ACCT6006 Auditing theory and practices

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ACCT6006 Auditing

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Contents
Introduction......................................................................................................................................3
Part 1: Brief History of Dick Smith and reasons that causes its failure..........................................3
Part 2: Accusation against the Directors of Dick Smith for Breach of Australian Accounting
Standards..........................................................................................................................................4
Part 3: Signs to be taken into account by Auditors for Identifying Going Concern Problem.........5
Part 4: Analyse of Dick Smith annual report 2014/15 to provide the evidence that company
might not be going concern.............................................................................................................7
Part 5: Reason behind giving the unmodified audit opinion by Deloitte for the financial year
ended 30June, 2015.........................................................................................................................8
Part 6: Auditor’s Legal Liability in the case of Dick Smith Electronics Ltd for providing answer
to an unmodified audit opinion for the financial year 30 June 2015...............................................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................11

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Introduction
Dick Smith was the renowned entity of Australia that collapsed in year 2016 due to
unethical accounting practices. There are many issues that have been found in financial report of
the company and same has been reported by liquidator in his report. Some of the values of
financial elements of the company have been wrongly reported in annual report that causes
undue increase in profits but it was not actually earned. Similarly there are many accounting
issues that will discussed in this essay and all these issues were the reason behind the failure of
Dick Smith.
The purpose of this essay is to examine the financial reports and relevant news articles
for identifying the probable causes and reasons for the collapse of the Dick Smith in very short
span of time. The essay will specifically highlight the accounting standards that have been
breached by the director of the company. Identification of signs that indicate that auditors
provided in the annual report that there was going concern problem of Dick Smith. This essay
also reports the evidences from the annual report for depicting the fraudulent accounting
practices followed by Dick Smith. Further there will be discussion on reasons that has caused
auditors to give unmodified audit opinion on the financial statements ended 30 June, 2015.
Lastly, there will be discussion on auditor’s legal liability for not providing the modified opinion
on the financial statements of Dick Smith for year ended 30June, 2015.
Part 1: Brief History of Dick Smith and reasons that causes its failure
Dick Smith Holdings was the subsidiary of Woolworth and it is known as Dick Smith
Electronics or DSE. Dick Smith had large number of electronic retails stores that sold wide
variety of electronic goods for domestic as well as industrial purpose. Dick Smith was formerly
listed on Australian Stock Exchange and it has successfully expanded its business in New
Zealand as well as many parts of Australia. Dick Smith Electronics has been founded by Dick
Smith in year 1968 and since then company has grown rapidly and Woolworth has purchased its
100% shares that makes the Dick Smith, subsidiary of Woolworth.
There are many reasons that have caused the failure of Dick Smith in year 2016 but the
exact reason was not clearly known as it was management act which was not easy to identify.

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The Administrator appointed in case of Dick Smith has successfully found the possible causes of
collapse of Dick Smith and has provided in its report. The main reason behind the collapse of
Dick Smith is excessive buying to build up the stock of inventory for the purpose of expansion.
In addition to inventory buildup, there were many accounting issues that were reported by the
administrator in his report. In last few months of collapse of the Dick Smith it has been found
that company was undergoing in losses and the main reason behind this was decrease in sales
and excessive inventory (The Conversation, 2016). The decision of directors to built up the
inventory and get rebates on the bulk purchases has forced to maintain inventory at very low cost
in their accounts and also the non availability cash surplus also affected liquidity position of the
company. During the last few month of collapse of Dick Smith it was found that company has
failed to pay its liabilities and also struggling with the working capital.
Another big mistake that has been committed was fraud performed by Anchorage
Capital. Anchorage Capital was involved accounting fraud through creating the hype in the stock
market and making millions of dollars through sales of shares at very high price. A year back of
Dick Smith collapse it was found that books of accounts has been manipulated and high profits
are being reported that helps in increasing the market value of shares. The increasing trend in
share price had attracted millions of potential shareholders to invest in company that raised the
value of company to $500 million. But company fails to meet the commitment made to
shareholders as revenue growth was not as expected and profits are declined and lead to losses.
This has left company with significant level of stocks and outdated products that has very low
value in the market. So the reasons like shortage of cash, accounting frauds, increase in debt and
continue losses are the main reasons behind the collapse of Dick Smith in starting of year 2016
(News.com.au, 2016).
Part 2: Accusation against the Directors of Dick Smith for Breach of Australian
Accounting Standards
Dick Smith directors are accused of adopting the use of fraudulent accounting methods
that are known within the industry as ‘Real Activities Management’. This accounting practice
involves the use of manipulation of sales figures and inventories of stock in which it purchases
excessive amount of inventory for rapid expansion of its stores and obtaining bank rebates from