Audit of JBH-Hi Fi: Inherent Risk Factors, Key Matters and Significant Accounts

This assignment discusses the inherent risk factors that can affect the audit of JBH-Hi Fi, the key matters which they should take into consideration and methods by which they can provide a correct opinion. It also highlights the significant accounts that the auditor needs to check. The assignment provides details about the company, its policies, competitors, and the rules and regulations that affect its operations. It also discusses the importance of corporate governance in the functioning of any company.

AUDIT
2018

1
By student name
Professor
Date: 13th Sep, 2018.
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Executive Summary
In this assignment, the overall elements that can affect the audit of a public limited company has
been discussed. The company that has been taken in consideration is JBH-Hi Fi which is one of
the top consumer products company in Australia. The audit of the company must be conducted
and various elements that as members of the audit team one should take into consideration is
discussed and stated. The main items that are the details about the competitors, the details about
the key audit matters and key assertions that might affect the company and should be in
knowledge of the auditors.
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CONTENTS:
Introduction......................……………….....................................................................................3
Analysis…........................……………….....................................................................................3
Conclusion.........................………………..................................................................................12
References......................……………….......................................................................................17
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Introduction
JBH is one of the largest company in Australia that deals in consumer retail products and
specializes in video games, mobile phones, electronics etc. The company was formed in 1974
and the company has expanded to other parts of the world also. The main headquarter of the
company is in Melbourne. The company initially started with selling Hi-Fi equipment and thus
the name came from there and later the company expanded its operations to other products that
were mostly consumer electronics. The aim of the company in the long run is to expand its
operations and deal in more variety of products (Abdullah & Said, 2017). Audit is an
independent examination of the books and the financial statements of the company to comment
whether they are free from all kind of errors and misstatements. In this assignment we shall
discuss various inherent risk factors that might affect the audit of JBH, the key matters which
they should take into consideration and methods by which they can provide a correct opinion.
The stakeholders depends on the audit report to take important decision regarding the company
and its operation and thus it is important that it must be free from errors. Various details
regarding the company, its policies and its competitors is discussed hereunder.
Analysis
1. JBH conducts its operations in various sectors that are mostly related to electronics that
are consumer retail products like mobile phones, CDs, Blue-ray, software and hardware
products. They initially started with selling Hi-Fi products and then moved to products
like CDs and Blue rays (Boghossian, 2017). Their main point of selling lies in CDs and
then in computer games, televisions and car stereos. The company is having 184 stores
across Australia and has now also expanded their operations to New Zealand. It is the
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seventh largest electronics and home appliance consumer in the world, based on its
overall revenue.
2. The four primary competitors of JB Hi-Fi in Australia are –
 Best Buy
 Ceconomy
 Gome
 M video
All these companies operate in the same business line of retail distribution and consumer
supplies. Few of the companies are doing better than JBH and few are doing less.
3. JB Hi- Fi is operating in the Australian Region and there are various rules and regulations
that affects the operations of the company. Few of these rules apart from the standard
rules and regulations are stated below:
 Australian Securities Exchange Listing Rules – The company is listed on the stock
exchange of Australia and to issue any new shares or any kind of activities related to
the shares the company needs to follow the rules of the listing agreement that has
been issued by the Stock Exchange. In case the management fails, the shares can be
suspended and the company must bear heavy losses (Bouret, 2017).
 Fair Trading Act Australia – The aim of this is that the consumers are protected and
they have the correct information about the products and services that they are
availing from the retail market. The Fair-Trading Act Australia is related to the
Australian Federal and State laws and aims to provide the consumers protection from
unfair trade practices. And hence it affects the operations of JBH.
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 International Taxation laws – Given the fact that JBH has operations even in New
Zealand. The company must abide by the international taxation laws, to avoid double
taxation and maintaining the rules and regulations that are related to import and
export. The company needs to abide by the rules of the international tax laws and
regulations of New Zealand when they indulge in business in their area.
 Australian Banking Regulation Act – The rules of these laws also extend to Retail
companies in Australia as companies must deal with banks and most of the
transactions are initiated through that. Also, the company has raised loans from
financial institutions thus that is also applicable to the company on how they are
managing the terms and agreement of loans with other financial parties (Delone &
Mclean, 2004).
4. Four key inherent risk factors that can affect the operations of the company are stated
below. These risk factors are due to the operational strategies and other elements that
affects the growth of the company. To mitigate these risk factors, it is important that the
management of the company is having proper internal controls in place. Few of these
material inherent risk factors are stated below:
 Competition – The overall competition in the market in which the group operates is
huge. This increased competition often leads to decrease in the overall sales and
profitability for the company. There is also a chance that the auditors end up sharing the
confidential information of the company with the outsider and that might affect the
company badly. Thus the best away company can deal with this kind of risk by providing
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better competitive advantages that would help them in maintaining the position of a top
player in the market.
 Loss and erosion of reputation – The groups business have been affected by the
increased claims for price leadership and the services that are provided to the consumers.
This can be mitigated by making sure that the activities of the management is properly
monitored when it comes to price fixation and price claiming, also the steps that are taken
by the competitors of the company in this regards should be carefully studied (Durtschi,
2004). The company should see that proper controls are in place that would help in
analyzing those factors that are responsible for fixing of prices. The auditor also needs to
see that there is no loss of information of the company due to fault in the system and the
IT management. This can be very detrimental as competitors can undue advantage in case
they get any information. Thus having proper controls in place is important fro
safeguarding the reputation of the company and the auditor needs to check that.
 Key Supplier Relationship – Suppliers are the people who are one of the main asset of
the company and any failure to maintain cordial relations with them can affect the
performance of the company and can also be considered as an inherent risk to the audit
that is been conducted. Given the fact that there are many companies that are competing
in the market and each one wants to tap in the suppliers. Thus suppliers would deal with
only those companies that would give them best resources and best terms on which they
can sale off their goods (Iggers, 2018). Thus the auditor needs to see what is the overall
position of the suppliers in the company, what are the credit rates at which the products
are bought and what are the competitors take on this.
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 Leasing Arrangements – It is important for the growth of the company that they are able
to establish leasing negotiations and sutiable sites that can support their business
operations. It is important for the financial success of the company. It is the responsibility
of the senior management to look in that matter and see that proper terms are there. This
is an inherent risk in auditing and the auditors needs to understand that they are managing
that in a correct manner and are checking all the aspects beforehand. There are also
chances that management might fraud with this item and indulge in activities that can
affect their position for their own self interest (Shimamoto, 2018).
5. There are certain accounts in a financial statement that are of significant risk and it is the
responsibility of the auditor to check that and make proper opinion on that. The annual report of
JBH has been downloaded and key points have been discussed hereunder about five accounts
that are significant to the company.
• Acquisition of the Good Guys –
The company had acquired 100% of the Good Guys in November for cash consideration
of $860 million. The overall accounting related to this matter was complex and the company had
kept certain amount of assets and liabilities that was attributable to the company in provision.
The key assertion in this regard was the valuation of the overall assets and liabilities of the
company at their fair value. And the allocation of the purchase consideration to the key
identifiable intangible assets of the company. The size of the transaction was huge and the
overall judgement involved was also very complex (Wellmer, 2018). Thus, this was an
important account for the auditors and they can deal with it be checking whether the terms of the
sale agreement were proper or not. The overall steps taken by the management in the finalizing
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of the value of the assets and liabilities that was undertaken by them should be analyzed by the
auditor of the company.
• Carrying value of the Cash generating Units
During the year, the company had impaired goodwill of $14.7 million and PPE OF $1.1
million, that is attributable to the cash generating Units. The management has assessed the value
of the CGU and have incorporated the various judgements about the future growth rate. The
main aim of the auditor would be to check the financial performance of the company in New
Zealand CGU and making judgement regarding future cash flows and main assumptions of the
company. The main audit procedure would involve making and analyzing the key management
steps that they have taken, the overall carrying value of the assets of the company and accessing
the accuracy of the value-in use model. It is also important to verify the appropriateness of the
disclosures of the notes to the financial report (Webster, 2017).
•Remuneration Provided to the executive
This is an important account that the auditor needs to value because there are high
chances that the management of the company can falsify this account for their own self benefit.
There are various components in the remuneration structure that includes fixed remuneration and
variable remuneration. A snapshot of the remuneration structure of the company is given below –
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The main step should be to check whether the overall policies related to the remuneration
structure are correct or not. The terms and conditions of the variable pay should also be checked
and in case there are any loopholes then that should also be stated by the auditor. The main step
should be to check that whether the company has defaulted in that and the management has not
misappropriated the accounts for their own benefit (Wang, et al., 2018). There are two types of
bonus that the company is giving qualitative and quantitative bonus and that should also be
checked. Different remuneration is given to different executives and also auditors are given
different remuneration so all that components should be checked by the auditor. They should see
what is the standard payment as per the market and whether the management of the company is
doing the same and in case there is any discripancies than that should also be checked.
 Carrying value of the inventories and PPE – Valuation of the property plant and
equipment is the chife account that the auditor should check. They form an important part
of the financial statements of the company and the aim should be to check that the fair
market value and the carrying value of these assets are properly calculated. Also they
should see what are the overall accounting policies that have been applied by the
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company in calculation of the depreciation and other expenses that are affecting the
assets. The total amount of PPE as per the financial statements are $208.2 million
In case of inventory they are valued at cost or market price which ever is lower. Thus it
should be checked that proper valuation is done and there should not be any discripancies on
part of the management in their valuation. The key audit assertion would be to check that all
the assets are properly valued and there is no over or under valuation as that would affect the
financial position of the company largely. Experts opinion should be taken and valuation
specialists can be considered when it is required. All the policies of the management should
be double checked and in case there is any issue then they should be informed. The total
amount of inventories as per the balance sheet is $859.9million (Cayon, et al., 2017).
 Recognition of Dividends – This is also an important account that the auditors needs to
check. Dividends are the returns that the shareholders of the company gets from the
company and it is important that the overall terms of payment of dividend should be
properly checked. There are high chances that the dividend payment may not be on
correct grounds and the company is falsification of the same. All the legislative rules and
regulations for measurement of dividend and their reporting should be followed by the
company. The key audit assertion in this regard would be to check whether the dividend
payment is as per the decided terms and the company is not defaulting in the same. There
are two types of dividend reporting done in this company- recognized and unrecognized
dividend.
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
6.Corporate Governance is an important aspect for the functioning of any company. It is
important that management of the company should adopt such policies and programs that would
help in the corporate governance (Chron, 2017). They should see that they are managing the
affairs of the business ethically and there is no mismanagement in that. As per the corporate
Governance Statement of JBH, following assurance has been provided :
 The policies and programs of the board in all material aspect should comply with the
ASX Corporate Governance Principles and in 2017 they have embodied the spirit of
corporate governance in their overall policies and programs that has been stated by the
ASX board.
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The corporate governance statement has been approved by the board and was effective from
14th August 2017.
There should be effective realiance on the control environment because the company is in an
expanding state and there are increasing their operations to other areas, and thus it becomes
important that they are abiding by the rules and regulations that have been framed by the
audthorities. In 2017 the company has acquired Good Guys and that accqusition was very
crucial for the success of the company as a whole and thus they need to see that there is no
mismanagement in that. It is also one of the key audit matters that has been stated by the
auditors of the company (Durtschi, 2004). Moreover secondly, corporate governance helps in
ensuring that the business of the company is moving on ethical terms and there are no
misstatements in that. JBH is a consumer based company and the aim of the company should
be to see that the cosumer is getting their dues and there is no falsification for them.
Independence is also an important factor that the company and its auditor needs to be aware
of for good corporate governance (Lane & Ferretti, 2017). There should be no self interest
involved in any steps that is taken by the management of the company and they should make
sure that there are should not be no biasness (Ghofiqi, 2018). Control environment are
important as they help in reducing the chances of risk and any kind of inherent risk that
might be there in case of audit of the company. They help in keeping the information of the
company safe and also helps in keeping the management of the company functional as per
the legal and ethical terms and conditions. Thus it is important that proper resliance must be
given on control environment and companies should follow the same in all cases. Corporate
Governance should be incorporated from the various basic start of the company and then
should be moved to higher level (Gullet, et al., 2018).
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Conclusion
Based on the overall analysis it can be said that JBH has been doing very well in terms of their
overall market position and has been able to establish a firm ground for themselves. In case there
are need for some changes with repsect to more focus on certain areas of control and
management and that the company can easily do. Overall it is the duty of the auditor to make
sure that the financial statements are free from any kind of misconduct and there are no
falsification and they should give an unbiased audit opinion that is useful for the stakeholders of
the company.
References
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Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), pp. 244-253.
Bouret, I., 2017. Benefits of higher education in mid-life: A life course agency perspective. Journal of
Adult and Continuing Education, 23(1), pp. 15-31.
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Cayon, E., Thorp, S. & Wu, E., 2017. Immunity and infection: Emerging and developed market sovereign
spreads over the Global Financial Crisis. Emerging Markets Review.
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[Accessed 07 december 2017].
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Lane, P. & Ferretti, G., 2017. International Financial Integration in the Aftermath of the Global Financial
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Shimamoto, D., 2018. Why Accountants Must Embrace Machine Learning. [Online]
Available at: https://www.ifac.org/global-knowledge-gateway/technology/discussion/why-accountants-
must-embrace-machine-learning
Wang, Z., Chiu, Y., li, Y. & Hsiao, L., 2018. Performance appraisal for the operation and management of
listed and OTC Taiwanese companies with DEA benchmarking models.
Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants'
Perspective. ProQuest Dissertations Publishing.
Wellmer, A., 2018. The Persistence of Modernity: Aesthetics, Ethics and Postmodernism. fourth ed. UK:
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