Corporate Auditing: Financial Statement Analysis, Audit Committee, and Risk Assessment

This article analyzes the financial statements of Brambles Ltd for the year 2017, the audit committee of the business, and the inherent and control risks faced by Wicked Wrist Watch Ltd. It also provides an audit strategy to minimize risks. The subject is corporate auditing and the course code is not mentioned. The college/university is not mentioned.

Running head: CORPORATE AUDITING
Corporate Auditing
Introduction
The assessment consists of two parts which are section 1 and section 2. The main purpose
of this section 1 is to analyze the financial statements of Brambles Ltd for the year 2017. Section
1 will be dealing with critical aspects of auditor’s report and audit committee of Brambles ltd.
The second part of the assessment which is Section 2 is further subdivided into two parts for
which a different case study is provided (Brambles Corporate Site. 2018). The requirements of
the section 2 will be solved considering the case study which is provided in each part of Section
2.
Section 1
Financial Statement Analysis
The company which is considered for this part of the assessment is Brambles Ltd is a
supply and logistic chain management which is engaged in the business of unit load equipment
and associated services (Simnett & Huggins 2014, pp.719-747). As per the annual report which
is formulated by the management of Brambles ltd, the financial year end of the business is shown
to be 30th June 2017. The auditor of Brambles Ltd is shown to be Pricewater House Coopers
(PwC) Australia.
Audit Committee
The audit committee of the business is responsible for looking after the audit process of
the business. The audit committee comprises of David Gosnell, Carolyn Kay, Scott Perkins and

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Brian Long who is the chairmen of the Audit committee of the business. As per the annual report
of the business, all the members of the audit committee which is mentioned above are
independent members of the business and forms a part of the audit committee of the business.
As per the corporate governance statement of the business, provision for non-audit
services of the business is covered in the charter of Audit Independence, states the requirements
which are to be followed before auditor can perform any non-audit work (Zadek, Evans &
Pruzan 2013). The charter classifies the work in three categories which is related to non-audit
services which is provided by the auditor which are works which are to be approved by the Chief
financial Officer of the business, work which is needed to be approved by the audit committee
and the works which the auditor is prohibited to perform (Bruynseels & Cardinaels 2013,
pp.113-145). The charter also makes it clear that prior consultation and approval of Chief
Financial Officer and Audit Committee is required in order to undertake non-audit services of the
client (Sun, Lan & Liu 2014, pp.153-172). In addition to this, auditors are prohibited from
carrying out internal accounting services, valuation services and internal auditing services for the
client’s business (Brambles Corporate Site. 2018). The charter therefore makes it clear that the
auditor is not allowed to offer non-audit services to its clients unless the Chief financial officer of
the company or the audit committee advise for the same.
Analysis of Auditor’s Report
As per the annual report of Brambles ltd for the year 2017, the auditor of the company
which is PwC Australia has considered the consolidated balance sheet, consolidated income
statement, consolidated cash flow statement, notes to accounts forming part of the financial
statements and Director’s declaration for the purpose of audit and forming an opinion for the

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same. In addition to this, the management considered certain significant items which had
influence on the audit opinion formed by the auditor which are covered in the key audit matters
of the business.
The accounting process which the company followed for pooling equipment assets of the
business which includes pooled pallets, Reusable plastic crates for which the auditor considers
the useful life and the amount which is charged as depreciation for the asset and also the
valuation for the same. Other components on which the auditor’s opinion was based on includes
recoverability of equity investments, deferred tax balances and also assets which are held for
sales by company. All these components have significant impacts on the decisions which is taken
by the auditor and thereby on the overall audit report which is shown in the annual reports of the
business.
The auditor of the company as stated in the annual reports of the company is PwC which
is one of the big four auditing firms. The partner who has signed the auditor report for Brambles
ltd for the year 2017 is Susan Horlin. In addition to this, it is also shown in the auditor’s report
which is attached to the annual reports of the business that the auditor report was signed on 21st
August 2017.
As per the auditor’s report which is shown in the annual reports of the company for the
year 2017 shows that the same is effectively prepared (Stanisic et al. 2014). The auditor has
provided the company with an unqualified report which is shown when the auditor’s opinion
states that the financial statements are free from any material misstatement and the same are truly
and fairly represented in the financial statements of the business (Blay & Geiger 2013, pp.579-
606). In addition to this, the company has followed all the relevant rules and regulations and

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accounts standards which are applicable to the company in the accounting process framework
which is followed by the company. The financial statements are showing true and fair view and
are in compliance with all the relevant standards which are applicable to the business and
therefore, the auditor has issued an unqualified audit report during the year.
Section 2
Question 2.1
Inherent Risks
Inherent risks are those risk in financial audit which can occur due to some error or
omission in the financial statements which is not due to failure in control of the management. In
normal circumstances inherent risks takes place when there is a degree of complexity in the
transactions of the business or estimate in the financial statement requires the judgement of the
auditor (Knechel &Salterio 2016). As per the case which is provided, Wicked Wrist Watch ltd
(WWW) is engaged in manufacturing of high quality of wrist watches which are made with the
use of precious stones. The business faces certain inherent risks which are identified and
explained below:
 As per the case study which is provided, there are two major watch makers for the
company who are approaching retirement stage. This can be regarded as an inherent risk
of the business as the retirement of the two experienced watch makers will affect the
quality of products and moreover, it is noticed that the younger generation are not much
interested in learning the trade, therefore the number of watch makers who are present
and have skills are lesser in numbers. Therefore, there is a risk of fall in the operations of
the business once the experienced watch makers retire.

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 The business is engaged in manufacturing classic watches which are embedded with
precious stones and the case study provides makes it clear that the company does not
follow latest trends and are of the belief that their inventory will not be obsolete. This is
an inherent risk as the business might not be able to keep up with the changes which are
taking place in technology which is also changing the taste and preference patterns of the
consumers. There is a high chance that the inventory of the business might become
obsolete due to the changing market (Griffiths 2016). Unless the management of WWW
makes changes in the business operations and adapt to changes occurring in the market,
the business will be facing significant level of inherent risks.
 Another inherent risks which can be identified is the risk of theft and burglary which can
affect the business. The watches which are manufactured by the company are made with
precious gems and the case study shows that the area in which the company operates is
susceptible to theft in regular intervals and therefore this increases the level of inherent
risks which are faced by the business. In addition to this, wrist watches are small in size
and therefore easily concealable and even easy to steal and therefore the business is
inherently risk in nature.
Control Risks
Control risks refers to the risk which arises due to inefficient internal control system. In
other words, the internal control of the business is unable to detect any risks which are associated
with the business. On the basis of the case which is provided in the question, the control risks
which can be detected are listed below in details:

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 The business operates in Australia and the product which is offered by the business are
expensive in nature and there is risk that the of theft. There is a risk that the employee
will be tempted to steal classic watches which is on the display and the theft will be
easily as well since every employee has a key for the same and even the spare key is
easily available (Vovchenko et al. 2017, pp.350-368). Therefore, there is a gap in the
control system which makes its risky.
 The business also makes cash sales for which the cash are kept in the register and as per
the internal control policy of the business is banked once in a week which is on Monday.
This creates significant amount of risks as liquid cash can easily be stolen from the
register and therefore this creates a control risks which the management of the company
needs to avoid (Newton et al. 2013, pp.603-623).
 As per the case study which is provided, WWW has a policy of stock takes incorporated
in the internal control policy of the business. The manager of the business is currently on
a sick leave and therefore stock tales are not undertaken which can result in control risks
of the business (Badara & Saidin 2013, pp.16-23). Moreover, the inventory management
is crucial part of the business and therefore is an area where risks are likely to arise.
Strengths of Internal Control
The strengths of the business which can be identified are listed and explained below in details:
 The business of WWW is engaged in the business of manufacturing classical wrist
watches which is manufactured using precious jewels and therefore the product which is
offered by the business is of best quality and an effective luxury good item for the
consumers.

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 The business has an effective management system for inventory as the business uses
perpetual inventory system and has an effective point of sales system which facilitates
perpetual inventory system (Johnstone, Gramling & Rittenberg 2013). In addition to this,
the business also has an effective cash collection system which is direct transfer to the
banks.
 The management of WWW has an effective security system which requires the jewellery
to be locked away in safe from the display when the shop closes. The safe has an alarm
system which is liked with police station which is an effective measure against theft. This
is considered to be one of the security measures which is adopted by the business.
Assessment of Audit Risks
As per the case study, the auditor needs to consider the risks which arises during the
course of audit and the same is to be classified on the basis of inherent risk, control risks and
detection risks. An analysis of the three risks in relation to the business of WWW is provided
below:
1. Inherent Risks: These types of risks take place in transactions which are of complex
nature and normally indicates some error or misstatement which took place not because
of the internal control of the business. The inventory which is used by the business can
become obsolete along with the product which is offered by the business due to the
changing trends in the taste and preference patterns of the consumers. Another risk which
can be identified is the risk of theft which can affect the profits of the business adversely.
The management needs to tighten the securities of the business so that risk relating to
thefts can be avoided.

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2. Control Risks: Such risks take places due to weakness or a gap in the internal control
process of the business. In case of WWW, the main risks which are associated with
internal control weakness is loss of inventory of precious jewels, internal thefts which can
be caused by the employee staffs of the business, Manipulation of entries and omission of
revenues in case of cash sales of the business (Dowling & Leech 2014, pp.230-252.). The
management needs to improve the internal control system so that the business can avoid
such a risk. Control risks of a business affects the stability and financial performance of a
business adversely.
3. Detection Risks: Theses sort of risks reflects the significant areas which are missed out
by the auditor. In the case of WWW, the auditor needs to ensure that the financial
statement is free from any misstatements in terms of cash sales and inventory revenue
which is generated by the business (Louwers et al. 2015). Detection risk depends on the
sample size which is considered by the auditor and also by the materiality of the item in
the business.
Audit Strategy
The role of audit planning process in the overall deduction of the risks which is faced
during the course of audit is immense. A proper and systematic plan can reduce the overall risks
which an auditor faces. Inherent risks of a business depend on the overall judgements and
estimation which is undertaken by the business and if the same are high, inherent risks of the
business will also be high. The auditor can ensure that the auditor uses minimum estimates and
judgements in order to lower the inherent risks which can arise. Instead of estimates and
judgements, the auditor needs to apply audit procedures in order to obtain corroborative audit
evidences.

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The control risks of the business can be minimized by improving the internal control
system or introducing a new internal control system which will be having strict norms and
regulations. The management needs to make the above improvements so that manipulation can
be stopped in the annual reports of the business. The auditor needs to consider the cash sales
system in order to ensure that the cash sales of the business are appropriately banked and not
misplaced.
The detection risks of the audit can be reduced significantly if the overall sample size
which is considered by the auditor is reduced and the same can also be reduced if the auditor
effectively plans the audit program and implements the audit procedures as per the plans of the
management (Ruhnke & Schmidt 2014, pp.247-269).
Planning Materiality
Planning materiality may be defined as the amount of misstatements which are set by the
auditor at the initial planning stages of the business. In order to calculate the planning materiality
one of the base is to be considered which can be total asset or revenues which is generated by the
business. In general cases auditor like to follow the highest value of items on the basis of which
materiality is computed. The materiality will be computed as a percentage of total asset of the
business as shown below:
Planning Materiality=Total Assets of the business∗1 %
¿ $ 4,400,000∗1 %
¿ $ 44,000

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The estimate is considered by the auditor to be 1% for the purpose of calculating the
materiality of the business. On the basis of the planning material which is computed above,
performance materiality is computed which is a fixed percentage of the planning materiality of
the business.
Question 2.2
Professional Skepticism
As per the requirement of the question, the attitude of questioning reliability of audit
information and considering in every case scenario the possibility of fraud is known as
Professional skepticism (Quadackers, Groot & Wright 2014, pp.639-657). Professional
skepticism is a characteristic which every auditor needs to possess in order to effectively conduct
the audit process. It is regarded as one of the qualities which must be present in a competent
auditor. An auditor is able to extract more information and collect evidences which appear not to
be significant bit are of material nature if the auditor maintains a questioning mind and critical
analysis attitude (Popoola & Akinyele 2017, pp.1927-1928). Professional skepticism can make
significant improvements in the overall audit process and also make adjustments to the audit
report which is formulated by the auditor. Moreover, this attitude of the auditor also prevents and
helps in the detection of any fraudulent activity which might be affecting the financial statements
of the company.
Threats to Independence Principle
As per the case which is shown in question, Nick settled his own trades by bypassing the
internal control system of the banks. This refers to threat of self interest which is discussed in the
case study which can impose a serious threat on the principle of independence (Johnstone,

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Gramling & Rittenberg 2013). Self interest threat refers to the threat which arises when the
employee considers the interest of himself above the interest of the company and thereby
affecting the business and also the profitability of the business.
The bank can limit the number of trades which can be done by the business and also
establish an appropriate internal control system so that the business is able to safeguard itself
from the fraudulent activities of the business. In addition to this, the management needs to
incorporation supervision practices in order to ensure that the business is safe from such
fraudulent practices.
Impact of Going Concern Principle on Audit Report
An unqualified report refers to the report which is given by the auditor when the financial
statements are showing true and fair view and all the relevant accounting standard are followed
in the preparation and presentation of the financial statements of the business. In the case which
is provided in the question, the auditor issued an unqualified report without considering whether
the going concern principle of the business was intact or not. The bank went bankrupt during the
year and therefore the responsibility lies with the auditor of the company as he should have
indicated the same in the emphasis of matters paragraph in the auditor report (Knechel & Salterio
2016). This is a reason which can create expectation-performance gap.
In the case which is given in the question, the auditor needed to consider the going
concern principle as negative indicators which suggest going concern principle of the business
might be affected must be present. The auditor did not detect the same and this can be considered
due to due negligence of the auditing process. The auditor should have included an emphasis on

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matter paragraph in the auditor’s report which would suggest the effectiveness of the going
concern principle and advice the shareholders about the same.
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