Importance of ASX Corporate Governance Principles and Risk Assessment Procedures: A Case Study of Wesfarmers Pty Ltd

The report analyzes the compliance of Wesfarmers Pty Ltd with ASX Corporate Governance Principles and its risk assessment procedures for mitigating audit risks. It discusses the importance of developing a solid framework for management and oversight, board structure, ethical and responsible behavior, integrity in corporate reporting, timely and balanced disclosure, protection of rights of security holders, risk management, and fair and responsible remuneration. The report also provides a brief description of Wesfarmers, its market overview, business strategy, and financial performance.

Audit, Assurance & Compliance

Executive Summary
The present report is undertaken to present a critical analysis of the importance of
Corporate Governance Principles established by the Australian Securities Exchange (ASX) for
strengthening the governance framework within Australian business entities that are listed on
ASX. Also, the report has provided a detail discussion of the risk assessment procedures used by
ASX listed entities for identification and mitigation of the audit risks. In this context, the
company selected is Wesfarmers Pty Ltd listed on ASX and is recognized as supermarket giant
in Australia. It has been illustrated from the analysis of corporate governance statement and risk
assessment procedures of the company that it effectively follows the standard guidelines and thus
is able to create value for all its stakeholders.

Contents
ASX Corporate Governance Principles.........................................................................................................3
Developing Solid Framework for Management and Oversight................................................................3
Board Structure to Add Value..................................................................................................................3
Acting Ethically and Responsibly:............................................................................................................4
Protecting Integrity in Corporate Reporting:...........................................................................................4
Timely and Balanced Disclosure:.............................................................................................................4
Protection of Rights of Security Holders:.................................................................................................5
Risk management....................................................................................................................................5
Fair & Responsible Remuneration...........................................................................................................5
Procedure of risk assessment in case of Wesfarmers..................................................................................5
Balance Sheet Ratio:................................................................................................................................7
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9

ASX Corporate Governance Principles
ASX has developed a set of principle and recommendations regarding the development of
corporate governance framework in the Australian business entities to promote trust and interest
in the business operations. Wesfarmers develops and publishes the corporate governance
statement in accordance with the ASX principles that is examined as follows:
Developing Solid Framework for Management and Oversight
ASX Council has stated the business entities to establish and define the roles ad
responsibilities of the Board and management properly. Wesfarmers Corporate Governance
Statement ahs adequately defined the roles and responsibilities of the Board and management.
The role of Board is to provide a strategic direction to the Group and develop the consecutive
business plans for achieving the long-term goals and objectives. As such, the board aims to
create value for the shareholders by aligning their aims and objective with the overall business
interests. The responsibilities of the Board include monitoring and reviewing the performance of
key management personnel (KMP), identifying the growth opportunities and development of
actions plans for overcoming the gaps in performance. On the other hand, the management role
and responsibility is to manage the daily operational activities of the business adequately and is
directly accountable to the Board. The performance of the board is evaluated by the Nomination
Committee with the assistance of an external consultant on an annual basis. The performance
evaluation of the KMP’s is carried out by the Board at the time of determining the variable
component of their remuneration package on a yearly basis (2017 Corporate Governance
Statement, 2017).
Board Structure to Add Value
Wesfarmers also complies with ASX principle of developing an adequate board structure
comprising of necessary skills, competencies and size to meet the strategic goals of the company.
The corporate governance statement of the company has provided detailed information about the
Board structure and composition. The company places strong focus on appointment of directors
within the Board who can bring an appropriate mix of skills, experience and expertise for
facilitating quick and accurate decision-making. The Board currently comprises of nine directors
out of which eight are non-executive directors having different qualification and expertise. The

presence of varied skills and competencies in the board ensures that it is able to carry out its roles
and duties adequately.
Acting Ethically and Responsibly:
As per ASX principle, a business entity should carry out its business activities in an
ethical and responsible manner for promoting its sustainable growth and development.
Wesfarmers have developed and implemented governance policies based on the principle of
ethics such as honesty and integrity to ensure that all the operational activities are carried out in
an ethical manner. The corporate governance policies are also adequately disclosed in the online
website of the company. The Code of Conduct of the company also ensures that all the business
procedures are carried out in a responsible way. The board regularly reviews the governance and
code of conduct framework of the company to ensure that all business operations are carried out
as per the stated standard behavior (2017 Corporate Governance Statement, 2017).
Protecting Integrity in Corporate Reporting:
ASX listed entities should have a rigorous process for verifying and safeguarding the
integrity in the corporate reporting. Wesfarmers have developed an Audit and Risk Committee
for reviewing the internal control policies and practices that are developed for protection of
integrity in the financial reporting. The committee conducts regular review of the business
process to ensure the integrity of the financial information disclosed as per the nature of the
business activities (2017 Corporate Governance Statement, 2017).
Timely and Balanced Disclosure:
Wesfarmers in accordance with this ASX listed principle makes timely and relevant
disclosure of information to its stakeholders that can have a material effect on the price of its
securities. The company prepares and published its financial reports on an annual basis to
provide relevant information to the end-users to assess its current and future financial growth.
Also, it develops and publishes its sustainability reports on an annual basis to provide the
required non-financial information to the end users about the nature of its operational activities.
This is essential to promote the trust and confidence of investors that assists them in taking
various types of decisions. Therefore, Wesfarmers makes timely and balanced disclosure of
information to the end-users to assist them in their decision-making process (Fleckner and Hopt,
2013).

Protection of Rights of Security Holders:
The business entities are required to develop proper policies and facilities for granting
rights to the security holders as per the ASX principles and recommendations. Wesfarmers have
identified the importance of protecting the rights of its shareholders as analyzed from its
corporate governance statement. For this, the company ensures that the shareholders have the
right to access high quality information trough the development of its program on investor
engagement. The program aims to provide all the updated information about the share prices to
the investors through the use of electronic communication (Plessis, McConvill and Bagaric,
2005).
Risk management
There should be a presence of an effective risk management framework within the
business entities to effectively identify, control and mitigate the risks. Wesfarmers have
developed and implemented a risk management framework to identify, monitor and manage the
material risks associated with its business activities. The management carries out the regular
compliance of the daily operations as per the risk management system. The framework
developed for mitigation of the risks is continually reviewed by the Board annually (Bazley,
Hancock and Robinson, 2014).
Fair & Responsible Remuneration
ASX listed entities should develop an effective remuneration structure for retaining
talented and competent directors and aligning their interest with the value for shareholders. The
Board has developed remuneration committee for monitoring and evaluation of the remuneration
structure of the senior executives. The remuneration structure is reviewed on an annual basis for
monitoring the performance of the KMP’s adequately (ASX Corporate Governance Council,
2014).
Procedure of risk assessment in case of Wesfarmers
Risk assessment is carried out in order to ensure that there is no material
misrepresentation in the financial statement. Risk assessment is the important part of audit
process and it is carried by the auditor before performing the audit work. The financial statement
that are handed over to the auditor by the client must be free from any error and material

misstatement as any material misstatement can lead to the audit risk and there will be impact
upon the audit opinion (Auditing and Assurance Standards Board, 2009).
Risk assessment is the process taken by the auditors to identify and assess any material
risk that can remain in the financial statement and other assertion level. The risk assessment
procedure was processed by the auditor themselves that means this process will not provide any
appropriate evidence through which the audit opinion can be modified. This procedure only
helps to ensure that financial statement are free from errors and there remain no analytical errors
in the financial statement that lead to incorrect auditor judgment (O'Donnell & Perkins, 2011)..
Risk assessment procedure consist of three main steps that are carried by the auditor
themselves and these steps are inquires from the management, analytical procedures and
observations and inspection. Risk assessment is the lengthy process as involves series of steps
that auditor have to perform in detail in order to ensure that all the information provided to the
auditor from the client is free from any material misrepresentation. Particularly in this report the
risk assessment procedure has been carried out by the auditor of Wesfarmers but here only some
steps have been incorporated, such nature of the company, market overview, business strategy,
financial performance and audit risk. All these steps will be discussed in more detail in below
section of the report (Auditing and Assurance Standards Board, 2009).
Wesfarmers: Description of type of company
Wesfarmers is the popular retail company in Australia and it ranks among the top 5 in
retail industry of Australia. It has major competition with the Woolworth as both companies
operate at large level and has same segment of product and services that are delivered to the
customers. The major goods that are sold at the retail stores of Wesfarmers are consumer goods,
groceries, daily consumables, liquor, other retail items, apparels and goods of public needs. In
addition to retail goods Wesfarmers is also engaged in providing additional services that are
essential to keep the retail store running and it also provides some other services such as
financial services, office supplies, home improvement and other similar services (Wesfarmers :
Our Businesses, 2018).
Wesfarmers: Overview of market

Wesfarmers operates in highly competitive market as there are multiple players in the
retail industry that operates in same segment as Wesfarmers do. On the basis of annual report it
has been found that Wesfarmers hold more than half of market share in Australia itself and
provides very huge competition to their competitors such as Woolworth etc. Wesfarmers is the
multinational company that has retail store both in Australia and outside Australia. Due to
presence of business outside home country there arise audit risks such as market risk due t high
fluctuations in the exchange rate of countries (Wesfarmers : Our Businesses, 2018).
Wesfarmers: Business Strategy of company
Business strategy refers to the action plan that is adopted by the company to achieve the
success in the business through applying principles of integrity. The correct application of
business strategies help to achieve the customer satisfaction and also increase the shareholders’
value. The Business strategies that are developed are by the Wesfarmers are helps to achieve the
shareholders value and also all the business strategies are in line with the mission and vision of
the company (Wesfarmers : Our Businesses, 2018).
Wesfarmers: Financial Performance
In order to evaluate the financial performance of the Wesfarmers it has been decided to
calculate the income and balance sheet ratios. The ratios are given as under:
Income statement ratio:
Gross profit margin: Gross profit /Net Sales Net profit margin = Net Profit/Net Sales
Gross Profit (2017) = 21,656 AUD million Net Profit (2017) = 2,873 AUD million
Net Sales (2017) = 68,015 AUD million Net Sales (2017) = 68,015 AUD million
Gross profit margin Ratio = =31.84% Net profit margin Ratio = 4.22%
Balance Sheet Ratio:
Current Ratio: Current Assets/Current
Liabilities Debt Equity Ratio = Debt/Equity
Current Assets (2017) = 9,667 AUD million Debt (2017) = 4,066 AUD million

Current liabilities (2017) = 10,417 AUD
million Equity (2017) = 23,941 AUD million
Current Ratio (2017) = 0.93 times Debt Equity Ratio (2017) = 0.17 times
(Wesfarmers: Annual Report, 2017).
Wesfarmers: Audit Risk and precautions taken
On the basis of analysis of the financial statement and notes to accounts of the
Wesfarmers the two main audit risks have been found they are market risk and credit risk.
Market risk arises due to fluctuations in the exchange rate of currency in countries where
Wesfarmers operate. It can be controlled through applying various financial control techniques
like interest rate swaps and hedging techniques. Second audit risk that can be raised due to the
credit risk which arises due to shortage of liquidity in the company. It can be overcome by
maintaining proper liquid assets that is required to pay the short term liabilities (Putra, 2010).
Conclusion
Thus, it can be stated from the overall discussion in the report that Wesfarmers have
effectively complies with ASX CGC principles and have developed an effective corporate
governance framework. Also, it has subsequently developed risk assessment procedures for
mitigating the audit risk that have a materialistic impact on its financial performance.

References
2017 Corporate Governance Statement. 2017. Wesfarmers. Retrieved 24 April, 2018, from
http://www.wesfarmers.com.au/docs/default-source/corporate-governance/2017-
corporate-governance-statement.pdf?sfvrsn=2
Auditing and Assurance Standards Board. (2009). Auditing Standard ASA 520 Analytical
Procedures. Retrieved 24 April, 2018, from
http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf
Bazley, M., Hancock, P. and Robinson, P. (2014). Contemporary Accounting PDF. Cengage
Learning Australia.
Fleckner, A. and Hopt, K. (2013). Comparative Corporate Governance: A Functional and
International Analysis. Cambridge University Press.
O'Donnell, Ed & Perkins, D. (2011). Assessing Risk with Analytical Procedures: Do
Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing;
Sarasota 30 (4), pp. 273-283.
Plessis, J., McConvill, J. and Bagaric, M. (2005). Principles of Contemporary Corporate
Governance. Cambridge University Press.
Putra, L. (2010). The Use Of Analytical Procedures In Auditing. Retrieved 24 April, 2018, from
http://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/
ASX Corporate Governance Council. (2014). Retrieved 24 April, 2018, from
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf
Wesfarmers. 2018. Our Businesses. Retrieved 24 April, 2018, from
http://www.wesfarmers.com.au/our-businesses/our-businesses [Accessed on: 24 April
2018].
Wesfarmers: Annual Report. 2017. Retrieved 24 April, 2018, from
https://www.wesfarmers.com.au/docs/default-source/reports/j000901-
ar17_interactive_final.pdf?sfvrsn=4 [Accessed on: 24 April 2018].