Auditing Theory and Practice: Collapse of Dick Smith and Going Concern Issues

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
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1AUDITING THEORY AND PRACTICE
Table of Contents
Answer 1....................................................................................................................................2
Brief history of Dick Smith....................................................................................................2
Reason behind collapse of Dick Smith..................................................................................2
Answer 2....................................................................................................................................4
Breaching of Australian accounting standard by the directors..............................................4
Answer 3....................................................................................................................................5
Signs the auditor must have looked into for indication of going concern problem...............5
Answer 4....................................................................................................................................7
Analysis of 2014/15 annual report for going concern issues evidences................................7
Answer 5....................................................................................................................................8
Unmodified audit opinion by auditor.....................................................................................8
Answer 6....................................................................................................................................9
Auditor’s liability regarding issuance of unmodified audit report.........................................9
Reference..................................................................................................................................12

2AUDITING THEORY AND PRACTICE
Answer 1
Brief history of Dick Smith
Dick Smith was an Australian based retail company for dealing with the products
related to consumer electronics. It sells wide range of products in 4 categories that is
mobility, office, entertainment and various other services and products. It had 2 segments –
Dick Smith New Zealand and Dick Smith Australia. Its store network includes more than 393
stores all over Australia and New Zealand (Dicksmith Australia, 2018).
In the year 1968, Dick Smith was formed as the young electronics technician. In the
initial period the company focussed it energy towards servicing and installing the car radios.
However, eventually the term business success for the company was not only meant the
bigger shop but it meant more shops. By the year 1980 the company grown to 20 stores and it
sold the working share of the company to Woolworths. The company continued adding main
street stores to its network in regional cities and suburbs all over Australia. Within few years
hundreds of stores were there that included various David Jones Electronics those were
powered by Dick Smith Stores. However, in May 2016, the company brand name was
acquired by Kogan.com and it continued carrying out Dick Smith’s Operations (Dicksmith
Australia, 2018).
Reason behind collapse of Dick Smith
Collapse of Dick Smith meant shortfall amounting to more than $ 260 million to the
creditors. Further, though the banks will get back some of their dues, little prospect was there
for the unsecured creditors. As per the report of McGrathNicol, administrator of the company
major reasons for the company’s collapse were as follows –

3AUDITING THEORY AND PRACTICE
 Changes in the network – market for the consumer electronics are highly competitive
with fast changes in the pattern of consumer demand.
 High cost for network store – the company had the store network that was
significantly larger as compared to its competitors. Therefore, the base of higher cost
with the considerable exposure and reliance towards the market of computer products
and fast moving office product led to involvement of higher level of cost
(SmartCompany, 2016).
 Too fast – expansion plan needed significant commitment for finance, utilisation of
entire cash resources. It further required significant commitment from suppliers and
bank borrowings.
 Fall in sales and shrinking of market share – growth in revenue was based on the
growth of stores and sales of commercials at the low margins
 Sales of the company did not work – company’s clearance sales did not created
sufficient margin or sales for alleviating the pressure of cash.
 Too much on the shelves – decisions regarding inventories made under the existing
environment were not regular with regard to the demand of the consumers. Ultimately
the company was left with significant level of inactive and obsolete stock that
required considerable write – down (SmartCompany, 2016).
 Too expensive cost of finance – the company was not able raise finance with
favourable terms of credit. It had an impact on the product mix, store presentation and
stock levels.
 Demand for loan was crushing – pressure with regard to cash flow led the company
towards banking covenants for breaching and it was not repairable (SmartCompany,
2016).