Analyzing JB Hi-fi's Annual Report and Audit Procedure

This report analyzes JB Hi-fi's annual report, focusing on areas of concern and relevant audit procedures. It also discusses corporate governance and the role of the audit committee.

Assessment Information
Subject Code: ACC302
Subject Name: Auditing & Assurance
Assessment Title: Assessment 3: A Practical Audit Scenario

JB Hi-fi
Executive Summary
The performance of the company can be best described though the annual report and it is one
of the areas that allow the investors and related parties to know about the performance.
Hence, it is imperative that the auditor must stress upon the procedure that will help the
related parties to get the desired result. In this report the main emphasis is one the annual
report of JB Hifi and an analytical review is being done with the areas of concern. Further,
the audit procedure in relation to the same is described. The other part of the report projects
upon corporate governance and audit committee.
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Contents
Executive Summary...............................................................................................................................2
Introduction...........................................................................................................................................3
Analytical review...................................................................................................................................3
Relevant Audit Procedure......................................................................................................................6
Corporate governance...........................................................................................................................7
Reporting under corporate governance................................................................................................7
Audit committee....................................................................................................................................7
Benefits of the audit committee............................................................................................................8
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10
Appendix.............................................................................................................................................11
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Introduction
The initial step that can be done in the process of audit is the audit planning that comprises of
steps such as knowing the client and the business nature, ascertaining the risk, as well as
materiality, formulations of strategy of audit and knowing the type of evidence that needs to
be collected on the parameter of certain risk level. Audit planning is vital for area
identification where risk might be present in the form of material misstatement and for
designing the procedure of audit to address the risk and obtain audit evidence that is
sufficient for cost minimization (Douma & Hein, 2013).
Analytical review
Key Risk area
Maintenance of relationship with the supplier - the group has powerful links with the major
suppliers and functions mainly with the help of supplier. The major suppliers enables
operations and merchandising but the main point of concern is the ability to maintain strong
relationship with the suppliers. Further, the important point of consideration is the authentic
level of the rebate figure that needs to be assessed. The trade receivables do not project any
amount relating to the supplier rebate and hence, is an area of concern. The inclusion of
supplier rebate is a must because it projects the rebate has been booked as receivable and is
not received in the present financial year (Suphatsorn & Phapruke, 2011). The rebate
receivable should be indicated in the balance sheet so that the transparency is indicated in the
items of balance sheet. The major concern that appears here is the accuracy of the figures that
needs to be ascertained. The recording, as well as treatment of accounting for the rebates is a
prime consideration (Matthew, 2015).
Area of concern
Foreign currency risk
Another area of concern is that the group is exposed to foreign currency risk because The
Good Guys purchase some private label product, the denomination of which appears in
foreign currencies (Suphatsorn & Phapruke, 2011). Further, the Group comprises of
contracts of forward foreign exchange. The composition of assets and liabilities of the group
is as follows:
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2018
$m
2017
$m
Financial assets
Cash and cash equivalents 72.0 72.8
Trade and other receivables 204.7 193.6
Forward foreign exchange contracts 1.0 –
277.7 266.4
Financial liabilities
Trade and other payables 665.3 644.7
Bank loans 469.4 558.8
Interest rate swaps and caps (net settled) 0.3 0.6
Forward foreign exchange contracts – 0.7
1,135.0 1,204.8
(JB Hifi, 2018)
Due to the alterations in the foreign exchange rates, the company will require to pay the huge
sum due to import as it leads to the greater amount for payment of import and will have more
losses for the company. In case the payment is made to the lender in the foreign currencies
the difference between the amount agreed and the amount paid will remain an actual Loss to
the company and the loss is to be booked in the P/L account. Further, the company makes a
provision for the currency rate fluctuation(JB Hifi, 2018).
Change in ratios
From the financial statements of JB Hifi, it can be observed that the ratios are uneven in
nature. The profitability of the company is weak even though the sales have increased. This
indicates that the company is unable to have a grasp over the expenses. Moreover, there is an
increment in the Return on assets but a very marginal movement in the net profit margin and
hence is an area of concern for the auditor. The current ratio of the company is strong but
again the quick ratio is weak implying more inventories are kept by the business. Another
concern is that even after an increment in the sales of the business the inventories increased in
2018 hence, creating another concern for the auditor.
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Relevant Audit Procedure
The audit procedure that can be followed in the case of JB-Hifi is as follows:
i. Rebate from Suppliers-
The supplier from rebate needs to be understood in terms of discount, rebate and other forms
of incentives that are provided by the group. Further, evidence needs to be obtained in respect
to the rebate, as well as discounts accounted for on a sample basis such as statements of
confirmation from the supplier that shall comprise of written approval discount that is
provided to them.
ii. Foreign currency exchange rates
• It is very important for the auditor to assess the changes in the currency rates because the
organization is working on an international scale (Cappelleto, 2010).
• All the record dates of the profit and loss accounts should be assessed by the auditor
• The asset or liability should be written off if the change in currency is permanent in
nature. Further, it should also be mentioned in the notes to accounts clearly.
• All the major changes that are being observed in the organization because of the foreign
exchange currency rates should be disclosed in the financial statements of the organization so
that investors and stakeholders can determine the extent of profit or loss on its basis (Niemi &
Sundgren, 2012).
iii. Check on the major variables in the financial statements
Going by the overall facts and observation, the auditor should stress upon the sales and match
it with the relevant expenses. The comparison should be done to find the cause of increment
in the expenses. Secondly, the increment in inventory and sales simultaneously should be
studied with proper verification (Fazal, 2013). The inventories should be counted physically
and recorded while the sales vouchers should be properly evaluated.
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Part - B
Corporate governance
Reporting under corporate governance
A proper corporate governance structure was observed in the company JB Hi-Fi Limited.
Different level of disclosure and policies or practices that were to be conducted by the board
and its management team were clearly analyzed by the corporate governance structure of the
organization (JB Hifi, 2018). All the recommendations made by the ASX corporate
governance principles were followed throughout the accounting period so that the statements
that are being issued by the group are in accordance with the financial rules and regulations.
Audit committee
The organization is having an audit committee that can conduct the process of risk
management and compliance activities. All the rules and regulations listed under the
guidelines of the ASX corporate governance structure to be followed by the organization. The
companies listed in the Australian stock exchange because of which it has been asked to set a
formal and independent verification of the corporate reporting method used by it (JB Hifi,
2018). The organization should try to safeguard the integrity of the corporate reporting
structure used by it. There are various criteria are needed to be fulfilled by the organization
for the composition of the audit committee:
• The audit committee should comply with only non-executive directors.
• Minimum of three members should be present in the group.
• The group should consist of a majority of independent directors.
• It should be headed by an independent chairperson and not the chairperson of the board.
It is important for the organization to set up the group's audit committee in accordance with
the above-mentioned criteria’s so that a clear analysis of the financial statements can be made
(Niemi & Sundgren, 2012). It should also be noticed that the audit, risk management, and
compliance committee consists of:
• Majority of independent directors.
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• Independent chairperson.
• At least three directors.
It was nowhere mentioned about the audit committee that all the members are non-executive
directors or not. In the full list of members, the non-executive directors are also not present
because of which the composition of the audit committee will be incomplete in nature.
Benefits of the audit committee
Yes in my opinion audit committee is of paramount importance to the auditor as it helps in
defining the role and lay the path for fuller development. There are various roles and
responsibilities that are completed by the audit committee in order to fulfil the needs of the
company, society, investors and other stakeholders (Baldwin, 2010). All these roles and
responsibilities that are needed to be fulfilled by the audit committee are mentioned in the
corporate governance statement that is being defined by the organization. By the completion
of these objectives, the auditor will provide direct and indirect benefits to the board, society,
and other stakeholders. Various kinds of recommendations are made by the external auditors
in order to help the internal auditor of the organization so that a clear analysis can be
conducted. As studied by me, audit committee also monitored the key audit matters of the
organization in order to determine the risks for material misstatement that are present in the
financial accounts of the firm. The audit committee also helps the board by reviewing the
performance of the organization and the quality of work that is being conducted by it in order
to carry out the operations (Edward & Moutchnik, 2013).
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Conclusion
A proper analysis of the financial reports of the company JB Hi-Fi suggested the proper view
of the organization. Also, the analysis stated that the financial position of the organization is
not able to meet the desired targets that have been set by the organization. Therefore it is
needed by the management to spot the inefficient areas and work on them so that efficiency
can be achieved. It was observed that the company has disclosed the data that is needed to be
stated in the financial report and the corporate governance structure is also effectively laid
down.
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References
Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ,
Melbourne
Douma, S & Hein, S. (2013) Economic Approaches to Organizations. London
Edward F & Moutchnik, A. (2013) Stakeholder management and CSR: questions and
answers. Oxford Press
Fazal, H. (2013) What is Intimidation threat in auditing?. Available from:
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/ [Accessed 19 May 2019]
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
JB Hifi. (2018) JB Hifi limited Annual Report and accounts 2018. Available from:
https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-
Chairmans-CEOs-Report.pdf [Accessed 16 May 2019]
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 19 May 2019]
Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. 21(4), p. 767-796.
Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 17 May 2019]
Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. 21(4), p. 767-796.
Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 19 May 2019]
Suphatsorn, T., & Phapruke, U. (2011). Internal audit planning strategy of Thai- firms: an
empirical investigation of antecedents and consequences. International listed. Academy of
Business and Economics, 11 (2). Available from:
https://pcaobus.org/Standards/Auditing/Pages/AS2101.aspx [Accessed 17 May 2019]
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Appendix
Profitability
2018 2017
Net profit 233.2 172.4
Sales 6854.3 5628
NP margin = NP/Sales *100 3.402244 3.063255
2018 2017
Gross profit 1470.2 1230.5
Sales 6854.3 5628
GP margin = GP/Sales *100 21.44931 21.86389
Return on Assets 2018 2017
Net profit 233.2 172.4
Average assets 2475.75 2345.4
ROA -= Sales/Avg Assets*100 9.419368 7.350559
Liquidity
2018 2017
Current assets 1210.5 1167.5
Current liabilities 917.2 885.4
Current ratio 1.319778 1.318613
2018 2017
Current assets 1210.5 1167.5
Inventories 891.1 859.7
CA-inv 319.4 307.8
Current liabilities 917.2 885.4
Quick ratio 0.348234 0.347639
Gearing ratio
2018 2017
Total liabilities 1544.1 1606.3
Equity 947.6 381.6
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Debt equity ratio 1.629485 4.209382
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