Audit and Assurance - Assignment

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AUDIT & ASSURANCE

Wesfarmers Ltd
Executive Summary
The role of auditors assumes a place of special importance because it is in direct link with the
ethics and functioning of the company. The corporate governance of the company relies on
the function of the auditor. Moreover, the auditor report lays a strong foundation when it
comes to the concept of a stakeholder. In this report, selection of Wesfarmers Limited is done
for the purpose of the report and the role of the auditor is studied in an elaborate manner. The
report begins with the introduction of the company and then spreads to concept such as
auditor’s independence, key audit matters, and the audit committee. Apart from this, the
remuneration and audit opinion is provided due emphasis.
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Wesfarmers Ltd
Contents
Introduction...........................................................................................................................................2
Compliance with the independent requirements..................................................................................2
Non audit services.................................................................................................................................2
Analysis of the Auditor remuneration...................................................................................................4
Nature of the audit services..................................................................................................................4
Key Audit matters..................................................................................................................................4
Difference in management’s responsibilities from that of the auditors................................................6
Material subsequent events..................................................................................................................7
Effectiveness of auditor’s material information....................................................................................7
Whether material information is missing/under-reported....................................................................8
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
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Wesfarmers Ltd
Introduction
Audit report and audit function is the need of the hour because it denotes the authenticity of
the company’s performance. Wesfarmers has provided a true and fair view of the state of
affairs of the company. This is by dint of strong audit planning and control. Further, the
compliance with the accounting standard and the Corporation regulation 2001 has ensured an
effective mechanism (Wesfarmer, 2017). The report will reflect the functioning of the
company together with a strong emphasis on various areas such as audit control,
remuneration, and key audit matters, etc.
Compliance with the independent requirements
From the annual report it is noted that the audit was done in tune to the Australian
Accounting Standards. The independent requirements are followed and the same has been
stated in the Audit report. The auditor independence requirement was followed as per the
needs of the Corporation Act 2001 and the ethical needs that has been stated by the
Professional and Ethical Standard Board APES 110 code of Ethics for Professional
Accountants that are necessary for the audit of the financial report. All other responsibilities
has been fulfilled that are in tune to the code (Wesfarmer, 2017).
Non audit services
The audit and this committee of Wesfarmers Limited have provided the board with legal
advice for the non-audit services provided by it in a written form so as to comply with the
passing of the resolution for a committee. The advice of the risk committee has been
considered by the board and they are clearly satisfied with the thought of compatibility of the
decision of the non-audit services that will be provided to them (Wesfarmer, 2017). There are
various types of standards that are needed to be accepted by an auditor in order to make such
decisions which are stated under the corporation's act 2001:
The auditor will not be allowed to review any work or acting in a management that has been
conducted by him and thus he is not going to provide any type of review on the non-audit
services.
The audit and the committee of the organization have clearly reviewed all the non-audit
services for their structural integrity and objectivity towards the organization so that they do
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not harm any corporate governance procedures or policies that have been adopted by the
company. The integrity of the auditor’s independence should not be questioned because the
declaration is already provided.
Analysis of the Auditor remuneration
Auditor fees 2017 2016 % %
Audit and review of financial reports
Ernst & Young (Australia) 5723 5780 72.30575 66.55919
Ernst & Young (Overseas network firms 702 577
8.869236 6.644404
Services of Assurance
Ernst & Young 1272 2215 16.07075 25.50668
Other audit firms 218 112 2.754264 1.289728
Total 7915 8684
Non-audit services
Ernst & Young (Australian & overseas
network firms):
- tax compliance 1088 1096 47.16081 55.4095
others 1219 882 52.83919 44.5905
Total 2307 1978
Payment to auditors 10222 10662
Nature of the audit services
Wesfarmers is about to be associated with a consolidate company to which the auditor has provided
the non-audit services and for the same, various amount is due and about to be received. The non-
audit services that were provided and the amount to be received stands at $2307 thousand that
figures 23.1 percent of the total amount of fees that is paid to the company for the year
ending 30th June 2017.
Key Audit matters
As per the annual report, it is witnessed that Wesfarmers have utilized different processes and
mechanism so that audit plan can be evaluated and assumptions can be done. The methodologies
are used to ascertain the audit plan that determines the rate of growth, valuation multiples, cash
flow forecast. The company managed various type of input that resembles relevancy for the
impairment test. The key factors in this area are:
Discount rates
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Wesfarmers Ltd
Terminal growth rates
Assumptions of Long-term inflation and growth rate
Assumptions of the price of the commodity
Market evidence of industry revenues valuation multiples
Forecast exchange rate assumptions
The preparation of the financial report has been done in accordance as per the guidelines and
has been projected by the testing approach of impairment, key assumptions and the
sensitivities.
The company also followed the various types of auditory tasks in order to respect the
commercial income that has been earned by them. Some of them are: Assessment of each and
every type of material that has helped in order to produce commercial income has been made
including the signed agreements that have taken place during the year (Matthew, 2015). The
company has also tried to regulate corporate and design an effective and relevant control
system in which it can try to relate places with the help of recognition and measurement of
the different discounted amount (Geoffrey et. al, 2016).
Wesfarmers Limited have also tried to compare various discounted arrangements after
learning from the previous year’s budget which has helped them to include analysis of aging
profiles and various material variances with the help of supporting evidence.
The supporting documents to the discount provided to suppliers were also sent for tests. An
analysis was made on the suppliers and different promotional credits strategies so that the
supporting documentation can be processed (Niemi & Sundgren, 2012).
The company have also tried to implement many new material contracts both before and after
the balancing of the statements which clearly states that an assessment should be made in
relation to the treatment that has been adopted by the group. Also, the appropriateness of this
statement should be analyzed (Livne, 2015).
A legal counsel was also enquired to find out any other terms for a condition that have been
existed other than the rebate contracts or any unusual contract in which the company has
taken part.
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Wesfarmers Ltd
Further, inquiry was even done on the various facts of the business that contains products,
merchandise, supply chain, staff so that the existence of nonstandard agreement can be
satisfied where the company contains its name.
All these or matters should be clearly analyzed by the company and actions should be
processed by them in order to correct these problems in time.
Difference in management’s responsibilities from that of
the auditors
In relation to Wesfarmers’ financial report, management of the same is the primary duty of
the directors or management but expressing an opinion on the same is the auditor’s task. The
auditor’s task is to perform and undertake the audit process to attain reasonable assurance
about whether the company’s financials are free from any material misstatements. In contrast
to this, when it comes to the directors and management of the company, it is their task to
adopt sound and effective accounting estimates and polices, thereby facilitating in the
establishment of internal control functions that can in turn assist in recording, initiating,
processing, and reporting transactions in alignment with their assertions declared in the
financial report (Viney, 2010). Furthermore, the company’s transactions and their associated
assets or liabilities together with the equities are within the direct purview and control of the
management. Besides, the knowledge of auditor’s regarding these matters and internal
control mechanisms are limited to that procured through the process of audit (Wesfarmers,
2017). Nevertheless, the fair representation of financial reports in alignment with the relevant
accounting principles is a significant and implicit responsibility of the management. In
contrast to this, the auditor may also take significant suggestions about the content or form of
such financial report, or draft them, in part or whole by depending on the information
procured from the management during audit procedure. Furthermore, the auditor’s duty for
such financial report he or she has undertaken is totally confined to the presentation or
assertation of his or her opinion on the same (Gay & Simnet, 2015). Moreover, the auditor of
Wesfarmers clearly does not have any kind of responsibility to perform and plan the audit to
procure reasonable assurance that the material misstatements whether caused by frauds or
errors are detected or identified. Therefore, the directors’ and managements’ responsibilities
are clearly distinct from that of the auditors when it comes to financial reporting
(Wesfarmers, 2017).
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Wesfarmers Ltd
Material subsequent events
It can be observed from the annual report of Wesfarmers that there are only two material
subsequent events that the company had experienced and that could have resulted in a big
impact on its financials. In tune to this, it should be recognized that the material subsequent
events are those that happens after the reporting date but before the financials for the period
of the issuance. The most vital event is observed in the annual report of the company where it
is seen that a fully franked and final ordinary dividend is paid after the period of reporting.
Moreover, payment of dividend is a potential factor that can easily affect the company’s
financial statements and overall performance on a whole (Wesfarmers, 2017). The main
factor behind such a matter can be attributed to the fact that the payment of dividend reflects
the ability of the company to attain prescribed EPS and ROI that helps the company to pay a
portion of the profit in terms of dividend. Therefore, since the company had paid a dividend
of 120 cents per share in the year 2017 after the reporting period, the same could have
affected its financial performance if it had occurred prior to the reporting period.
Nevertheless, it has paid a dividend of $1361 million that was declared for the payment date
of September 2017. Furthermore, the company had not paid dividend for the year 2017 that
may have affected its financials in a negative way. Further, Kmart which is known as the
department store acquired the brand in New Zealand and Australia.. This event can be
regarded as material in nature because Wesfarmers utilized such departmental store under a
licence-agreement that was long-term in nature and costed around hundred million dollars to
it (Wesfarmers, 2017). Even though based on the company’s statement, such transaction
could not possess a material impact on the earnings of Kmart, yet it could have affected the
share prices and earnings if the same occurred before the reporting date.
Effectiveness of auditor’s material information
It is observable from the auditor’s report of Wesfarmers that even though the auditors have
asserted that they audited the financial report of the company and it has complied with the
Corporations Act 2001 and AAS, yet the effectiveness of such material information cannot be
entirely seen. The primary reason behind this can be attributed to the fact that auditors have
only reflected few key audit matters in their report and have highlighted the process of how
they have undertaken the audit in relation to addressing such key audit matters. In addition,
such key audit matters are not properly described or explained by them and instead, only why
this key matter has been accounted for, has been portrayed (Wesfarmers, 2017). Therefore, if
the key audit matters are not explained effectively, it will become complicated for the users to
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Wesfarmers Ltd
determine the nature of such matter, thereby resulting in improper decision-making on their
part. However, they have effectively disclosed the process on how such matter has been taken
into consideration that is a positive indicator on the part of users. Furthermore, when it comes
to an interested third-party stakeholder, it must be noted that highlighting any issue as
material information also necessitates proper and adequate details regarding the same
(Kaplan, 2011). However, the same is absent from the auditors’ report that is a problematic
scenario as users may face problems while making decisions (Wesfarmers, 2017).
Nonetheless, the auditors have not provided complete information in relation to such key
audit matters, yet they have disclosed details of footnotes and notes wherein information
regarding the same can be found. Overall, the effectiveness of auditor’s material information
can be considered risky in nature and any third-party stakeholder may not rely upon such
details to make appropriate decisions.
Whether material information is missing/under-reported
Furthermore, there are various things that had to be disclosed by the company but it failed to
do so. Moreover, absence of such information can result in complications on the part of users
in effective decision-making. For instance, it can be seen from the financial statements of the
company that there are no footnotes to such financial statements that may create an issue for
users to ascertain the relation of any transaction. However, there are notes to financial
statements that have been properly addressed by the company and that is a positive step on its
part but absence of adequate footnotes to the financials are not appropriate for the intended
users (Wesfarmers, 2017). Furthermore, other material information like sustainability,
corporate governance, risk factors, etc are adequately disclosed by the company that can
facilitate in proper decisions on the part of intended users. In addition to these, there are few
details that are under-reported by the company. For instance, when it comes to the principal
affairs of entities within the consolidated group, the company has not disclosed adequate
information (Hoffelder, 2012). It has only mentioned slight details of the activities that are
not enough in nature because users demand proper disclosure for undertaking decision-
making processes. In addition, material information regarding the company’s diversity is also
not prevalent in the annual report and the same has been disclosed separately on the website
that may result in absence of material information (Rezaee &Kedia, 2012).
Apart from these issues, only the key audit matters are inaccurately disclosed by the auditors
that can have a material impact on the financials of the company. If the auditors had provided
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Wesfarmers Ltd
more information regarding their key audit matters rather than focusing on why such
information was significant, then it may have resulted in more effectiveness. Nevertheless,
compliance with the AAS and generally accepted accounting principles shed light on the fact
that the company has been consistent in its duties to attain intended objectives (Baldwin,
2010). However, if these facts were given due consideration, the annual report would become
more beneficial to the entire group of stakeholders.
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Wesfarmers Ltd
Conclusion
Form the overall report, it comes to the conclusion that the audit report and the audit function
of Wesfarmers is placed in an effective manner. It signifies the fact that the company has
complied with the Corporation Act 2001 and the Professional and Ethical Standard Board
APES 110. Hence, the audit structure of the company has been highly effective. All the
responsibilities in the Auditor Responsibilities has been fulfilled and the audit is designed in a
manner that responds to the risk assessment and misstatement in the financial report. Overall,
the company has projected a strong audit report and it is by dint of proper planning and
adherence to the regulations.
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Wesfarmers Ltd
References
Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting
Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309
[Accessed 4 August 2018]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and
practice. The Accounting Review [online]. 86(2), pp. 367–383. Available from
https://doi.org/10.2308/accr.00000031
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management. [online]. 9(3), pp. 291-292. Available from
https://doi.org/10.1111/1468-0408.00081
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. [online] Available
from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full [Accessed 4 August 2018]
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 4 August 2018]
Pilbeam, K. (2009) Finance and Financial Markets. Palgrave Macmillan
Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing
and Detecting Financial Statement Fraud. Journal of Forensic & Investigative Accounting.
[online]. 4(2), pp. 176-205. Available from: doi: 10.1016/j.sbspro.2014.06.041 [Accessed 4
August 2018]
Viney, C. (2010) McGrath’s Financial Institutions, Instruments and Markets, Sydney
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-
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796. Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 4 August
2018]
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
Wesfarmer. (2017) Wesfarmer annual report and accounts 2017 [online]. Available from:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed 4 August 2018]
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