Audit & Assurance: Key Audit Matters in Wesfarmers
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This report discusses the key audit matters in Wesfarmers and the new proposed auditing standard ASA 701. It analyzes the annual report of Wesfarmers and provides recommendations for improvement.
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Wesfarmer 1 2019 AUDIT & ASSURANCE
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Wesfarmer Executive Summary The main aim of the report or its role is to shed light on the new proposed auditing standard ASA 701 that is the communication of key audit matter in the independent auditor report. The report is prepared in the light of the ASX listed company that is Wesfarmers. The report initiates with the introduction followed by the key audit matter of Wesfarmers, and why ASA 570. Further various matter of the company in respect to different activities has been indicated in the report. The annual report of Wesfarmer has been studied to get a strong insight. This enables proper understanding of the matter. 2
Wesfarmer Contents Introduction.................................................................................................................................................2 Discussion....................................................................................................................................................2 Key matters needing attention of the directors and auditors......................................................................3 Advantages and disadvantages of ASA 701.................................................................................................3 Review of the annual report for the year ended 30th June 2018................................................................3 Impairment of the noncurrent assets inclusive of the intangible assets of the organization..............4 Supplier rebate....................................................................................................................................4 Finalization of the acquisition accounting of home base.....................................................................5 Recommendations.......................................................................................................................................6 Conclusions..................................................................................................................................................7 References...................................................................................................................................................8 3
Wesfarmer Introduction The report is a good treat to the users and the outside investors which look on to the statements and the results of the company as a sign to get their mind on for investing in the company as per their scales. There have been many cases stating that due to improper or distraction and manipulation in the file data have caused severe damage and humungous losses to the investors and the users. This brings into light that the fact of using the ASA701 is quite necessary and important for the company and its investors and the on-lookers who have a keen interest in the company and the article deals with the same and highlights the points that are seemingly important and require attention. The beginning of the report helps to have a revision of the traditional method of ASA570 along with the foundations of the ASA701 and the explanations for leading such preferences. The use of the ASA701 has been made a tally with the reports submitted by the higher authority of the company and hence the positives and the negatives about the needed concept has been noted and listed (Mock et. al, 2013). Discussion •Why there has been a remembrance for the ASA570. It had come to the display that the investors from all over the world have been suffering huge losses due to the present position of the market and there has been a non-compliance with the financial structure of the company growth along with time in the past years. As the concept of ASA570 deals and is based on the structure of Going Concern so it provides a transparent picture of the working of the auditor's reports and thus there has been a revision for the concept of ASA5770. From the moment when the revision for the above concept has started, it has brought about a massive change in the field and that to related to the functioning of the Going Concern terminology along with the clearance of all the corrupt and distracting techniques which were eventually followed. Also, it has been successfully seen that the auditors were almost at the part of creating the concept on a practical basis as per the preparations of their reports without the use of any branch of manipulations (Mock et. al, 2013). The relationship developed between the practices of an auditor's and the rules of primary auditing in tune to the application of the ASA701. The reason for the establishment of the ASA701 has been done so that its reflection can be seen in the working of the auditor while the preparation of the reports under its rules. The ASA701 was created under the AUASB powering act and since its creating it has made it to the big platform with all the audit reports being made under its attention (Needles & Powers, 2012). The ASA710 carries solution to all the matters that were a fact of concern lately for the auditors whiles the conduction of the audition and during the preparations of the reports in the final stage for a company (Manoharan, 2011). Following all the humps of the concept has helped the 4
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Wesfarmer auditors to keep their work clean and has duly made the company to disclose all the facts about the structure of the company (CAANZ, 2016). The corporate governance structure of the organization basically and most probably consists of the directors and the top executives (Niemi &Sundgren, 2012). Key matters needing attention of the directors and auditors The key matters and all the processes in the organization is known and taken care of by the directors and the top executive managers only. All the important matters and the fact that is to be published in the statements are to be determined by the executives only (Wood, 2011). The welfare for the company is the top priority for the directors of the company any many such matters that distort or damage these facts are to be taken care of by the company and such facts many-a-times remains hidden. Under such conditions, it has been seen that and is of utter importance that all the auditors pay attention to their work and all the reports which are prepared during this time interval are to be in association with the rules of the concept (Roach, 2010). In the paragraph 9 of the ASA701 it has been described that all the important matters are to carefully study with the attentive rules to be followed and then all the facts and the figures are to be noted down and displayed clearly so as it can be a positive aspect on the investors and the stakeholders of the company (Wesfarmers, 2018). It is also the duty of the auditors that to work in the welfare of the company also and not throw out any data on the sensitive areas of the company that can have collateral damage to the company. Situations have also risen where the auditors have shown much linearity and attention is not paid to the data and the auditing matters which are to be dealt with for the welfare of the company or may the situation may be somewhat like in which the auditor is not given much of an authority to set up and control the important auditing matters of the company as it is in the hands of the higher executives. Advantages and disadvantages of ASA 701 The vagueness and the opacity in the auditing matters and the statements have been much more improved and cleared by the new standard and the concept that has been followed. The increase in the standard of the auditing reports has been a very positive fact for the stakeholders and the investors of the company as they are able to analyze and make their freed decisions by staying on the fact that what is the financial state of the company (English et. al, 2010). All this also be increasing the liabilities of the auditors simultaneously and will also serve the cause for the non- involvement and the ignorance of the ASA701 but it generally does not happen and the rules of the case are likely in which the basic and the structure of the ASA701 is promptly followed so as for the preparation of the final and transparent report. Review of the annual report for the year ended 30th June 2018 The organization Wesfarmers Limited is one of the most important companies which was trying to analyze the report by the help of the ASK corporate governance principles. Also, a clear report of the auditor was presented on the financial documents which stated various aspects of the annual financial accounts of the organization. Therefore, a detailed analysis of the financial 5
Wesfarmer statements should be conducted so as to get a proper insight into auditing reports by considering all the key audit matters (Wesfarmers, 2018). Impairment of the noncurrent assets inclusive of the intangible assets of the organization It has been observed that the auditors have skipped the analysis of impairment of noncurrent assets which are inclusive of tangible assets of the organization. This is one of the most important key auditing matters which can create a great impact on the performance of the organization (Wesfarmers, 2018). The impairment losses are a type of deductible expense which can reduce the revenue of the organization by hiding certain profits and deducting certain losses using unethical measures. The auditors should try to pay special attention for maintaining the accuracy of the impairment loss of a particular organization. It is very important for the organizations to calculate and evaluate the total impairment losses that are being incurred by the organization at the end of each year so that it can be mentioned in the audit reports. All the noncurrent assets and intangible assets should be clearly testified so that the total value of goodwill can be evaluated for finding out the total impairment loss. Also, it was noticed that the annual report of the financial accounts mentioned that the organization is having no clue in regards to impairment losses charged (Peirson et. al, 2015). There were several sensitive cash generating units that were to be assessed for impairment losses. Even if there is a small chance that an impairment loss exists in an organization, then the financial report should clearly mention them (Teen, 2012). The suggested measures that should be taken into account by the auditors are: •Analysis of all the assumption that is made in relation to the cash flow of the organization. •Analyzing the discount rates, growth rate and determination of cash generating units of the organization. •Determining the disclosures that are being made by the auditor while conducting the analysis of the financial reports. Supplier rebate Supplier rebate is also one of the most important key audit matters that are generally missed by the auditors while conducting the audit process. The company is conducting business at a large scale because of which a lot of purchases have been made. The suppliers of the organization also provide them with various types of schemes and discounts because of the huge purchases made by it. The figures of the discount that have been provided to the organization can be easily manipulated and hence it is very important for the auditors to analyze the financial statement for anykind ofmisstatements(Parrino,Kudwell&Bates,2012). Therearevariousfactors determining which the discount is being provided to the organizations. A disclosure statement is also presented by the supplier for maintaining clarity towards the discounts that have been given to the organization. There are suggestive measures that are needed to be checked for the accuracy of KAM: 6
Wesfarmer •Evaluating the design of the controls that were used for the determination of the supplier discount. •Comparison of the rebate agreement with agreements of the past year. •Analysis of the supplier rebates by understanding the documents collected from the population. •Clear analysis of the rates of supplier credits and recognition of rebates. •Making time to time inquiries for the rebate contracts that are not part of the main contract. •Collection of regular statements from purchase managers, supply chain manager and other staff members without any non-standard agreement. Finalization of the acquisition accounting of home base Third possible key auditing matter for the organization is to evaluate the accounting of home base. In the current fiscal year, it has been observed that the organization have acquired Hamden group that works in accordance with the principles of AASB 3. There are various key auditing matters that can be very important for preparing the balance sheet of the organization. The total value of acquisition that was being felicitated by the organization was observed to be 665 million dollars which is the very huge sum and may also lead to the change the fair value of assets and liabilities in an identifiable manner (Wesfarmers, 2018). There are certain measures that should be taken into account for confronting this kind of audit matters: •Setting the acquisition accounting policy and the methodology of the organization. •Making certain key changes in the judgments and estimation of the values •Valuable changes should be made in the fair value within the period of 12 months. •Taking valuable consultations from the expert so that the process can be carried out easily (Parker, Guthrie & Linacre, 2011). 7
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Wesfarmer Recommendations The first and most important auditing matter was related to the impairment of noncurrent assets and intangible assets like goodwill and patents. The transactions in relation to the impairment losses are highly sensitive in nature because of which they require a greater emphasis on auditors. Hence, it is very important for the auditors to clearly analyze the accounts for any kind of impairment losses present in the financial reports. The second important auditing matter was related to the supplier rebate or discount which was provided to the organization. The auditors classify the incomes and assumptions with the help of a clear analysis of income statement that can be easily manipulated using these figures of rebates. Hence, it should be further noticed by the auditors that analysis of such figures is very important because they can not only make changes in the figures of financial reports but also can harm their relationship with their suppliers. Another important key auditing matter was about the firm acquiring Hampden group Limited. The differences in the standards followed by the two companies were very important to be considered because it can create a lot of problems in the future. 8
Wesfarmer Conclusions After making the analysis of all the financial reports of the organizations it can be stated that various key audit matters should be taken into account while preparing the audit reports. It is also important for the order to determine the methodology that has been used by the organization for preparing its financial statements and further conduct the audit process for that the information collected by them can be used by the stakeholders and investors of the business for making further decisions. It is the general duty of the auditors to use correct auditing measures while assessing the financial reports of the organization so that proper report can be submitted to the shareholders and investors who can further use it for conducting the process of decision making efficiently. These reports also help the organization to provide transparency to its customers about the business that is being carried out by the firm. 9
Wesfarmer References AUASB. 2015.Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report, [online]. Available at: http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 6 May 2019]. CAANZ. 2016.Auditing, and Assurance Handbook 2016 Australia.Australia: John Wiley & Sons. English, L., Guthrie, J., Broadbent, J. and Laughlin, R. 2010. Performance audit of the operational stage of long term partnerships for the private sector provision of public services. Australian Accounting Review, [e-journal].20(1), pp. 64-75.DOI:10.1111/j.1835- 2561.2010.00075.x Manoharan, T.N., 2011.Financial Statement Fraud and Corporate Governance. The George Washington University. Mock, T. J., Bedard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. 2013. The audit reporting model: Current research synthesis and implications.Auditing: A Journal of Practice and Theory, [e-journal]. 32,pp. 323-351.https://doi.org/10.2308/ajpt-50294 Needles, B.E. & Powers, M. 2012.Principles of Financial Accounting. Financial Accounting Series: Cengage Learning. Niemi, L., and Sundgren, S. (2012) Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs.European Accounting Review. [online]21(4), p. 767-796. Available from:https://doi.org/10.1080/09638180.2012.671465[Accessed 21 April 2018] Parker, L.,Guthrie, J. and Linacre, S. 2011. The relationship between academic accounting research and professional practice.Accounting, Auditing & Accountability Journal,[e-journal].24(1), pp. 5-14. http://media.accountingeducation.com/1304/Parkeraaaj24(1).pdf Parrino, R, Kidwell, D. and Bates, T. 2012.Fundamentals of corporate finance. Hoboken, NJ: Wiley Pash, C., 2018.Retail Food Group shares are being crushed.[online]Available at: https://www.businessinsider.com.au/retail-food-group-shares-fall-trading-2018-3[Accessed13 May 2018] Peirson, G., Brown, R., Easton, S., Howard, P. and Pinder, S. 2015.Business Finance. 12th ed. North Ryde: McGraw-Hill Australia. 10
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Wesfarmer Roach, L. 2010.Auditor Liability: Liability Limitation Agreements.Pearson Teen, M.Y. 2012.The ABC of a corporate collapse,[online]. Available at: http://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/[Accessed 6 May 2019] Vause, B., 2009.Guide to Analysing Companies. Bloomberg Press Wesfarmers. (2018)Wesfarmers Ltd.[Online] Available at:https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018- annual-report.pdf?sfvrsn=0[Accessed 20 May 2018]. Wood, D A. 2011.The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision.The Accounting Review, [e-journal].86(6), pp. 34-56.https://doi.org/10.2308/accr-10136 11