Auditing: Analysis of Woolworths Ltd Financial Statements

This assessment analyzes the business of Woolworths Ltd, its risks, financial statements, and estimation of planning materiality. It also discusses audit assertions and planning.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Background and Industry Analysis..............................................................................................2
Analysis of Financial Statement of the Business.........................................................................3
Analytical Review of the Business..............................................................................................5
Estimation of Planning Materiality..............................................................................................8
Audit Assertions and Planning........................................................................................................9
Reference.......................................................................................................................................17

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Introduction
The main purpose of the assessment is to analyse the business of Woolworths Ltd which
is engaged in the business of providing different varieties of products in Australia. Woolworths
ltd operates supermarket business in Australia. The assessment would be analysing different
risks which is faced by the business from the perspective of audit. The assessment would be
computing appropriate financial ratios which can show the performance of the business over the
past three years. The assessment would be discussing the materiality of different items which are
presented in the financial statements of the business (Woolworthsgroup.com.au. 2019). In
addition to this, the report would be identifying ten accounts which can be affected by material
misstatement and also provide necessary assertion regarding the same. The assessment would
also be covering a sampling plan for testing each of the accounts which are identified from the
financial statements.
Discussion
Background and Industry Analysis
The company which is selected for this assessment is Woolworths ltd which operates in
chain of supermarket and the same is considered to be the leading supermarket of Australia. As
per the recent market conditions, the supermarket industry is at its growth phase which is evident
from the number of customers which Woolworths is serving on a r weekly basis. The annual
report of the company shows that the business is serving around 29 million customers on a
weekly basis on an average. This shows that the industry is growing one and it is anticipated to
grow even more in future years. The annual report further shows that the earnings of the business

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has grown by 9.5% in 2018 in comparison to previous year. The management of the company
anticipates that the business would be achieving sales at a higher rate in future.
The different types of risks which are faced by the business are listed below:
 Competitive Pressure: The industry of supermarket is competitive in nature as
Woolworth ltd has a close competitor Coles Group which is also performing
appropriately which makes the market divided. This affect the revenue which is
generated by the company and also has an affect on the profitability of the business.
 Liquidity Conditions: This is another major risk which is faced by the business which
relates to the inability of the business to collect necessary funds from the market so as
finance different projects. The nature of the business demands that an appropriate portion
of liquid cash needs to maintained at all times so that any current obligations of the
business can be met effectively.
 Regulation and Government Regulations: The business also faces risks which is
associated with change in regulations of the business. In many cases, the business enters
into tie up agreements with other organization. A change in regulations of the business
would affect such tie up agreement with the business.
Analysis of Financial Statement of the Business
The financial reports of the business for the period 2018 is considered for the purpose of
analysis whether the estimates which are presented in the financial statement are showing true
and fair view or not. The profit and loss statement show that the profits of the business have
slightly increased in comparison to previous year which may be due to increase in the sales
revenue of the business or reduction in costs. However, the financial statement of the business
shows an increase in the both the sales figure and costs of sales. In such a case, the auditor of the

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business needs to be careful as there is a high chance that either or both sales and costs of sales
might be misstated. This would create a risk of material misstatement which would affect the
accuracy of the financial statements. In the balance sheet of the company, there has been
significant decrease in the borrowings of the business which indicates that the management of
the company has repaid a part of the loan of the business (Kumar and Sharma 2015). However,
the auditor needs to check in order to confirm there are no discrepancies in the situation. In
addition to this, the figure of inventory shows significant rise in comparison to previous year
estimate which needs to be assessed by the auditor as there might be a material misstatement in
the financial records of the business.
The risks which are faced by the business are classified as inherent risks and control risks
of a business. The inherent risks of the business are those risks which takes place due to a
material misstatement or omission which is not caused due to the fault of the internal control
system. On the other hand, control risks occur when the internal control which is established has
some weakness. In the case of Woolworths company, there might be inherent risks as well as
control risks which the auditor needs to considering while undertaking the audit process
(Wow2017ar.qreports.com.au 2019). In order to assess the control risks, detection risks and
inherent risks, audit risk model can be applied by the management of the company. The audit
risk model which is followed by the business applies the following formula which explains the
relationship between audit risks of a business and inherent risks, control risks and detection risks
of the business (Toy and Hay 2014). The audit risk model uses the following formula which
establishes the relationship between control risks, detection risks and inherent risks of a business.
AR=DR × CR× IR
AR – Audit Risks

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DR – Detection Risks
CR – Control Risks
IR- Inherent Risks
The above equation shows the components which forms the Audit risks which the auditor
faces while conducting the audit of the business. In the case of Woolworths ltd, there are certain
accounts which are susceptible to risks which needs to be considered by the auditor in the audit
program which is carried out by the business (Corporate Finance Institute. 2019). The analysis of
different accounts which are susceptible for risks are explained below in table format:
Account
Name
Audit Risks
(AR)
Inherent
Risk (IR)
Control Risk
(CR)
Detection
Risk (DR)
Requirement
of Evidences
Sales
Revenue
High High (90%) High (95%) Low High
Costs of
Sales
High High (85%) High (80%) Low High
Inventory High Low (40%) Moderate Moderate Moderate
Borrowings High Low (30%) Moderate Moderate Moderate
Figure 1: Audit Risk Model
Source: (Created by Author)
Analytical Review of the Business
The process of analytical review involves computation of key financial ratios of the
business in order to estimate whether the financial statements are showing accurate presentation
or not. The key financial ratios are analyzed for ascertaining the accuracy of the financial
information of the business.

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Figure 2: Key Financial Ratios of the Business
Source: (Created by Author)
The above figure effectively shows that the key financial ratios of the business which
reflect key financial ratios of the business (Omar et al. 2014). The profitability of the business
effectively shows that the business has improved significantly in terms of generation of profits in
comparison to previous year estimate. The return on assets and return on equity of the business is
also shown to be appropriate for the business which shows that the business is at it growing

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phase. The auditor needs to assess the net profit figure in order to ensure that the sane are
accurate. The auditor needs to apply substantive procedure for assessing the income and
expenses of the business.
The efficiency ratio of the business also shows total asset turnover ratio, inventory
turnover ratio and debtors turnover ratio. The estimates which are shown for 2018 shows an
overall decline in the estimates which means that the efficiency of the business has declined. The
inventory turnover ratio has improved slightly but the management of the company needs to take
steps to make more improvements to the same (Delen, Kuzey and Uyar 2013). The debtor policy
of the business also shows changes as the estimate which is computed above has declined in
comparison to previous year estimate. The auditor of the business needs to review the debtors
and inventory of the business appropriately so that the same are representing true and fair view
of the financial statements of the business. The auditor would be applying verification
procedures for ascertaining whether the financial statement is showing appropriate view of the
financial position of the business (Sin, Moroney and Strydom 2015).
The liquidity ratio of the business is represented by current ratio, quick ratio and gearing
ratio. The current ratio and quick ratio of the business shows significant decline and the same is
shown to be below 1 which means that the current liabilities of the business are much more than
the current assets of the business (Babalola and Abiola 2013). The auditor of the business needs
to take appropriate steps for the purpose assessing the financial activities of the business so that
an opinion can be formed on the same. The gearing ratio of the business shows a decline which
indicates that the management of the company is trying to reduce the overall debts of the
business and ensure that a proper capital structure is maintained by the business. The auditor

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needs to check whether the business actually pays of the loan or not and also ascertain the
amount for the same.
Estimation of Planning Materiality
The process of auditing involves estimation of materiality which is an integral part of the
audit process of the business (William Jr, Glover and Prawitt 2016). The materiality of an item is
the basis on which the auditor decides whether the item is misstated or not. The materiality of an
item represented in the financial statement is estimated on the basis of nature of the item,
recurrence of the item, complexity of the item. In other words, an item which is represented in
the financial statement would be considered to be material if misstatement of the same can affect
the financial position of the business (Eilifsen and Messier Jr 2014). As per the analysis of the
annual report of Woolworths ltd, the material items which are presented in the financial
statements are sales, cost of sales, net profit, total assets and several other items as well
depending on the nature of the business.
The auditor prior to commencing audit of a business needs to formulate an audit program
which requires computation of planning materiality on the basis of which performance
materiality is to be computed. The planning materiality computation requires the auditor to
consider a base which can be the largest figures in terms of numeric presented in the financial
statements of the business (Christensen, Glover and Wood 2013). The estimate is then multiplied
with a fixed rate of percent for computing the planning materiality of the business (Vîlsănoiu and
Buzenche 2014). In the case of Woolworths ltd, percentage which is used for computing
planning materiality is considered to be 5% while the item which is considered for the base
would be total asset figure. The computation of planning materiality is shown below:
Planning Materiality=Total Asset∗5 %

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¿ $ 23,558∗5 %
¿ $ 1,177.9 million
The above equation shows computation of planning materiality of the business and the
same is shown to be $ 1,179.9 million which is computed considering the total assets as the base.
The materiality estimate would help the auditor to compute performance materiality of different
items which can then be used for identifying the material misstatement in the annual report of the
business.
Audit Assertions and Planning
Account
Balances
Assertions Audit Work Steps Audit Sampling
Cash and
Cash
Equivalents
The auditor of the business
needs to assess primarily
whether the cash balance
actually exists in the financial
statements. In addition to this,
the auditor also needs to
confirm whether the business
has a right over the asset or
not. The auditor of the
business also needs to check
whether the cash balances are
appropriately presented in the
The auditor needs to
check all the inflows
and outflows of cash
and assess the cash
register of the
business. In addition
to this, the auditor of
the company would
be applying vouching
practices to the cash
balances for detail
scrutiny of the
The auditor of the
business needs to
apply variable
sampling test on the
balances of cash as
the same is
considered to be
appropriate from the
perspective of audit
of a business.

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financial statements of the
business.
transaction and
ensuring the same are
not misstated in any
manner.
Inventories The auditor of the business
needs assesses whether the
balances of inventory are
showing complete view and
whether the same are
showing accurate valuation or
not. In addition to this, the
auditor of the business would
also be checking if the
inventory actually exists or
not. The main assertion in
this respect is whether the
valuation of inventory is
appropriately done by the
management of the company
or not.
The auditor would be
applying verification
of the inventory so as
to ascertain correct
value for the
inventory. The
auditor would be
reviewing the records
of inventory of the
business and ensure
that the records
confirm regarding the
figures which is
presented in the
financial statements
of the business
(Knechel and Salterio
2016). If the situation
requires, the auditor
The auditor of the
business would be
applying attribute
sampling tests for
assessing the internal
control as
management of
inventory is the
responsibility of the
management and any
weaknesses in the
internal control
system can cause
material misstatement
in the financial
accounts. The auditor
would further test the
error prone items as
well as high value

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can also engage in
physical stock count
so that appropriate
valuation can be done
for the asset.
items of inventory
which contains
maximum
misstatements. The
auditor would also
assess inventory
which are in transit
Other
Financial
Assets
The auditor of the business
would also be checking the
other financial assets of the
business for which the auditor
needs to assess whether the
same are appropriately
represented in the financial
statements. In addition to this,
the auditor needs to assess
whether the same exists
during the period which is
being considered for the
analysis.
The auditor would be
applying verification
of the assets so that
the auditor is able to
confirm that the value
which is shown is
appropriate (Titera
2013). The auditor
would also engage in
management
representation and
ask for clarification
for any wrong
treatment which is
done by the business
The auditor must
apply attribute
sampling test as the
valuation of such
assets are on the
management and
therefore the auditor
would apply
appropriately on the
business.
Property, The auditor needs to assess The auditor needs to The auditor needs to

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Plant and
Equipment
primarily whether the assets
exists at the balance sheet
date and whether the same is
under the ownership of the
business (Johnstone,
Gramling and Rittenberg
2013). In addition to this, the
auditor must also check if the
asset is appropriately valued
in the financial statements.
The auditor also need to
check if proper accounting
policies are applied and the
same are properly represented
or not.
apply first
verification of the
assets so that it can
be ascertained that
the assets are
appropriately valued
by the business. The
auditor also need to
confirm with external
parties if the asset is
really under the
ownership of the
business at the
balance sheet date
(Bumgarner and
Vasarhelyi 2018).
The auditor can also
appoint an external
valuer as per ASA
620 Using the work
of an Expert. This
would provide the
auditor with an
apply variable
sampling technique
so that appropriate
value of the asset can
be recognized.

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appropriate opinion
regarding the
valuation of the
assets of the business.
Intangible
Assets
The auditor of the business
needs to check the existence
of the asset and also ensure
that the same are
appropriately valued as per
accounting standards. The
auditor needs to also assess if
the asset is under the
licensing of the business or
not.
The auditor would be
applying verification
practices in the
business so that
appropriate valuation
can be done. In
addition to this, the
auditor would also be
assessing if the
impairment charges
made on the asset are
appropriately done.
The auditor of the
business would be
applying attribute
sampling as the same
would help the
auditor identify any
flaws in internal
control system (Elder
et al. 2013).
Trade and
Other
Payables
The auditor of the company
needs to carefully assess the
trade payables and inspect the
balances which is shown in
the financial statements. The
auditor would assess whether
the same are accurate in
The auditor would
apply verification of
the trade payables
and also engage in
external confirmation
under ASA 505
External
The auditor of the
company would be
applying variable
sampling so that
appropriately all the
expenses incurred by
the business can be

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valuation and whether the
same exist in the business or
not. The auditor needs to
assess whether the transaction
is recorded in the correct
accounting period or not.
Confirmation so as
to ensure that the
values which are
presented are
appropriate. The
auditor would review
all credit sales
transactions in order
to assess any
omission
assessed (Jones
2017).
Provisions The auditor of the company
needs to assess the provisions
value should in the balance
sheet and ensure that the
same are showing true and
fair view. The auditor needs
to check whether the same is
for the current period and
whether the same has
changed any or not.
The auditor would
apply verification of
the liability and ask
for management
representation so that
the purpose of
provision can be
established. The
auditor would review
all entries and ensure
that the management
of the company has
followed appropriate
The auditor would be
applying attribute
sampling technique
so that internal
policies of creating a
provision can be
recognized and the
same can be assessed
(Appelbaum, Kogan
and Vasarhelyi
2017).

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standards.
Current Tax
payable
The auditor would be
assessing whether the tax
which is paid is related to
current year or not. In
addition to this, the auditor
would also assess if the
amount is accurate or not.
The auditor would be
applying verification
and would also
review relevant ATO
legislations and tax
rate applicable so that
it can be assured that
there is no material
misstatement in the
financial reports.
The auditor would
apply variable
sampling technique
which would
appropriately reveal
if the same is
appropriate or not.
Borrowings The auditor needs to assess
the value of the loan which is
represented in the financial
statement of the business and
ensure that the same are
showing appropriate
valuation. The auditor would
ensure that the records
maintained are complete or
not. The auditor would also
check the accuracy of the
reporting of the business
The auditor needs to
apply verification
practices in the
business and also
engage in external
confirmation under
ASA 505 External
Confirmation so as
to ensure that the
values are accurate as
misstatement in the
same can affect the
The auditor would be
apply variable
sampling test for
assessing the value of
the loans and would
also test the interest
expenses which is
shown in the annual
report of the business.

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financial position of
the business.
Retained
Earnings
The auditor would firstly
ensure that the figure is
appropriate and the same is
existing in the business. The
auditor would check if the
same is not over stated.
The auditor would be
applying verification
practices in the
business so that it can
be confirmed that
appropriate value is
presented for the
assets. The auditor
would check prior
period payments, net
income or loss and
dividend so that
appropriate
ascertainment can be
obtained regarding
the figure
The auditor needs to
apply attribute
sampling as the same
is internal policy of
the business and is
heavily dependent on
the internal control of
the business.

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