Auditing and Assurance

The report evaluates the financial statements of Harvey Norman Holdings Limited from the perspective of the auditor. It identifies audit risks and suggests appropriate audit procedures. It also discusses the corporate governance process and audit committee of the organization.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
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Executive Summary:
The report has been prepared with the intent for evaluating the financial statements of Harvey
Normal Holdings Limited from the perspective of the auditor. It has been found that Harvey
Norman is subject to a number of audit risks, which could result in significant material
misstatements. Therefore, appropriate audit procedures have been suggested for dealing with
them. Finally, it has been evaluated that the organisation has sound corporate governance process
and audit committee for meeting the information needs of the stakeholders.

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Table of Contents
Introduction:....................................................................................................................................3
Part A:..............................................................................................................................................3
1. Analytical review of the financial statements of Harvey Norman Holdings Limited:............3
2. Relevant audit procedures:......................................................................................................6
Part B:..............................................................................................................................................8
1. Process relating to corporate governance:...............................................................................8
2. Audit committee:.....................................................................................................................9
3. Benefits of audit committees:..................................................................................................9
Conclusion:......................................................................................................................................9
References:....................................................................................................................................10
Appendix:......................................................................................................................................12

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Introduction:
The current report would focus on evaluating the financial statements of Harvey Normal
Holdings Limited from the perspective of the auditor. Initially, the analytical review of the
financial statements of the organisation would be made by calculating a number of ratios that are
subject to material misstatements. In other words, this review would help in finding out the areas
of concern and accordingly, relevant audit procedures would be devised for offsetting the same.
The second section would evaluate the corporate governance process of Harvey Normal
Holdings Limited and composition of its audit committee. Finally, the report would shed light on
identifying whether the audit commitments are beneficial in the current era or not supported by
adequate justifications.
Part A:
1. Analytical review of the financial statements of Harvey Norman Holdings Limited:
In order to conduct the analytical review of the financial statements of the concerned
organisation, certain financial ratios are taken into consideration prone to audit risk (Refer to
Appendix for detailed calculations) and they are evaluated briefly as follows:
Current ratio:
This ratio is observed to increase in 2018 compared to 2017 that denotes rise in current
assets compared to current liabilities. It implies favourable working capital position for the
organisation (Byrnes et al. 2018). The increase in this ratio is prone to audit risk, since it might
have overstated its balance of current assets for representing better working capital management

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position. Another objective might be to show lower short-term debt position to the users of the
financial statements (Farooq and De Villiers 2017).
Quick ratio:
The increase in this ratio implies faster transformation of the liquid assets into cash for
managing short-term obligations and the situation is similar in case of Harvey Norman as well.
This implies enhancement in the liquidity position of the business, as it has adequate cash base
for covering short-term obligations (Static1.squarespace.com 2019). This aspect is subject to
audit risk, as there might be misstatement in the existing status of the organisation by converting
quick assets resulting in increase in the ratio.
Return on equity:
This ratio for Harvey Norman is observed to decline in 2018, which denotes fall in
shareholders’ wealth and increase in debt. This is prone to audit risk, as profit might be
understated to minimise current tax liability and raise debt margin for lowering its cost of capital.
Return on assets:
The trend of this ratio is declining as well for Harvey Norman in 2018, which is subject
to audit risk. This is because the organisation might have disclosed overstated gross profit
resulting in increased net income. On the contrary, there might be understatement in profit, since
this strategy might have been adopted for maintaining its competitiveness in the market (Hay,
Knechel and Willekens 2014).
Gross margin:

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This ratio is observed to increase for Harvey Norman mainly due to significant increase
in sales revenue owing to the changes in the attitudes and preferences of the customers (Harvey
Norman Holdings 2019). The ratio is related to audit risk where the sales misstatements might be
found coupled with the gross profit of the organisation in the current period. For maintaining its
competitive edge, the management of the organisation might reveal increased gross profit for
gaining the trust of the suppliers and the shareholders.
Sales to administrative expenses ratio:
Harvey Norman has experienced an increase in this ratio in 2018, which is not a
favourable indication from the business perspective. This is prone to audit risk, as the
management of the organisation might deliberately overstate this expense in order to disclose
lower net income so that it could pay lower amount of tax (Knechel and Salterio 2016).
Days in inventory:
This ratio is identified to fall in 2018, which denotes lower time taken by Harvey Norman
in releasing its inventory for meeting sales demand. The fall in this ratio would lead to increase
in inventory turnover for the organisation (Messier Jr 2016). However, it is subject to audit risk,
as there could be misstatement in the closing stock balance in 2018 that has lead to increased
inventory turnover.
Interest cover ratio:
The ratio for Harvey Norman has fallen in 2018, which is mainly due to the decline in
operating income and increase in long-term debt. This ratio is prone to audit risk of earnings
manipulation by the management, which has lowered the ability of the management in settling its

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finance costs with more ease (Lombardi, Bloch and Vasarhelyi 2014). Moreover, understatement
risk persists in the debt position of Harvey Norman, as an element of its existing strategy.
Debt-to-equity ratio:
Increase in this ratio is found in 2018 signifying rise in its leverage position and it is an
indicator of stable cash flow. Harvey Norman might deliberately show overstated debt for
showing better cash flow position and as a result, the value of equity would be understated.
2. Relevant audit procedures:
For dealing with the above-identified risks, the following audit procedures could be
formulated:
Key areas of concern Audit procedure
Current ratio The liquidity position needs to be investigated through
invigilation of the balances of current assets and current
liabilities.
Quick ratio In this case, the auditor needs to evaluate as well as
current assets, which are quickly converted into liquid
assets. Moreover, the balances of quick assets need to be
verified coupled with the necessary documents in order
to identify any kind of misstatements (William Jr,
Glover and Prawitt 2016).
Return on equity For this risk, the audit procedure includes thorough
observation of different line items in the profit and loss

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statement along with debt obligations that would detect
any misstatement in net profit.
Return on assets Each critical document requires checking that include
the balances of line items and assets based on their
annual trends. In addition to this, the profit generated by
Harvey Norman in 2018 needs to be assessed to find out
the presence of misstatement, if any.
Gross margin The sales of the firm as well as the trend of gross margin
in the previous margin have to be analysed thoroughly.
In addition, the audit procedure requires investigation
and matching of invoices, sales receipts and other
documents in order to detect material misstatements in
the sales amount of the firm.
Sales to administrative expenses Various documents such as vouchers, bills and receipts
need to be scrutinised having relationship with sales and
administrative expenses in order to find out any kind of
misstatement in the same.
Days in inventory The internal inventory control system of Harey Norman
needs to be examined in the form of inspection of the
physical inventory count process that would aid in
finding any material misstatements in the closing

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inventory balances of the firm (
Interest cover ratio The earnings of Harvey Norman should be investigated
in order to determine whether there is any manipulation
made in earnings. Moreover, the debt position requires
review as well so that material misstatements, if any,
could be identified appropriately (Simnett, Carson and
Vanstraelen 2016).
Debt-to-equity ratio The documents and agreement papers of long-term loans
need to be checked in order to ascertain the
misstatement in loan amount along with checking equity
balances regarding share issue.
Part B:
1. Process relating to corporate governance:
According to the corporate governance principles of Harvey Norman, the organisation
emphasises on analysing strategic information, monitoring ongoing planning along with gauging,
preparing and enforcing budgeting for assessing financial resource needs as well as future
business performance (Harvey Norman Holdings 2019). The framework assesses the
implications of various committees in the organisation like auditing financials, nominating
employees and auditing analysis. The corporate governance committee of Harvey Norman is
formed with relation to involve particular risk management that the Board of Directors
elaborates, analyses and gauges for enhancing the firm performance in the market. From the

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2018 annual report of Harvey Norman, information about corporate governance could be found
in the Corporate Governance Statement section (Page 67 of the Annual Report).
2. Audit committee:
The audit committee of Harvey Norman has three members and they include Graham
Charles Paton (Chairman), Christopher Herbert Brown and Kenneth William Gunderson-Briggs.
All the members are non-executive directors and the Chairman is independent of the Board of
Directors. According to “Principle 4 of ASX Corporate Governance Principles and
Recommendations”, an audit committee needs to have at least non-executive directors and the
Chairman should be independent of the Board of Directors of the organisation (Asx.com.au
2019). Thus, the audit committee of Harvey Norman has the accurate composition.
3. Benefits of audit committees:
An audit committee is deemed to be beneficial to auditors, organisations, audit profession
and society for the following reasons:
 Creation and maintenance of effective anti-fraud programs
 Enhancement in the function of internal audit (Junior, Best and Cotter 2014)
 Strengthening credibility with the stakeholders by disclosing the role and functions of the
audit committee
 Monitoring the external auditors for ensuring their independence
Conclusion:
From the above discussion, it could be stated that Harvey Norman is subject to a number
of audit risks, which could result in significant material misstatements. Therefore, appropriate
audit procedures have been suggested for dealing with them. Finally, it has been evaluated that

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the organisation has sound corporate governance process and audit committee for meeting the
information needs of the stakeholders.
References:
Asx.com.au., 2019. [online] Available at:
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-
edn.pdf [Accessed 17 May 2019].
Byrnes, P.E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J.D. and
Vasarhelyi, M., 2018. Evolution of Auditing: From the Traditional Approach to the Future Audit
1. In Continuous Auditing: Theory and Application (pp. 285-297). Emerald Publishing Limited.
Farooq, M.B. and De Villiers, C., 2017. The market for sustainability assurance services: A
comprehensive literature review and future avenues for research. Pacific Accounting
Review, 29(1), pp.79-106.
Harvey Norman Holdings., 2019. [online] Available at:
http://www.harveynormanholdings.com.au/ [Accessed 17 May 2019].
Hay, D., Knechel, W.R. and Willekens, M. eds., 2014. The Routledge companion to auditing.
Routledge.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: a historical
analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Lombardi, D., Bloch, R. and Vasarhelyi, M., 2014. The future of audit. JISTEM-Journal of
Information Systems and Technology Management, 11(1), pp.21-32.

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Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill
Higher Education.
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance
research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice &
Theory, 35(3), pp.1-32.
Static1.squarespace.com., 2019. [online] Available at:
https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/
5bad8412f4e1fcd2edb86026/1538098250289/2018-Annual-Report.pdf [Accessed 17 May 2019].
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.

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Appendix:
Financial data of Harvey Norman Holdings Limited for the years 2017 and 2018:
Financial ratios of Harvey Norman Holdings Limited for the years 2017 and 2018:

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