HI6026 Auditing Theory And Practice

Auditor’s compliance

Knechel and Salterio (2016) opines that the auditors play a pivotal role in order to manage any kind of miss statements in financial statements of modern business organizations. It can be inferred that the primary responsibility of the auditor is to recognize errors in financial statements and identify whether the organizations have followed the legal requirements while preparing financial statements or not. One of the principle importance of auditing is to maintain and regulate the internal organization as well as to establish a well-structured working and financial structure. Internal auditing helps a company to know how the companies performing in terms of financial and non-financial aspects will also help the company to regulate transactions which it is undergoing. It also helps the company to know financial prospect in future which can help them to establish the strategies which will give more profit (Louwers et al 2015).

 It has also been observed that various organizations have taken several initiatives in order to improve the process of auditing of the financial statements. This is done in order to avoid any kind of misstatements in the financial statements. The given report will analyze the annual report of the organization Wesfarmers on the basis of auditor’s compliance and key audit matters as undertaken by the auditors of the firm.

It is the primary responsibility of an auditor in order to comply with the various rules and regulations of auditor’s independence (Sirois Bédard and Bera 2018). If an auditor fails to do so, there will be violation on the part of auditor’s part. In case of the organization Wesfarmers, it has been seen that the auditors have complied with the requirements of Australian Accounting Standards and the Corporations Act 2001. This has further enhanced the internal control of the organization while preparing the financial statements. This kind of compliance has helped the organization to provide a true and fair value of their financial statements and it is free from any kind of misstatements. This has further avoided fraud or error in financial statements. Apart from this, it has also been seen that the Remuneration Report of Wesfarmers Limited for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001.  This further implies that the organization is free from any kind of misstatements in their overall financial statements.

Cannon and Bedard (2016) opine that various auditors need to provide different kind of non-audit services to their client organizations. From the annual report of the organization Wesfarmers, it has been seen that Ernest & Young has provided non-audit services to the firm. The total provisions of non-audit services received by the firm can be evaluated with the help of the following table:-

Non-audit services

Table 1: Services provided by Ernest & Young

(Source: Wesfarmers.com.au. 2018).

It can also be inferred that Ernest & Young has successfully complied with all the rules and regulations of Corporations Act 2001 which can be considered as a positive sign for the organization Wesfarmers.

It is of utmost importance for any business organization to disclose the total amount of auditor’s remuneration in their financial statements (Knechel and Salterio 2016). The auditor’s remuneration of the firm can be evaluated with the help of the following figure:

From the above figure, it can be inferred that total amount paid to auditors in the 2017 is 10,222 (in 000’s), while it was 10662 (in 000’s) in the previous year. It has also been seen that Ernest & Young has received and amount of 5723 (in 000’s) and 5780 (in 000’s) in the years 2017 and 2016 for providing audit services to Wesfarmers.

The above table also indicates that Ernest & Young has also received payment for providing non-audit services to Wesfarmers. The firm has received 1272 (in 000’s) and 2215 (in 000’s) in last two financial years for providing non-audit services (Wesfarmers.com.au. 2018).

Apart from this, Ernest & Young has also received payment for providing assurance related services to the firm Wesfarmers. They have received 1272 (in 000’s) in the year 2017 and 2215 (in 000’s) in the financial year 2016 for providing assurance related services to the firm (Wesfarmers.com.au. 2018).

It can be inferred that the auditors need to disclose Key audit matters and their subsequent audit procedures in the respective financial statements of the firm (Kachelmeie Schmidt and Valentine 2017). In case of Wesfarmers, the key audit matters can be segmented in various types.

From the financial statements, it can be seen that the organization Wesfarmers has not recognized any material impairments during the financial year of 2017. Moreover, it is mandatory to assess Goodwill on annual basis (Wesfarmers.com.au. 2018). This is considered to be a key audit matter for the auditor.

Audit procedures performed for these key audit matter

In case of determination of CGU’s (Cash generating units), the auditors have evaluated growth rates, forecast cash flows, different discount rates and other form of comparative industry valuation multiples. The auditors have also considered the various disclosures made in the financial report regarding impairment testing and different forms of key assumptions.

Supplier rebates is the second key audit matter that can be evaluated from the annual report of the Wesfarmers.  This can be considered as significant due to various reasons. Supplier rebates can be also terms as commercial inform where different form of rebates are received from various group of suppliers in the operational process of the firm. Commercial income can be recognized due to various factors. These factors are as follows:-

• Commercial terms
• The given time of recognition
• The given consideration
• Accurate recognition based on Australian Accounting Standards (com.au. 2018).

Auditor’s remuneration

The auditors have understood the nature of each material related to commercial income while treating them. They have also compared various rebate assessments with reference to previous financial years and variances were identified from the above process. The given variance analysis were taken as a supporting evidence for the auditors. Proper inspection of supplier material contracts were done which further added to supporting documentation of the auditors. A proper enquiry was done for the supply chain managers, merchandisers and procurement staffs related to any kind of non-standard agreements. This test of controls implemented by the auditor has helped the organization Wesfarmers to display a true and fair view of the financial statements.

In 2016, Wesfarmers has acquired Hampden Group Limited (Homebase) as a business combination as per section AASB 3B of Australian Accounting Standard. As per the accounting standard of AASB 3, a provision period of 12 month during which the initial acquisition accounting can be revised (Wesfarmers.com.au. 2018). This is considered to be a key audit matter due to nature and size of the given acquisition and different judgments while determining fair value of assets and liabilities of the organization in its financial statements (Wesfarmers.com.au. 2018).

The auditor has successfully assessed the given acquisition strategy and methodology. Apart from this, all the changes and key judgments were assessed properly. This further supports the true and fair value assessment of the assets and liabilities of the firm.  The auditor has also assessed whether there is any variances in provisional fair values of assets and liabilities since the acquisition have taken place. In addition to this, the auditors have involved their specialists in the valuation and recognition process which is also disclosed in the given financial report.

The organization Wesfarmers have an audit and risk management committee which is evident from their financial statements.  The major aim and objectives of audit and risk committee is to protect the organization in case of any discrepancies of financial reporting. The non-executive directors A J Howrath and Smith-Gander were the members of the audit committee. However, it can also be inferred that there is no proper audit committee present within the organization.  The remuneration of the audit committee can be explained.

However, it has also been seen that there is no audit committee charter within the organization Wesfarmers. Apart from this, functions and responsibilities of Audit committee is not clearly described in the annual report.

Key audit matters and audit procedures

The financial statement of Wesfarmers for the year ended 2017 reports about the audit opinion regarding the remuneration report. The auditors of Wesfarmers have expressed that Remuneration Report of Wesfarmers Limited is accordance with section 300A of the Corporations Act 2001 for the year ended 30 June 2017. This opinion and report of the auditors indicate that financial statements of the firm reflects a true picture of their business operational activities. This can be considered as a positive sign for the organization Wesfarmers.

Peecher Solomon and Trotman (2013) opines that there are differences between a responsibility of an auditor and responsibility of the director and management of any business organization like Wesfarmers. The basic objectives of the director and management is to prepare the financial statements of the firm in accordance to the Corporations Act, 2001. The primary aim of the auditor is to express their opinion of the financial report while conducting audit in accordance to the Australian Auditing Standards (Brasel et al 2016). Similarly, the directors and managers ensures the preparation of remuneration report as per Section 300A of the Corporations Act 2001 and auditors conduct audit as per the given standards. In addition to this, there are several other roles and responsibilities of an auditor. One of the primary responsibilities of an auditor is to identify and assess the risks of misstatement that are present in the financial report of the firm. Another responsibility of the auditor is to evaluate the appropriateness and effectiveness of accounting policies used by the firm. The auditor needs to evaluate the overall structure and presentation of financial report prepared by the management of the organization. The auditor also needs to evaluate and obtain certain audit evidence of financial information of the firm. These are the major differences of responsibilities between auditors and management of the firm.

There were various material subsequent events which was reported after the reporting period.  The first material subsequent event was related to fully-franked final ordinary dividend. A total of $1,361 million of fully-franked final ordinary dividend was declared during September, 2017. However, the dividend was not provided till June, 2017. The second material subsequent event is related to Kmart brand name acquisition. During August 2017, the brand name of Kmart was acquired with an agreement of $100 million (Wesfarmers.com.au. 2018). However, this transaction is not expected to have any materialistic impact of the earnings of the firm.

Ernst & Young have audited the financial statements of the organization Wesfarmers in an effective manner. There are no form of material information missing in the financial statements of the firm. In addition to this, it can be also highlighted that all the key audit matters have been assessed and analyzed effectively by Ernst & Young. Apart from this, remuneration report, non-audit services have been highlighted effectively in the financial statements. Proper and effective audit opinion was also expressed through the presentation of the financial statements. The audit committee have also performed their role in an effective manner (De Paula 2016)

From this, it can be also inferred that all the stakeholders of the firm Wesfarmers will be satisfied with the presentation of findings of the financial statements.

From the above analysis, it can be reflected that there are no such material information is missing in the procedure undertaken by the auditor of the form. All the issues have been appropriately addressed and dealt with effective audit procedures. In addition to this, the financial reporting of Wesfarmers have been done in accordance to Corporation Act, 2001. However, there could have been a proper charter of risk management committee of the auditors. In addition to this, the treatment of subsequent events could have been shown in the financial statements (Knechel and Salterio 2016). Apart from the above two, there are no missing material information in case of the organization Wesfarmers.

There can be many follow-up questions for the auditors of Wesfarmers. These are as follows:-

• What other analytical procedures that can be used to detect any form of missing material information?
• Do Wesfarmers have any contingency plan in relation to any kind of foreseeable events in the future?
• What are the major findings from the report of internal and external auditors of the firm?
• What other steps that can be taken to measure and identify key audit matters in case of Wesfarmers? (Kachelmeier Schmidt and Valentine 2017)

These are the follow-up questions for the auditors of Wesfarmers.

Conclusion

It can be concluded that the importance of auditing lies in the fact that it helps a company to determine the specific areas in which the company should invest and the areas from which it should refrain. Due to the occurrence of auditing, the company has an idea as to which prospective investment and which investment it should avoid at the earliest. This also makes sure that the company is not at risk in terms of financial matter which is one of the important aspects of any organization like Wesfarmers. In the modern world the occurrence of frauds has increased manifold which has made the company to seek auditing to avoid the same. Due to auditing at regular intervals, the company can prevent the happening of frauds and can also make out the people who are doing the same. Due to auditing, the internal miscalculations and faults in the balance of payment can be determined.

From the above report, it can be concluded that the auditors of the firm have performed their duties effectively and this is reflected from the disclosures made in the annual report. In addition to this, the auditors of the firm Wesfarmers have taken three audit matters into consideration and performed their audit procedure accordingly. They have also followed the guidelines mentioned in Corporation Act, 2001. The financial statements of the organization Wesfarmers also reflect true and fair view of their business activities. Apart from the audit committee charter, there are no missing material information in the financial report of Wesfarmers. Due to this, it can be inferred that the organization have successfully met the requirements and objectives of the stakeholders. Lastly, based on the findings, four follow-up questions have been formulated for the auditors of the firm that can be asked in the annual general meeting.

References

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.

Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), pp.81-114.

De Paula, F.R.M., 2016. The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919).

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.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Peecher, M.E., Solomon, I. and Trotman, K.T., 2013. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society, 38(8), pp.596-620.

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

Wesfarmers.com.au. (2018). [online] Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 19 Sep. 2018].

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