Auditing Procedure Of Dick Smith Electronics

The report aims to interpret the reasons for the corporate collapse of Dick Smith Electronics and the lessons that can be learned from the failure of the company. It discusses the strategic errors, accounting policies, and governance issues that led to the fall of the company.

Running head: AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
Auditing Procedure Of Dick Smith Electronics
Name of the Student
Name of the University
Author note

1AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
Executive Summary
The aim of the report is to interpret the reasons of the corporate collapse of dick smith
and the lessons that can be learned from the failure of the company. The report gives brief
details of the company and the type of business that the company in which the company is
engaged. The strategic errors of dick smith that become the reason of the failure of the
company has been explained. The accounting policies that has been adopted by the company
to manipulate the financial records of the company are analysed. The report also find out the
governance issues that led to the fall of dick smith. The last part of the report contains the
lessons that other companies can learn from the case dick smith so that these events of
corporate failure does not happened again.

2AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Question 1..................................................................................................................................3
Overview of dick smith electronics ltd......................................................................................3
Question 2..................................................................................................................................3
Question 3..................................................................................................................................9
Question 4................................................................................................................................11
Question 5................................................................................................................................11
Question 6................................................................................................................................11
Conclusion................................................................................................................................12
Reference..................................................................................................................................13

3AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
Introduction
The reason behind the failure of any organisation is due to the absence of a strong
corporate governance policy and the inability of the company to form a transparent
accounting system. Every failed companies has specific reason of failure but the main reason
that is associated with all the companies is their negligence in maintaining a good governance
policy. Dick smith, which is known as one of the largest retail chain in Australia, has
collapsed due to their strategic mistakes and the poor execution of the governance policies.
There are several reasons for the failure of the company among which some major points are
the absence of the accounting policies framed by the AASB code of conduct and the APES
110. The company’s board and management makes several mistakes that lead to the sudden
fall of business. In addition to the non compliance of the accounting standards the company
also failed to sustain as a going concern. The auditors give an unmodified report against the
company which indicates that the company is adopting unfair practices and that lead to the
collapse of the company.
Discussion
Question 1
Overview of dick smith electronics ltd
Dick smith holdings was an Australian retail store that deals in the business of selling
consumer electronic components and electronic project kits. The company was formed in
Sydney in the year 1968 by Dick smith who later sold 60% of the shares to Woolworths in
1980 and hold 40% of the shares and later on 2016 they ceased the operation of the business.
The company was suspended for trading in the Australian stock market by the Australian
securities exchange on sixth of January 2016.

4AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
Question 2
What was allegedly done by the directors of dick smith
In spite of realising the high competition in the consumer electronics market, Dick
smith never tried to understand the change of demand of the consumers and neglected the
requirement of analysing the demand of the market (Bhasin 2016).
The management of the company give more focus to earn more profit by adopting
unfair means. The management fails to maintain all the compliances that are required to list
the company in the securities market. The decision of the management to list the shares in the
market is to raise fund from the market and invest in the business. The company started to
buy more inventory without making proper research of the market demand. This leads to the
situation that most of the inventories of the company become obsolete and the organisation
fails to realise the minimum amount to cover the loss that they have incur due to over buying
of inferior products.
Due to the mismanagement of the inventory, the company have to face the problems
like high debt, high volume of inventory, failure to utilise the surplus earnings and unable to
generate sufficient sales margin to sustain in the competitive market of electronic sector.
It has been observed that the expansion plan of dick smith has become a major
strategic failure of the company. The decisions of the inventory purchasing in the yearly 2015
was carrying too many obsolete stocks that were not marketable and thus overestimated by
the management. This over purchasing of obsolete stock has results in to the creation of debts
of 390 million that the company fail to repay any more. In addition to this though the sales
margin of the company increased but the profit margin falls down as the company started to
sale its product at huge discount .

5AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
The expansion plan of the organisation has become a major failure. They expansion
plan is so large that it requires huge capital, and the company even by utilising all the cash
resource, bank borrowings and considerable supplier commitment, failed to fulfil the required
amount.
The company’s inability to get conducive credit terms affected on the process of
operation and storing of the obsolete items. The level of obsolete items increased day by day,
which forced the company to sale goods at lower or at no profit margins. Due to the declining
sales figures, the company failed to get credit from the suppliers and the banks refused to
give them any fresh loan (Dai 2017).
The management of dick smith has never realised the fact that only by increasing the
number of stores it is not possible to cover the loss of falling reputation. Instead of giving
more importance to give customer services and improvement in the quality of the products
they started to give more emphasis on expanding the network, this decision turned out to be
failure and lead to the collapse of the company.
The companies in the retail sector should have efficient inventory management
system, which the management of dick smith fails to adopt. The retailers should know the age
of their inventory of individual products as the inventory aging reports give the insight of the
information about which products are on high demand and which are in the poor categories.
This system is considered very effective for the retailers to keep track of their inventory when
they are purchasing new inventories in high number. Due to the lack of research in the
inventory management process the top management of dick smith holdings failed to control
the large number of inventories and for that reason most of their inventories become useless
and the company has to suffer huge loss.

6AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
The unreliable accounting policy that has been adopted by dick smith has led to the
failure of the company. The management of the company started to manipulate the sales
figure and the inventory position. To get loan from the market the company started to over
value the inventories and confused the lenders about the real position of the business.
Dick smith neglected the fact that it has never followed the AASB conceptual rules in
recording the financial records. The AASB sets the concept that frame the structure of the
financial statements for the use of the stakeholders. The objective of the AASB is to bring
transparency in recording the financial statements so that the company can prepare a financial
statement that will give a true and fair view of affairs of the company (Chi et al 2018).
Further, the rules of the AASB framework also assist the auditor of the company to
give their opinion regarding the fact that whether the organisation has followed all the
provisions that are required to maintain while preparing the financial statements. The AASB
also prepared framework, which will help the stakeholders to interpret the financial
statements, which leads to bring more transparency in the financial statements (Rodgers
Simon and Gabrielsson 2017).
The code of ethics of AASB states that the company should faithfully disclose all the
material misstatements in the books of accounts and thereby protect the interest of the
stakeholders. The ethical or faithful disclosure means that the company should prepare the
financial reports in such a manner that it does not contain any error and that all the
transactions are adequately recorded in the books of account. The organisation should give
more importance on the fact that it does not try to hide any important financial transaction
that could have effect the interest of the stakeholders. The organisation should maintain ethics
that ensure that it has prepared the financial statements that is free from any error of omission

7AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
and it reveal the actual financial strength of the company (Anantharaman Pittman and Wans
2016).
The accounting policy for investment in private equity has never been followed in a
transparent way by the management of the organisation. The objective of investing in the
private equity is to increase the value of the firm but the management of dick smith utilised
the invested amount for the fulfilment of their own interest and not for the improvement of
the company. Due to non-disclosure of the invested amount in the private equity the
stakeholders never have get an idea about the actual utilisation of the fund that has been
invested (Pratama and Meutia 2018).
Dick smith adopted unfair methods in recording the sale of non-core assets and
discontinuing the non-profitable segment of the company, which in turn effects the business
of the company .
Dick smith also violated the APES 110 code of ethics for the professional accountants
.The company does not asked there auditor to follow the rules framed by the APES 110. The
APES110 standard includes both the ethical and professional behaviour that the auditors
should maintain while doing the audit work of the company. The audit work requires high
standard of knowledge as well as ethical behaviour. As the auditor verify all the financial
transactions of the company and help the management in framing the internal control system,
so they are aware of any manipulation that has been adopted by the organisation. It is the
moral and ethical duty of the auditor to mention all the facts related to the manipulation of the
financial transactions in the reports that are prepared by the auditor (Porumb et al 2018).
Therefore, it can be realised that other than all other accounting policies the AASB
notional framework and the APES 110 are the most vital framework that helps the accountant
and the auditors to prepare a transparent and fair financial statement. The APES 110 ethical

8AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
code helps the professionals to perform the professional services efficiently (Billings Tilba
and Wilson 2016).
Non-disclosure of the material facts is another governance issue of the company that
leads to the failure of dick smith. It is the basic need of transparent governance system that
the company should disclose all the facts that have material effect on the business and is
related with the protection of the public interest (Palazuelos Crespo and del Corte 2018) .
Dick smith has never taken any step to disclose any facts that is related with the unfair
practices that they have adopted to manipulate their inventory and the sales figure of the
company. This non-disclosure of material misstatements has resulted in the collapse of the
market value of the shares of the company and ultimately become the main cause for which
the company has to shut down its operation (Granade 2017).
Deloitte, the auditor of dick smith, has also stated that the adoption of the real activity
management system of recording the transactions has led to the failure of the company.
Deloitte in its report stated that dick smith intentional overvalued their inventory and inflated
the sales figures by recording the discounts availed from the suppliers as actual sales
(Mitchell 2018).
Therefore, the adoption of the real activity management has led to the adoption of
unfair and nebulous accounting policies, which become a major factor for the fall of the
company (Ye and Simunic 2016).
Adoption of effective inventory management system
The inventory problem started from the month of June of the financial year 2015 and
in November 2015 the company disclosed that it has to write down the value of the

9AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
inventories by 20% of its inventory value. The company started to manipulate the value of the
inventory by storing the obsolete products in their stores and valued these obsolete stocks at
their original value (Gottschalk and Smith 2016).
The company also bought excessive inventory by anticipating a sales level which they
have never achieved in the past year. They have never been able to achieve that sales level
which led to the excessive storing of unsold products. The company does not have that
infrastructure to store such a large volume of unsold products for which the products become
obsolete and nothing can be realised from these products in future (Bublitz Philipich and
Blatz 2015).
The company started to dispose of the obsolete stock by giving huge discounts to the
consumers for which the sales figures slashed down by 70%. The management of the
company try to manage the situation by taking alternative route of funding but this policy of
the company failed as the alternative fund proves to be insufficient to fulfil the short-term
inventory requirement of the company. Dick smith’s total liability for this mismanagement
inventory raised to 340 million, which the company failed to recover (Dumay and Guthrie
2017).
Question 3
Signs that auditor look for to indicate that there might be a going concern problem
The auditors found that the company has started to dispose of the unsold stocks at
very cheap rate and that indicates that the company may not be interested to carry on the
business activities in the long run. The auditor also realise that the noncompliance of various
rules and regulations of the securities exchange board further indicates that the board of
directors of the company is not thinking about the inters of the stakeholders of the company.

10AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
This is also an indication that the company may not interested to carry the business in the
long run (Gkouma Filos and Chytis 2018).
The regular auditing process that can recognise the conditions and incidents that
indicate a going concern process includes the following points
Analytical procedures
The analytical process can be used as a important tool to identify whether the
company wants to sustain as a going concern organisation. Some of the analytical indicators
are the negative trends in the financial statements, slow moving inventory, receivable and
collectability problems, liquidity and solvency problems (Gimbar Hansen and Ozlanski
2015).
Review of subsequent events
The subsequent events that indicate a going concern problem includes the following points
 Collapse of the market price of the inventory of the company
 Withdrawal of terms of loans by the banks that has given loan to the company
 Expropriation of the assets of the company
Review of compliance of the terms of debt and loan agreements
The company has violated the terms and conditions of the debt and that results in to
the occurrence of the situation of loan default (Gendron and Smith-Lacroix 2015).
Minutes reading
Minutes of meetings of the stockholders board of directors and board members may
indicate the following potentially expensive litigations ,loss of terms of credit ,loss of a major

11AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
supplier, changes in the operations of the business that bring significant losses (Shvyreva and
Kruglyak 2016).
Inquiry of the legal counsel
Responses to the queries of the organisations legal counsel about the litigations claims
and assessment could indicate possible significant losses for product liability claims
copyright or patent infringement (Friedman and Kass 2018).
Confirmations concerning financial support
Confirmation with related parties and third parties of the details of arrangements to
provide or maintain financial support may indicate loss of terms of loan with banks or any
third party relation (Simpson et al 2018).
Question 4
Annual report analysis as an evidence that the company might not be a going concern
From the financial report of 2014-2015 of Dick smith electronics it is found that the
company’s inventory value fall rapidly and that the company has not taken any measure to
manage that situation.
Further the loan obligation of the company are not meet on time and there are huge
amount of outstanding loan amount in the balance sheet.
The financial statement clearly indicates that the profit margin of the company is
decreasing rapidly in comparison to the profit margin of previous years which is the main
indicator that the company will not be able to sustain as a going concern (Fagerström Hartwig
and Cunningham 2017).

12AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
Question 5
Why the auditor give an unmodified audit report
An unmodified report gives a high level of assurance that a professional or
independent examination of financial statements has not disclosed the actual or real material
misstatements in the financial statements. The auditors of dick smith electronics has found
that the company has not disclosed many material misstatements in the financial statements
and for that reason they has given a unmodified report.
Question 6
Legal liability of the auditor
As an auditor Deloittes has to be responsible for giving an unmodified opinion in the
financial year ended on June 2015. As a unmodified opinion is given by an auditor when the
auditor during the course of its audit work founds that the company has adopted unfair
practices and violated the accounting standards. Deloittes has been in the process of audit of
dick smith from long time so the obvious question rises that why they failed to detect the
fraud case of dick smith in the earlier years and suddenly give the unmodified report in the
financial year 2015. Deloittes will be legally liable for not giving the unmodified report in the
previous financial years as the dick smith has adopted the practice of material misstatements
even before the financial year 2015 (Zhang 2018).
Conclusion
Therefore, it can be concluded that the reason behind the collapse of Dick smith is due
to the non-maintenance of effective strategy to compete with the competitors in the market,

13AUDITING PROCEDURE OF DICK SMITH ELECTRONICS
absence of transparent accounting principles and good corporate governance policies. The
member of the governing body of the company adopted all short of practices that led to the
manipulation of the financial transactions of the company. The management used to inflate
the inventory value of the company, which creates confusion for the users of the financial
statement. The company, also manipulated the sales figure by recording the discounts that
dick smith receives from the supplier. These are the causes, which results in to
misrepresentation of the value of the organisation, which adversely affects the investors’
interest. The auditor of the company has been held equally responsible for the accounting
scandal that has occurred due to the irresponsible act of dick smith.
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