Audit, Assurance and Compliance of Wesfarmers: An Analysis of Auditor's Report

This report examines the integrity and independency of auditor for carrying out his roles and responsibilities in examining the financial statements of Wesfarmers. The purpose of the report is to examine on the enhanced reporting requirement of an auditor while performing the audit process to provide the qualified opinion on the financial condition and financial performance of the company.

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HI6026 Audit, Assurance and Compliance

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Executive Summary
This report examines the integrity and independency of auditor for carrying out his roles
and responsibilities in examining the financial statements of Wesfarmers. Wesfarmers is a
recognized retail company of Australia and it has selected Ernst & Young as their external
auditor. The purpose of the report is to examine on the enhanced reporting requirement of an
auditor while performing the audit process to provide the qualified opinion on the financial
condition and financial performance of the company. It has been found that auditor has provided
true and fair opinion on the financial statements after carrying out all his responsibilities towards
the material information found in the financial statements of the company.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Compliance of Auditors Independence...........................................................................................4
Non Audit services and nature of such services..............................................................................4
Comparison of Auditor’s Remuneration for year 2017 with remuneration given in year 2016......5
Key Audit Matters...........................................................................................................................6
Role, functions and composition of the audit committee................................................................8
Audit Opinion expressed by the Ernst & Young.............................................................................8
Difference between the director and management responsibilities from the auditor
responsibilities in context of financial reporting.............................................................................9
Subsequent material event...............................................................................................................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

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Introduction
The International Auditing and Assurance Standards Board (IAASB) have issued new
reporting requirements for auditor in the year 2016. There have been significant changes in the
key audit areas for improving the material information to increase the quality of auditing
reporting. The increased disclosure in the auditor’s report is required for enhancing the
communication value of such a report to the end-users. The auditing standard-setters in various
jurisdictions such as Australia and New Zealand have issued the new requirements to be adopted
while other countries are still in the process to integrate them. IAASB is emphasizing largely on
adopting the new sections in the report of auditor’s for providing greater transparency to the
users (Demartini and Trucco, 2017). In this context, the present report is undertaken for
evaluating the annual report of an ASX listed company. This has been done by reviewing all the
sections of the annual report of a selected company for examining the role of auditor’s over its
financial and control environment. This has been carried out by examining the key areas in the
annual report of the selected company that is independence declaration of auditor’s, independent
auditor’s report, non-audit services carried out by the auditor, remuneration of auditor, role of
audit committee, independent auditors report to the members and reviewing all the key audit
matters and associated audit procedures. The company selected for the analysis purpose is
Wesfarmers, a leading Australia listed company that have specifically interest in retail,
chemicals, fertilizers, coal mining and industrial products.
Compliance of Auditors Independence
The external auditor of Wesfarmers is Ernst & Young and the independency of external
auditor is examined by the Audit and Risk Committee setup to make compliance with corporate

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governance. The auditor Ernst & Young has stated the declaration of its independency to the
Board of Directors in a separate document developed and the same has been provided in the
director report section of annual report. The main auditor partner from Ernst & Young has
provided declaration to the directors of Wesfarmers that clearly states that there have been no
contraventions of the Corporation Act 2001 in context of the auditor’s independence
requirements and there have been no contradiction of various code of professional conduct in
developed for carrying out audit process. All these disclosures in the annual report of
Wesfarmers clearly indicate that auditor Ernst & Young has complied with independence
requirement (Annual Report, 2017).
Non-Audit services and nature of such services
Yes, Wesfarmers take non-audit services from the Ernst & Young in the financial year
2017. As per information provided in the annual report of Wesfarmers, Ernst & Young provided
non-audit services such as tax compliance analysis and other related services. Ernst & Young has
taken $1,088,000 audit fees for tax compliance and $1,219,000 audit fees for other services.
Overall Ernst & Young has taken $2,307,000 audit fees for providing non-audit services to the
Wesfarmers. The nature of non-audit services is such that it does not impact the independency of
auditors in relation to the audit and assurance services provided to the company. The non-audit
services do not involve reviewing his own work or acting as a person in the management or
taking significant decisions of the company. As per the information given the non-audit services
should comply with the corporate governance rules and regulations. The non-audit services are
evaluated by the Audit and Risk Committee for ensuring the honesty and auditor’s objectivity
auditor (Annual Report, 2017).

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Comparison of Auditor’s Remuneration for year 2017 with remuneration given in year
2016
The remuneration of auditor’s is decided by the audit committee and it is paid for two
main services that are given by the Auditor to Wesfarmers. These services are provided by the
Wesfarmers auditor and includes both audit and non-audit services. Audit service includes
auditing and examining financial reports, and assurance related services. Non-Audit services
include services like compliance with tax procedures and other financial or non-financial
services. The detailed information on amount of remuneration paid to auditors has been provided
in below table and there will be table for percentage change from year 2017 to year 2016.
Detailed Information about the remuneration of
the Auditor
2017 2016
%
Changes
$'000
Audit Services
In respect of audit and review of financial reports
$
5,723.00 $ 5,780.00 -0.99%
for the units located in Australia
$
702.00 $ 577.00 21.66%
for the units located at Overseas network
firms
In respect of assurance related services
for Australian and overseas firms
$
1,272.00 $ 2,215.00 -42.57%

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for other audit firms
$
218.00 $ 112.00 94.64%
$
7,915.00 $ 8,684.00 -8.86%
Non Audit Services
For firms located in Australia and Overseas
Branches
Tax Compliance Services
$
1,088.00 $ 1,096.00 -0.73%
Other Services
$
1,219.00 $ 882.00 38.21%
$
2,307.00 $ 1,978.00 16.63%
Total Auditors Remuneration Paid
$
10,222.00 $ 10,662.00 -4.13%
(Annual Report, 2017)
On the basis analysis of auditor’s remuneration there has been rise of 16.63% in the fees
paid for the non-audit services that indicates extra non-audit work performed by the auditors
during the year 2017 as compared to year 2016. Overall there has been decrease of 4.13 % in the
total audit remuneration but for fees related to assurance services has been increased by 42.57%.
The non-audit fees amount to 23.1% of total audit remuneration paid to the auditors.

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Key Audit Matters
The main audit matters refer to all the significant issues that very important in regard to
the auditor’s judgment. Ernst & Young have discussed the key audit matters in their
independence report and they have provided the audit procedure carried out to address the
matter. They do not provide separate opinion on the key audit matters (CPA, 2018). The result
obtained from the audit procedures carried on the key audit matters and other material
information has provided the base for forming the audit opinion. The key audit matter provided
in the annual report of Wesfarmers has been provided below:
Impairment of non-current assets including intangible items
It is important because calculation of recoverable value of property, plant and equipment,
and intangible assets such as goodwill requiring many significant judgments by the company.
The business entities for aligning with the Australian Accounting Standards must look for
triggers indicating the need for assets to be impaired at the reporting period end. There is
requirement to assess the impairment of goodwill once in a year (Butera, 2016). The assessment
procedures carried out for the impairment of assets are complex and judgmental in nature
because it includes modeling of range of assumptions and key estimates that can impact the
market conditions and future performance of the company (Annual Report, 2017). As per the
accounting procedures there are no material triggers found that indicate the reason to impair the
assets. Based on the information provided to the Ernst & Young, auditor has carried out the audit
procedure to consider impairment of assets. The recoverable value of CGU unit Target has been
found above on its carrying value and it is subjected to changes in the discount rate and terminal
value. The calculation of sensitivity analysis and key assumptions made the carrying value of
Target (CGU) has been altered. Similarly, the recoverable value is sensitive to change the

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discount rate and future post tax cash flows. The changes due to negative movement in key
assumptions can result in impairment (Annual Report, 2017).
Auditor has carried out audit procedure to evaluate the assumptions and methodologies
used for the assessment to determine the value of CGUs, forecast cash flows, growth rates,
discount rates and other valuations. Auditors has taken help of the valuation expert to analyze the
value of key inputs used in the impairment testing of the assets such as discount rates, terminal
growth rates, long term inflations, market evidence of industry earrings, forecast exchange rates
and commodity price assumptions (Braiotta, 2010). This audit procedure has been classified as
the analytical procedures used to evaluate the test performed for the impairment of assets
(Annual Report, 2017).
Supplier Rebates
The monetary or non-monetary benefits (Commercial Income) received by the
Wesfarmers from the suppliers in retail operations is referred to as supplier rebate. There are
various factors that makes supplier rebate a key audit matter. It is defined as a key audit matter
because of amount of commercial income (Rebate) recognized by the Wesfarmers in a year and
audit judgments required for valuing the amount of commercial income. There is need to
consider various factors such as commercial terms of each individual rebates, time of
recognition, nature of rebate (i.e. it should be recognized in income statement or should be
consider as carrying value of inventory, and recognition and measurement of rebate according to
Australian Standards and controls (Annual Report, 2017).
The application of analytical procedures and substantive test of the balances of
commercial income is carried out by the audit procedures in detail. Auditor has gained the

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substantial knowledge in relation to the types of commercial income. The auditor examines the
designing and operational effectiveness of controls applicable in context of recigniting and
measuring of rebate amount. The auditor’s for having substantial proof need to test the sample of
supplier’s rebates and carry out the analytical procedure to test the balances of rebates (Annual
Report, 2017).
Finalization of the acquisition accounting of Homebase
Wesfarmers has acquired the Hampden Group Limited (Homebase) in form of business
combination under the Australian Accounting Standard. According to AASB 3, company who
has acquired the other company under business combination can perform the 12-month
provisional accounting period to adjust any revision in accounting of acquisition. The main
reason for the significant auditing issues is due to size of acquired entity and opinion involved in
determination of fair value of assets and liabilities that are acquired under the acquisition process
(Annual Report, 2017).
Auditors has applied substantial test of balance and analytical procedure to audit this key
audit matter. Auditor has carefully tested the acquisition accounting methodology to assess the
key judgments and estimates for fair value of asset and liabilities (Al-ghalayini, 2015). The
purpose is to verify the changes in the fair value of assets and liabilities acquired under
acquisition after the acquisition date to one year after the acquisition so that necessary changes
can be incorporated. Support from the valuation experts has been taken to verify the fair value
(Annual Report, 2017).

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Role, functions and composition of the audit committee
There is an audit committee developed by the Board of Directors of Wesfarmers involving
majority of independent non-executive directors and is chaired by the independent director. The
Board has also established the charter for the audit committee for providing details in relation to
the role, functions and composition of the audit committee. The structure of the audit committee
is described as follows:
Structure:
 Chairman: Tony Howarth
 Independent non-executive directors: Diane Smith-Gander & Jennifer Westacott
Functions & Responsibilities
The audit committee role is monitoring the internal policies and procedures developed
for protecting the assets of the company and to maintaining the transparency in financial
reporting. The audit committee major functions are stated as follows:
 Reviewing the business practices of company for ensuring the integrity in financial
reporting
 Reviewing the internal control policies of the business for ensuring its compliance with
all the relevant accounting, legal and regulatory requirements (Houghton and Ng, 2010)
 Monitoring the data protection management, reporting structure, ethical sourcing of
products for ensuring that there are adequate safeguards in the business practices to
minimize the chances of occurrence of business risks
 Reviewing and monitoring the tax compliance program of the company in Australia and
also in overseas (2017 Corporate Governance Statement, 2017).

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Audit Opinion expressed by the Ernst & Young
The auditor Ernst & Young has provided that financial statements of Wesfarmers provide
true and realistic view of financial performance of the company as on date 30 June 2017 and also
for the year ended on that date. Auditor also mentioned that financial statement also complies
with the requirements under Australian Accounting Standards and other regulations (Annual
Report, 2017).
Difference between the director and management responsibilities from the auditor
responsibilities in context of financial reporting
The responsibility of management and director is to develop and disclose the financial
statement for protecting the interest of end-users. The management is responsible for adopting
the use of standard accounting policies to maintain the internal as well as external control over
the firm performance. Th financial transactions carried out in the firm in relation to its key
financial items such as assets, liabilities and equity are in direct control of the management.
Thus, it can be stated that the major responsibility of management is to ensure that financial
reports provide true and fair value of the financial condition of the firm. The directors ensure that
the financial information presented has complied with all the standards accounting policies and
regulations (Australian Government: AASB, 2018).
On the other hand, the responsibility of an auditor is to provide an opinion about the
accuracy and reliability of the financial statement prepared by the management. This is done to
protect the interest of the stakeholders by ensuring that the financial information is free from any
type of materialistic error. The auditor role is to carry out audit for obtaining reasonable
assurance of the financial statement disclosed by a firm. The reasonable assurance provided by

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an auditor ensures that the financial statements are free from any type of material misstatement
that can occur due to errors or fraud (Public Company Accounting Oversight Board, 2003).
Subsequent material event
As per the annual report of Wesfarmers there was no subsequent material event that has
been reported by the company (Annual Report, 2017).
Conclusion
The Auditor Ernst & Young has performed the audit process with integrity, independence
and reliability. Auditor has given his opinion after performing through analysis of all financial
statements and notes to accounts prepared by the company. All the relevant audit process has
been followed to evaluate the key audit matters and other material information. In addition to the
audit service, auditor provides the non-audit services to the Wesfarmers. The non-audit services
provided by the auditor to the company do not impact the materiality of the audit of services
given to the company. Thus, it can be said on the behalf of the third-party stakeholders that
auditor has successfully examined all the materialistic issues that impacts the audit process and
have disclosed all the relevant facts. It has been found that there was no missing or under
reported material information that has not been fully disclosed by the auditor in the audit report.

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References
2017 Corporate Governance Statement: Wesfarmers Limited. 2017. Retrieved 14 September,
2018, from
Annual Report. 2017. Wesfarmers. Retrieved 14 September, 2018, from
Australian Government: AASB. 2018. Auditor Reporting FAQs. Retrieved 14 September, 2018,
from
CPA. 2018. Auditor Reporting. Retrieved 14 September, 2018, from
Public Company Accounting Oversight Board. 2003. Responsibilities and Functions of the
Independent Auditor. Retrieved 14 September, 2018, from
Houghton, K. and Ng, j. 2010. The Future of Audit: Keeping Capital Markets Efficient. ANU E
Press.
Demartini, C. and Trucco, S. 2017. Integrated Reporting and Audit Quality: An Empirical
Analysis in the European Setting. Springer.
Butera, A. 2016. Mastering the Five Tiers of Audit Competency: The Essence of Effective
Auditing. CRC Press.
Al-ghalayini, S. 2015. The Effect of the Internal Auditing on Financial Performance. GRIN
Verlag.
Braiotta, L. 2010. The Audit Committee Handbook. John Wiley & Sons.

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