Auditing and Assurance in Australia

This article discusses the auditing and assurance practices in Australia, focusing on a case study of JB Hi-Fi Limited. It covers the nature of the entity, inherent risks, audit results, and potential for fraudulent financial reporting. The article concludes with an overall assessment of the inherent risk level for the company.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and assurance in Australia
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1AUDITING AND ASSURANCE IN AUSTRALIA
NAME of your
Entity >>>
JB Hi-Fi Limited
DISCUSSION
FACTOR According to ASA200.13(n)(i) inherent
risk (IR) is a measure of the
susceptibility of material misstatement
before considering any internal
controls.
LOW MODER
ATE HIGH
Nature of
client’s business
The entity is engaged in retailing of the
home consumer related products through
2 segments – Australia and New
Zealand. It sells consumer electronic
products and the services including
computers, cameras, software, games,
blu-ray discs and compact discs. While
considering the risks involved with the
entity in consideration to ASA 200 it can
be stated that the risks of the company
can be categorised under –
Economic sustainability risk – this
includes the risks associated with the
ability of the entity to continue its
operation at the current level with regard
to the economic production over the
long term period
(Investors.jbhifi.com.au 2019)
Social sustainability risk – it involves
the risk of the entity’s ability to continue
its operation in a way that will meet the
accepted social need and norms for long
term period.
Environmental sustainability risk – it
involves the ability of the entity to
continue its operation in a way that will
not compromised the ecosystem’s health
under which it will operate for long term
Other risks to which the entity is
exposed are risks of regulatory and
monetary policy, government’s fiscal
policy, competition, loss of reputation or
erosion and nature of consumer
spending (Investors.jbhifi.com.au 2019)
(Pg. 12 of annual report 2018)

Results of
previous audits
The audit of the company for both the
period ended on 30th June 2018 as well
as 30th June 2017 has been carried out by
Deloitte Touche Tohmatsu. As per the
auditor’s opinion financial statements
are prepared as per the requirement of
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2AUDITING AND ASSURANCE IN AUSTRALIA
Corporation Act 2001 and complied
with the Australian Standards and
Corporation Regulation 2001. For both
the years the auditors issued unmodified
opinion (Auasb.gov.au 2019).
However, some key audit matters were
mentioned in the audit report as follows
–
 Goodwill generated from acquisition
of The Good Guys has been
allocated to cash generating unit of
the entity
Accounting for the transaction of The Good
Guys acquisition was complex and required
management’s judgment regarding
determination of fair value for identifiable
liabilities and assets and allocation of the
purchase consideration to the intangible
assets separately identifiable
(Investors.jbhifi.com.au 2019) (Pg. 54 -
56 of annual report 2018)
Initial versus
repeat audits
It is found that since the year 2002 the
audit of the entity is carried on by
Deloitte. Only the audit engagement
partners are rotated in each 5 years.
Hence, JB Hi-Fi must follow the
continuance procedure as per ASQC1
s.26-28. However, continuance of same
audit firm for so long will lead to
creation of familiarity threat as per
APES 110 as the auditors will have idea
regarding which area of the financial
report may have been misstated. Hence,
inherent risk is moderate owing to long
term association with the entity
(Auasb.gov.au 2019). (Pg.10 – ‘integrity
of reporting’ of annual report 2018)

Quantity of
non-routine
transactions
Inherent risks with regard to non-routine
transactions are outlined under ASA 315
s.A140-A142 and s.A32. It is observed
from the income statement that the gross
profit of the company is $ 1470.2
million and the net profit attributable to
the shareholders after meeting all the
expenses amounted to $ 233.2 million.
Non-routine transactions like amount
received from changes in fair value of
the cash flow hedges amounted to $ 1.9
million that is not a big amount. Hence,
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3AUDITING AND ASSURANCE IN AUSTRALIA
the inherent risk from non-routine
transaction is low (Auasb.gov.au 2019).
(Pg. 60 & 61 of annual report 2018)
Quantity of
estimates and
judgement
required for
accounts
Inherent risk related to requirement of
judgments and estimates are mentioned
under ASA 540 s.A45-A51 and ASA
315 s.A140-A142 and s.A32. areas for
which the company required significant
estimates and judgments are –
Long service leave regarding future
increase in the salaries and wages, future
cost rates and employee’s experience on
departure and service period
(Investors.jbhifi.com.au 2019)
 Business combination
Impairment of the goodwill and the
other intangible assets (Pg. 66 of annual
report 2018)
Recording of the items those require
estimates and judgements require
knowledge and skill regarding substance
of item and related accounting standards
knowledge (Legislation.gov.au 2019).

Potential for
fraudulent
financial
reporting &
misappropriation
of assets (fraud
risk factors, see
ASA 240)
As per ASA 240, fraud risk intentional
error or misstatement and is mainly
driven by attitudes, pressure, incentives
and personal benefits
(Legislation.gov.au 2019). At the
industry level the retail industry is
highly competitive and volatile. Further,
it can be confirmed from the executive’s
remuneration as $ 12,146,800 has been
paid as remuneration to the key
managerial personnel. It is signifying
that incentive is a big factor that drives
to fraud or misstatement (Pg. 66 – ‘key
management personnel compensation’
of annual report 2018)
Further, some of the items in the
financial statements are always exposed
to alteration, manipulation or
falsification. These items include cash
and cash equivalents, revenues, accounts
receivable, provisions and inventories.
Inherent risks with regard to treatment
and recording of these items are high
(Auasb.gov.au 2019).

List any other Though most of the risk factors are 

4AUDITING AND ASSURANCE IN AUSTRALIA
factors (can you
see any
illustrations in
your client’s
annual report of
the examples in
ASA 315, Appendix
2 and ASA
570.A2?)
mentioned above under nature of
business some other risks to which the
company is exposed to are –
 Competition – Australian retail
industry is already competitive and
further entry of new competitor will
lead to deflation of price and
reduction is profitability and sales
 Ineffective management of inventory
– this may have adverse impact on
the financial and operating
performance of the entity.
Leasing arrangements – ability of
identifying suitable and negotiable leasing
terms for existing and new stores is key to
the ongoing growth as well as profitability
of the entity (Investors.jbhifi.com.au 2019)
(Pg. 27 & 28 of annual report 2018)
Conclusion:
Overall inherent
risk level
While providing conclusions all the
above mentioned inherent risks shall be
taken into consideration with regard to
the nature of business, auditor’s report,
past association of the auditors with the
company and fraud related signals. It is
found that the company is operating
under the industry which is highly
competitive. Further, the repeating audit
by Deloitte and long term association
with JB HI-Fi will create familiarity
threat. Further, it can be identified from
the executive’s remuneration that $
12,146,800 has been paid as
remuneration to the key managerial
personnel. It is signifying that incentive
is a big factor that drives to fraud or
misstatement. Taking all these factors
into consideration it can be concluded
that the overall level of inherent risk is
high for the entity.
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5AUDITING AND ASSURANCE IN AUSTRALIA
References
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_A
SA_315.pdf [Accessed 4 May 2019].
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2015.pdf
[Accessed 4 May 2019].
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
[Accessed 4 May 2019].
Auasb.gov.au., 2019. Auditor’s Responsibilities Statement [online] Available at:
https://www.auasb.gov.au/auditors_responsibilities/ar1.pdf [Accessed 4 May 2019].
Investors.jbhifi.com.au., 2019. [online] Available at: https://investors.jbhifi.com.au/wp-
content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf [Accessed
4 May 2019].
Legislation.gov.au., 2019. ASA 240 - The Auditor’s Responsibility to Consider Fraud in an
Audit of a Financial Report - April 2006 . [online] Available at:
https://www.legislation.gov.au/Details/F2006L01368 [Accessed 4 May 2019].