Auditing Theory and Practice: A Case Study on Wesfarmers

This report provides an overview of the auditing process and its importance in evaluating the financial statements of a company. It also includes a case study on Wesfarmers, analyzing its business risks, financial ratios, and corporate governance practices.

Running head: Auditing Theory and Practice
Auditing Theory and Practice
Name of the Student
Name of the University
Author Note

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Auditing Theory and Practice
Executive Summary
The report include about the auditing process which is been carried by the auditor. Auditing
is the process which is carried by the auditor in regards of the financial statement of the
company it gives an opinion whether the financial statement are showing true and fair view
or not. It check all the internal control of the company and show how the company is
operating their business in the industry. The report also includes about the company
Wesfarmers and show the different business risk in the company and how it can affect the
accounts of the company. It also has the analytical review of the company and judge some of
the risk associated with it. The analysis of the corporate governance is been also there in the
report and also how the company follow the rules related to corporate governance.

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Auditing Theory and Practice
Table of Contents
Introduction................................................................................................................................4
Discussion..................................................................................................................................4
Overview of the Company.....................................................................................................4
Operations Carry by the Company.........................................................................................4
Industry in which the company works...................................................................................5
Risk in the industry................................................................................................................5
Analytical Review of Financial Statement.............................................................................8
Corporate Governance in the company................................................................................10
Conclusion................................................................................................................................11
Reference..................................................................................................................................11
Appendix..................................................................................................................................14

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Auditing Theory and Practice

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Auditing Theory and Practice
Introduction
Audit is the process which helps the financial user to know about the company
performance in the industry (Armstrong et al., 2015). The process is been carried by an
external person name as auditor who check the financial statement of the company and give
its opinion whether the financial reporting of the company is showing true and fair view or
not. Auditor carry many audit process so that it able to access the company business process
and help it to know more about the business of the company. The auditor check the internal
control of the company as it is the main reason for the risk and fraud which happen in the
business of the company. Audited financial statement help the company to get the public
confident and as result it able to get the money from the public in the business (Crowther &
Seifi 2018). The auditor check all the fact and event of the company and then provide an
independent report about how the company is following the norms and regulation in regards
of the accounting of the business transaction. It also check all the necessary disclosure which
the company have to give in regards of the business activities and how they have done in the
company those entry is also be checked by the auditor (DeFond & Zhang 2014).
Discussion
Overview of the Company
The report is been based upon the company name Wesfarmers. It is an Australian
based company and carries its business operation in many countries. It was founded in 1914
and had it headquarter in Perth, Western Australia. The company is an conglomerate industry
and have many company in the business.
Operations Carry by the Company
The company is one of the largest company in the Australia. It has many companies
as subsidiary and carries many types of operation in the business. The operation which are

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Auditing Theory and Practice
carried by the company are as home improvement and outdoor living, office supplies and
general merchandise. It also has divided in the Industrial division as it divided its business in
the energy, chemicals and fertilizers. It also deal in the super market industry as it have many
parts in these industry.
Industry in which the company works
The main industry in which the company works is the retail industry business. It work
as it have supermarket in many parts of the Australia so it basically deal with the retail
industry as it provide services to the ultimate consumers of the company (Du Plessis,
Hargovan & Harris 2018). It also takes over the Coles ltd on 2 July 2007 and become one of
the largest companies in regards of the retail business. It provides all the service to the
consumer in one place so this helps them to get more amounts of customers. So the retail
industry is one of the finest industries and it should be hold by the company as a whole. As
Coles was retail industry so this added more point to the company and able them to more
ahead of their competitors and able to get more edge in the market.
Risk in the industry
Business Risk Justification Account Affected by
the Risk
Material
Misstatement
Changes in consumer
behaviour
It is been consider as
an business risk as if
the consumer have
change its
consumption power
than it will directly
affect the profit of
the company and it
It will directly affect
the revenue as the
consumer is not
ready to purchase the
product of the
company so it will
decrease the total
sale and which will
Material
misstatement can be
occur as the company
may show high
amount of revenue so
that it can able to
increase the profit
and can able to show

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Auditing Theory and Practice
may happen that it
also affect the
company financial
position.
decrease the revenue
of the company
(Edmans 2014).
good position of the
company (Furnham &
Gunter 2015).
Existing and New
Competitors
It is been consider as
an business risk as if
the industry have
new entry than it can
directly affect the
company sale as if
the new entry will
give the consumer
more less cost
product so it will
affect the company
financial position
As the company will
not able to get proper
amount of sale so as
a result of it will
affect the net profit
of the company and
as a result the
company will not
able to do carry
proper amount of the
business (Griffiths
2016).
Material
Misstatement is that
if the company is not
able to get sale than
it may happen that it
overvalued the profit
so that it able to do
more amount of
profit and able to
show a false profit so
that the company can
get the confidence of
the financial users
(Hall 2015).
Unfavourable
Economic Conditions
It is been consider as
an business risk as if
the economic of the
country changes than
the consumer will not
able to spend much
so it will directly
The account is
affected is the
expenses account of
the company as they
will not able to get
much revenue so that
will directly affect
Material
misstatement can
happen as they may
show that the
company is having a
good financial
position in the

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Auditing Theory and Practice
affect the revenue of
the company as they
will not able to get
proper revenue from
the market.
the company expense
as they will not able
to fulfil all the
expenses of the
company (He,
Zeadally & Wu 2015).
market but it may not
be the one so it can
do fraud with
investors and can
misuse their money
(Knechel & Salterio
2016).
It security and
Important data
It can be consider as
an business risk as if
the company is not
able to secure their
important documents
than it may happen
that the competitors
may find out the cost
structure of the
company and can
misuse the same in
against the company.
The account is been
affected by the risk is
the goodwill of the
company as if the
company is not able
to satisfy the security
than it may happen
the competitors of
the company may use
the company
information and can
affect the brand value
of the company
(McCahery, Sautne &
Starks 2016).
Material
Misstatement can be
found in this section
as it may happen due
to lack of proper of
internal control the
company was unable
to secure the data
from the competitors
and as a result it may
affect the financial
position of the
company (Power &
Gendron 2015).
Changes in the rate
of interest and other
borrowing rates
It is been consider as
a business risk as the
company take many
The account which is
been affected by the
risk is that it will
Material
misstatement which
can be occur is that

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Auditing Theory and Practice
amount from the
borrowings so if the
cost of the interest is
been increase than it
will increase the cost
of the company and
decrease the total
profit of the
company.
increase the interest
cost of the company
so as a result of it the
company may have
to get low amount of
profit from the
business (Tricker &
Tricker 2015).
the company may
show high amount of
borrowing cost so
that it can able to
decrease the profit
and able to save
some amount of the
tax which it have to
pay upon the profit
which is been earned
by the company (Jizi
et al., 2014).
Analytical Review of Financial Statement
Ratio Justification Assertion Effect on User

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Auditing Theory and Practice
Current Ratio It can be consider as
a risk as the current
ratio of the company
is been decrease in
the current year as in
2017 it was 0.93 but
in 2018 it is 0.87 so
this a risk as the
company is not able
to maintain its
liquidity position in
the business
Assertion :
Completeness
It should be check
whether the company
have recorded all the
transaction related the
current asset or not. No
error and omission is
been done by the
company.
If the company is
not able to make
their ratio better
than the financial
user will not able
to get the
confident and it
can directly affect
the company
financial position
of the company
Debt-Equity Ratio It is been consider as
an risk as it can be
seen that the
company have got a
decrease in the ratio
as in 2017 it was 0.24
and in 2018 it is 0.18
so the ratio should be
checked as it many
contain material
misstatement in the
account
Assertion :
Classification
It should be checked all
the business activities
are only recorded in the
same as no non-business
activities should not be
recorded in the same.
If this account
contain material
misstatement than
it will able to
show a good
position of the
company in fornt
of the financial
user and as a
result the
company will able
to get the
confidence of the

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Auditing Theory and Practice
financial user.
Gross Profit Margin It can be consider as
an business risk as
the company is not
able to increase the
profit as the sales is
been increase but it
not able to increase
the profit of the
company
Assertion :
Completeness
It should be checked
that proper record of the
sale and expenses is
been taken by the
company in the regards
and also it should be see
whether calculation
done by the company is
accurate or not.
The material
misstatement of
the company
account is that the
company may
show high amount
of expenses and as
a result it is not
able to get proper
result from the
same.
Corporate Governance in the company
Wesfarmers have a corporate governance which is enclosed in the annual report of the
company. It can be say that the company Wesfarmers is participating and also encouraging in
regards of the Corporate Governance Council Principles and Recommendation which is been
listed in the website of Australian Securities Exchnage.
The practice the company follow is that it should making strategy in regards of the
shareholder so that it able to address the area where the company have underperforms and
how they can increase the portfolio of the growth to the shareholder return
(Wesfarmers.com.au. 2019). They also have changed the director of Coles limited. It also to
the monitoring of the operation of group in regards of the financial position of the company.
It also have make new strategic option in regards of the Bunnings United Kingdom and

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Auditing Theory and Practice
Ireland Business so that it can able to increase the shareholder return of the company
(Yermack 2017).
Conclusion
The report concludes about the auditing process which is been carry in the company.
Auditor gives its opinion upon the financial statement that whether they are showing true and
fair view or not. It carry many process which help it to know the details of the financial
statement and also help it to know how it should be overcome by the company. It also check
the internal control of the company as it contain the most amount of the risk in the
management. So after completing all the audit process and gathering information regarding
the company its gives its opinion upon the financial statement of the company. This
information help the user to check whether they should invest in the company or not.
The report also concludes about the company Wesfarmers. It is an Australian based
company and is carry its business in much country. It is a conglomerate industry. The report
concludes about the business risk which the company has and how it affect the company
accounts as a whole. It also show the analytical review of the company which is been done
with the help of financial ratio an assertion which are to be taken by the company in regards
of the ratio. Lastly it contains the detail analysis of the corporate governance of the company
and show what are the policies which the company has in regards of the corporate
governance.
Reference
Armstrong, C. S., Blouin, J. L., Jagolinzer, A. D., & Larcker, D. F. (2015). Corporate
governance, incentives, and tax avoidance. Journal of Accounting and
Economics, 60(1), 1-17.

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Crowther, D., & Seifi, S. (Eds.). (2018). Redefining Corporate Social Responsibility. Emerald
Group Publishing.
DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of
Accounting and Economics, 58(2-3), 275-326.
Du Plessis, J. J., Hargovan, A., & Harris, J. (2018). Principles of contemporary corporate
governance. Cambridge University Press.
Edmans, A. (2014). Blockholders and corporate governance. Annu. Rev. Financ. Econ., 6(1),
23-50.
Furnham, A., & Gunter, B. (2015). Corporate Assessment (Routledge Revivals): Auditing a
Company's Personality. Routledge.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Hall, J. A. (2015). Information technology auditing. Cengage Learning.
He, D., Zeadally, S., & Wu, L. (2015). Certificateless public auditing scheme for cloud-
assisted wireless body area networks. IEEE Systems Journal, 12(1), 64-73.
Jizi, M. I., Salama, A., Dixon, R., & Stratling, R. (2014). Corporate governance and corporate
social responsibility disclosure: Evidence from the US banking sector. Journal of
Business Ethics, 125(4), 601-615.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
McCahery, J. A., Sautner, Z., & Starks, L. T. (2016). Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance, 71(6),
2905-2932.

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Power, M. K., & Gendron, Y. (2015). Qualitative research in auditing: A methodological
roadmap. Auditing: A Journal of Practice & Theory, 34(2), 147-165.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.
Wesfarmers.com.au. (2019). Retrieved from https://www.wesfarmers.com.au/docs/default-
source/asx-announcements/2018-annual-report.pdf?sfvrsn=0
Yermack, D. (2017). Corporate governance and blockchains. Review of Finance, 21(1), 7-31.

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Appendix

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