responsibility of director to promote to overall who is an objective of the company. A director should not gain any personal benefit from operations of the business on the cost of company. At last director of the company should be considered the interest of society and industry in which business organisation is operating.

Responsibility of implementing internal control and preparing financial statements lies with management of the company. Management is also responsible for assigning roles and responsibilities for each and every employee in order to achieve ultimate goal and objective of the company (Goetsch and Davis, 2014). Management is responsible to report directly to board of directors and other committees formed by BOD. 

Material subsequent event can be defined as the events that are material four stakeholders of the company in relation to their business decisions which occurs after closing of balance sheet but before presentation of financial statements to stakeholders. After a detailed analysis of financial statements and latest news in market in relation to the company, it can be said that there are no material subsequent events that can affect decisions to be taken by the stakeholders (Setó?Pamies, 2015).

From an independent and unbiased perspective, it can be said that financial statements of the company are presenting true and fair view of financial position of the company. All the rules and regulations in relation to financial accounting are properly followed by management of the company in order to prepare financial statements. Audit for the financial year 2017 was conducted by Ernst and young which is one of the most reputed accounting firms in the world. Therefore it can be said that both accounting and auditing functions conducted for the year 2017 are effective and efficient.

After evaluating audit report, annual report, director’s report and financial statement of the company it can be concluded that there are no material misstatement that are not disclosed in financial statements. One factors that can be considered as limitation of financial statement is that language used in audit report and management report are very complex. This language may not be effectively understandable for stakeholder who does not have any knowledge in respect to finance and accounting.

Follow up question that can be asked in the annual general meeting from the auditor is the extent of role and duties performed by audit committee during the process of audit. This follow up question will help in identifying if the members of audit committee are actually performing the work assigned to them according to charter of the company. This will also help in understanding whether audit committee has checked the independence of auditor which can have vital impact on audit opinion presented in the report.       

Conclusion

It can be concluded that financial statements prepared by management of Wesfarmers Limited are representing true and fair view of financial position of the company. This report has evaluated functions of Management and auditor from every perspective and there are no deficiencies in the roles and responsibilities performed by auditor and management of the company. There are some key audit matters that should be considered by stakeholders of the company before making investment decisions in relation to Wesfarmers Limited.

References

Adams, T., Krishnan, J. and Krishnan, J., 2017. Client Influence and Auditor Independence Revisited: Evidence from Auditor Resignations.

Bédard, J., Gonthier-Besacier, N. and Schatt, A., 2014, January. Costs and benefits of reporting Key Audit Matters in the audit report: The French experience. In International Symposium on Audit Research. Available at: https://documents. escdijon. eu/pdf/cig2014/ACTESDUCOLLOQUE/BEDARD_GONTHIER_BESACIER_SCHATT. pdf.

Bell, T.B., Causholli, M. and Knechel, W.R., 2015. Audit firm tenure, non?audit services, and internal assessments of audit quality. Journal of Accounting Research, 53(3), pp.461-509.

Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), pp.579-606.

Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), pp.1345-1362.

Causholli, M., Chambers, D.J. and Payne, J.L., 2014. Future nonaudit service fees and audit quality. Contemporary Accounting Research, 31(3), pp.681-712.

DeZoort, F.T. and Taylor, M.H., 2015. COMMENTARY––A Public Interest View of Auditor Independence: Moving Toward Auditor Reliability When Considering and Promoting Audit Quality. Accounting and the Public Interest, 15(1), pp.53-63.

Goetsch, D.L. and Davis, S.B., 2014. Quality management for organizational excellence. Upper Saddle River, NJ: pearson.

Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2017. The disclaimer effect of disclosing critical audit matters in the auditor’s report.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.

Martinov-Bennie, N., Soh, D.S. and Tweedie, D., 2015. An investigation into the roles, characteristics, expectations and evaluation practices of audit committees. Managerial Auditing Journal, 30(8/9), pp.727-755.

Modum, U., Ugwoke, R.O. and Onyeanu, E.O., 2013. Audit Committees and Corporate Performance of Selected Companies Quoted in the Nigerian Stock Exchange: a Perception Analysis. corporate governance, 4(16).

Setó?Pamies, D., 2015. The relationship between women directors and corporate social responsibility. Corporate Social Responsibility and Environmental Management, 22(6), pp.334-345.

Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the auditor’s report: evidence from an Eye-tracking study. Accounting Horizons.

Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.

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