Audit & Assurance: Wesfarmer - Principles of Auditing and Analysis of Various Audit Matters

The report focuses on the principles of auditing and analyzes various audit matters of Wesfarmers, a company listed on the ASX. The report covers compliance with statutory requirements, non-audit services, auditor remuneration, audit committee, significant audit matters, subsequent events, and missing information. The summary emphasizes the importance of auditors in providing a true and fair view of the state of affairs of a company and the need for effective internal control mechanisms.

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AUDIT & ASSURANCE

Wesfarmer
Executive Summary
The role of auditors in the smooth functioning of the company is vital because they are the
professional who are engaged in providing a true and fair view of the state of affairs. Further,
the auditors are responsible for conducting the audit and ensure that the financial statements
are free from errors because any error will dampen the goodwill of the company and provide
misleading information that might not go well with the status of the company. In this report,
the major emphasis is on the principles of auditing. For this purpose Wesfarmer is selected
that is listed on the ASX and in the light of this company various audit matter is studied. The
report initiates with the introduction followed by the compliance system with the needful
requirements. Further, non audit services and auditor remuneration is highlighted. Thereafter,
the audit committee is studied for the company. The report even sheds light on the
subsequent material events and the missing information.
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Contents
Introduction...........................................................................................................................................3
Compliance with the necessary statutory requirements.........................................................................3
Non-audit services.................................................................................................................................3
Calculation of the salaries given to auditors..........................................................................................4
Audit Committee...................................................................................................................................5
Significant audit matters........................................................................................................................5
Are the management’s and auditors responsibilities different from one another?..............................6
Key subsequent events..........................................................................................................................7
Effectiveness of the auditor’s report......................................................................................................7
Under-reporting/missing information....................................................................................................8
An auditor can be questioned that whether-...........................................................................................9
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
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Introduction
In order to trace errors and frauds in the financial statements of the company, the auditors
should always make sure that they are focussing on the internal control system of the same
company. This will aid them in detecting material misstatements caused as a result of errors
or/and frauds and representing a true and fair view of the financial well being of the company
in their audit reports. Considering the audit process carried out at Wesfarmers, it would be
fair enough to say that the reports of the company reflected transparency of its affairs and
offered a true and fair picture of its financial performance (Wesfarmer, 2017). The credit for
the same can be entirely given to the auditors for the functioning of the same was considerate
and also the company was able to adhere to all the necessary independent requirements
especially the ones like The Corporations Act, 2001.
Compliance with the necessary statutory requirements
The company was able to survive and expand in its industry in the presence of all its rivalry
companies owing to the compliance that was made with all the necessary statutory
requirements. The fact that the company was able to adhere to almost every independent
requirements is highly appreciable. The audit report of Wesfarmers too highlighted the fact
that the company has been in compliance with all the necessary standards. All such necessary
statutory requirements were based on the Corporations Act, 2001 which affirms the true and
fair view of the financial performance of the organization and APES 110 code of ethics that
are especially for professional accountants (Wesfarmer, 2017). Also, certain other significant
matters apart from compliance are also dealt with appropriately.
Non-audit services
In context of non-audit services, it can be said that the audit committee of the company has
extended their services by means of providing legal and ethical advice on the same. Also, all
these legal and ethical suggestions were provided in written form for the purpose of non-audit
services so as to comply with the resolutions made. Not only this, the board assessed the risk
on behalf the risk committee and they were extremely contended seeing that the auditors of
the company are well capable of offering non audit services as well by means of giving legal
and ethical suggestions (Wesfarmer, 2017). The capability of the auditors in providing both
auditing and non audit services was reflected in the annual report of the company which
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assists the users in making appropriate decisions. In context to Corporations Act 2001 for the
purpose of decision making there are various standards that are required to be accepted-
1. The objectivity and integrity of non audit services are required to be substantially
monitored by the audit committee of Wesfarmers so as to safeguard the policies of
corporate governance adopted by the company. Also, when the independence
declaration copy has been provided, it is unacceptable to question the credibility of an
auditor’s suggestions and decisions (Wesfarmer, 2017).
2. The auditors are not allowed to review their own work may it be in the case of audit
or non-audit services.
Calculation of the salaries given to auditors
Audit or fees 2017 2016 % %
Review and audit of financials
E &Y (Overseas) 702 577 8.869236 6.644404
E &Y (Australia) 5723 5780 72.30575 66.55919
Assurance services
Other audit firms 218 112 2.754264 1.289728
E &Y 1272 2215 16.07075 25.50668
Total 7915 8684
Non-audit services
E &Y (Australian & overseas):
- Compliance of tax 1088 1096 47.16081 55.4095
Others 1219 882 52.83919 44.5905
Total 2307 1978
Payment to auditors 10222 10662
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Audit Committee
In order to govern the overall performance of the organization and taking care of all its
compliance of necessary independent requirements, internal and external audit, internal
control process, financial reporting an Audit Committee was formed at Wesfarmers. The
audit committee can only work on the matters that are confined to it or rather within its
limitations so as to avoid any conflict with the work of the management (Wesfarmer, 2017).
The financial records of the organization are made available to the audit committee which
will also assist the management in diligently executing their responsibilities.
Amount of non-audit services provided to the consolidated group
The company offered audit services of worth US$2307000 to its consolidated group. It is
close to 23.1 per cent of the amount that was being paid to other companies in June 2017. The
amount is yet to be received by Wesfarmers from its consolidated company.
Significant audit matters
The auditor provided a favorable result meaning that the financial statements were free from
any error. In short, it can be commented that the auditor provided an unqualified opinion that
reflects the financial statements are free from error and is clean. Such reports are highly
dependable. Wesfarmer has a clean report and the financial statement does not have any
uncertainty that is duly undertaken and assessed by the auditors. This projects that the
compliance system of the company is followed in an effective manner.
For the purpose of evaluation of forecast cash flows, Corporate Governance, decisions,
discount rates, internal control mechanisms, risk assessment, growth rates and other
denominations by means of assessing the audit plan, Wesfarmers installed various
procedures. This assessment shall pave ways for the company to expand its operations. The
company has examined numerous components by means of incorporating impairment test in
order to trace their effectiveness (Cooper & Coram, 2015). All such factors are elaborated
below-
Credit strategies were decided by means of examining the documents that were created
whenever the discounts were offered to suppliers. Determination of non-standard agreement
was done so as to trace any misuse of company’s name by analysing certain business facts
such as merchandisers, products, supply chain manager, staff in order, etc (Wesfarmer, 2017).
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The effectiveness and worthiness of the financial report presented by the company were
assessed by disclosure of sensitivities, key assumptions and impairment testing approach.
Certain auditory tasks like valuation of all types of materials and few others not only yielded
commercial income for the company but also paved ways for the regulation of efficient
control mechanisms (Dauber, 2009).
Forecast exchange rate assumptions.
The company not just before but also after balancing its financial statements installed new
material contracts. This helps in ascertaining the effectiveness of the procedures. The last
year’s budget was considered by means of comparisons so as to evaluate effective discount
schemes. It allowed the management of the company in considering and analysing the ageing
profiles.
Are the management’s and auditors responsibilities
different from one another?
Yes, there is a huge contrast between the responsibilities of the management and the auditor
of the same company. The financial statements that are initially prepared and handled by the
management of the company forms a basis of assessment and scrutiny by the auditors for
sharing their opinions and suggestions on the financial well being of the company
(Wesfarmer, 2017). The auditors evaluate the financial statements prepared by the
management of the company so as to bring out the transparency of the financial performance
of the company and give and true and fair view of its state of affairs that will help the users in
their decision making (Matthew, 2015).
It is the job of the auditor to trace the material misstatements and label them as errors or/and
fraud for the purpose of eliminating data corruption and maintaining the genuineness of the
financials of the company whereas the job of the management of the company is to adopt
sound policies and such other practices along with the installation of internal control
mechanisms for the purpose of recording and processing transactions in the financial
statements that overall derive benefits to the company and allow it to survive and expand its
business in its industry (Christensen, 2011). All such operations, related assets and liabilities
along with equities are controlled and regulated by the management.
The auditors form an opinion on mainly two grounds. One on the basis of the information
provided by the directors and the management prior to the auditing and secondly, on the basis
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of their own findings (Ruhnke & Schmidt, 2014). It is entirely the duty of the management of
the company to effectively present the financial statements of the company governing all the
accounting principles and statutory requirements (Wesfarmer, 2017). On the other hand, it is
the responsibility of the auditors to fairly represent their opinions and suggestions based on
their research work.
The auditors at Wesfarmers were not efficient in their work. They were ignorant towards
classifying the misstatements as errors or frauds which brings out the contrast in between the
responsibilities of the management and auditors (Wesfarmer, 2017).
Key subsequent events
The annual report of Wesfarmers shows the occurrence of 2 key subsequent events after its
date of reporting. These events were regarded as material subsequent events for if the same
would have occurred prior to the date of reporting the consequences would have been huge
for the company. The events have occurred right one after another which could have badly
impacted the financial statements of the organization. Payment of dividend has widely
affected the financials and well being of the company. This is due to the fact that the payment
of dividend reflects the capability of the company to earn sufficient revenues and achieve
substantial EPS and ROI which allows the company to declare dividend to its shareholders. A
profit of 120 cents per share was paid by the company just after its date of reporting. If the
same would have been paid before the date of reporting, the financial well being of the
company would have severely suffered (Wesfarmer, 2017). The company also failed to
provide dividend for year 2017. It would have also severely affected the finances of the
company.
The next material subsequent event is related to the departmental store of the company which
is Kmart that has developed its brand value in New Zealand and Australia. The long term
license agreement of the company to hold such departmental stores cost around US$ 100
million. It could not impact the revenues of Kmart but had the capacity of affecting the share
prices and earnings of Wesfarmers Ltd if only it happened prior to the date of reporting.
Effectiveness of the auditor’s report
The report prepared by the auditors of Wesfarmers was hardly effective. The efficacy of the
auditor’s report was not clear. It was asserted by the auditors of the company that they
adhered to all the necessary statutory requirements and have audited the financials of the
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organizations carefully(Wesfarmer, 2017). The auditors failed to disclose certain significant
audit matters in their audit reports that were required to be projected. The essential matters
were not explained. These were just highlighted by the auditors in their reports which could
be confusing for the users in evaluating and arriving at their decisions (CAANZ, 2016).
Focusing on the positive side, it can be seen that the auditors have at least offered
explanations of the processes considering the significance of such audit matters which can be
of great help for the users in taking decisions (Elder et. al, 2010).
However, the auditors have failed to represent necessary issues in their audit reports which
required mandatory disclosure as a significant information. Labelling a significant issue as
material information defines the effectiveness of such issue which was completely ignored by
the auditors in their report thus, disallowing the users in taking effective decisions. But, the
positive side to the reports was the presence of notes and footnotes represented by the
auditors (Wesfarmer, 2017). This allows the users to make a quick review of certain
information. The effectiveness of the report prepared by the auditors was barely seen. This
makes it harder and complicated for the users to depend on such details and make effective
decisions.
Under-reporting/missing information
The crucial matters that required disclosures were not mentioned in the reports of
Wesfarmers. The absence of such material disclosures puts the company’s image into
question. Not just the goodwill of the company but the users are also affected as a result of
missing of such significant information. The users face dilemma in making decisions owing
to the mishaps in the audit reports. The credibility of the company is also doubted. Missing
notes and footnotes in the financial statements of the company are an example of such
failures (AUASB, 2015).
However, the presence of notes attached with the financial statements is appreciable. The
company not just missed to disclose required information but also under reported significant
information. Wesfarmers has failed to disclose information related to its consolidated
companies. Minimal information regarding its consolidating companies was presented that is
of hardly any use or rather inappropriate for the users in taking decisions. Full and sufficient
disclosures allow the users in making appropriate decisions. The details of the diversity of the
company, was also not mentioned in its audit report. Material information related to risk
factors, corporate governance, sustainability, etc are few to be named that were disclosed in
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the report of the company (Moroney & Trotman, 2016). This shall assist the users in their
decision making ability. Moreover, such information will aid the parties in taking useful
decision. Hence, the projection of such information gives clarity of the work undertaken.
The key audit matters were also not legitimately presented by the auditors in the company’s
audit reports. There were some areas that were not significantly projected. All such
discrepancies in the audit report on the part of auditors can severely affect intended users in
taking decisions of investing in the company along with hampering the goodwill of the
company (Wesfarmer, 2017). Presence of crucial matters and significant information in the
audit report could have justified the performance of the company and assisted the intended
users in taking effective decisions.
An auditor can be questioned that whether-
i. How the complicated matters of the company were addressed and the steps taken
by them in times of contingency.
ii. How the sensitive matters were answered that pose a threat to the smooth
functioning of the company?
iii. The strength and weakness of the management of the company are detailed?
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Conclusion
From the above report it can be commented that the audit procedure plays a dominant role in
shaping the destiny of the company. Further, in the light of Wesfarmer it can be seen that the
role of auditor is immense because of the company being huge. The overall report sheds light
on the fact that the audit was done in an effective manner. The crucial matters were dealt and
disclosed in an appropriate manner thereby providing the stakeholder relevant information.
Hence, from the discussion it is imperative that the auditors play an important part in shaping
the destiny of the organization. The auditors play an important role in providing a true and
fair view of the state of affairs of the company. The audit report is important as it leads to
projecting up of vital information.
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References
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Cooper , B. and Coram, P. (2015) Modern Auditing & Assurance Services. 6th ed. Australia:
Wiley.
Dauber, N. (2009) Wiley The Complete Guide to Auditing Standards, and Other Professional
Standards for Accountants. NY: John Wiley & Sons.
Elder, J. R., Beasley S. M., and Arens A. A. (2010) Auditing and Assurance Services. Person
Education, New Jersey: USA
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review [online]. 90(2), p. 495-527. Available from:
https://doi.org/10.2308/accr-50871 [Accessed 17 September 2018].
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific
Accounting Review [online]. 24(3), p. 1-34. Available from:
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Moroney, R., and Trotman, K.T. (2016) Differences in Auditors' Materiality Assessments
When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research. [online]. 33(2), p.551-575. Available from: https://doi.org/10.1111/1911-
3846.12162 [Accessed 17 September 2018]
Moroney, R., and Trotman, K.T. (2016) Differences in Auditors' Materiality Assessments
When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research. [online]. 33(2), p.551-575. Available from: https://doi.org/10.1111/1911-
3846.12162 [Accessed 17 September 2018]
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 17
September 2018]
Ruhnke, K., and Schmidt, M. (2014) Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of
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Practice & Theory. [online]. 33(4), p.247-269. Available from: https://doi.org/10.2308/ajpt-
50784 [Accessed 18 September 2018]
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 18 September 2018]
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