Audit Report Analysis of Harvey Norman Holdings Limited

This report reflects the key information given in the audit report and responsibilities of the auditors. The audit report analysis, structure and responsibilities of the auditors have been analyzed in this report. The company selected for the case study purpose is Harvey Norman Holdings Limited and auditor’s independence and their responsibilities have been analysed to determine the key information about the company.

HI6026 Audit, Assurance and Compliance
Trimester 2 2018
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EXECUTIVE SUMMARY
This report reflects the key information given in the audit report and responsibilities
of the auditors. This report has been prepared on the selected company named Harvey
Normal Company. The audit report analysis, structure and responsibilities of the auditors
have been analyzed in this report. Harvey Norman Holding Limited is the company chosen in
the current research study. The group has the auditors named Ernst & Young who have issued
a clean report regarding the financials of the entity and the related controls. The report has
significantly laid the independence declaration that the auditors have made and the nature of
the non-audit services in form of tax compliance and others is also specified. The company
has paid overall remuneration to the auditors that has shown a certain rise when audit services
are concerned. The rest of the matters are briefly explained in the report presented herein.
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Table of Contents
EXECUTIVE SUMMARY........................................................................................................2
INTRODUCTION......................................................................................................................3
AUDITOR’S INDEPENDENCE...............................................................................................3
PROVISION OF NON-AUDIT SERVICES.............................................................................3
AUDITER REMUNERATION.................................................................................................4
KEY AUDIT MATTERS..........................................................................................................4
AUDIT COMMITTEE & AUDIT CHARTER.........................................................................6
STRUCTURE............................................................................................................................6
FUNCTIONS.............................................................................................................................6
RESPONSIBILITIES.................................................................................................................6
AUDIT OPINION......................................................................................................................7
DIFFERENCE BETWEEN THE RESPONSIBILITIES OF MANAGEMENT AND
AUDITOR..................................................................................................................................7
MATERIAL SUBSEQUENT EVENTS....................................................................................7
CONCLUSION..........................................................................................................................8
REFERENCES...........................................................................................................................8
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INTRODUCTION
The background of the current report lies on the reporting requirements related to the
auditor that are initiated by the International Auditing and Assurance Board (IAASB).
Following the line of these new requirements the current report analyses the company’s
annual report. The areas analysed include the declaration for auditor’s independence, report
of independent auditor, the performance of non-audit services by the auditor, remuneration of
auditor, the composition of the audit committee, and its role and functions, and key
consideration to the audit report issued by the auditor with special emphasis on the key audit
matters. The limelight question is if the company has followed with all the reporting
requirements in its annual report. All the assurance services as related to the auditor are also
reviewed. The company selected for the case study purpose is Harvey Norman Holdings
Limited and auditor’s independence and their responsibilities have been analysed to
determine the key information about the company.
AUDITOR’S INDEPENDENCE
The auditors of the Harvey Norman Holdings Limited are named Ernst & Young. It is
well evidenced by the directors that the regulations laid by the Corporations Act 2001 are
well complied. These regulations do relate to the independence of the auditor. Further, the
mention of audit committee is also made. It is specified that the audit committee is also
convinced and have recommended that the auditors have been independent in their operation.
The auditors have also given a declaration to the directors of the Harvey Norman Holdings
Limited regarding their independence (Harvey Norman Holdings Limited., 2016).The
declaration clearly states that the auditors have not made any contraventions as far as the
applicable codes of the professional conduct and the corporations act 2001, in relation to the
audit conducted are concerned (Tepalagul, and Lin, 2015). This auditor’s independence
report has shown how well auditors have performed and their independence with the Harvey
Norman Holdings Limited. It is analyzed that auditors should keep their independence with
the company when they are auditing the financial statements (Louwers, et al. 2015). In the
audit report, it is considered that auditor has complied with Independence requirements of the
auditing and assurance.
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PROVISION OF NON-AUDIT SERVICES
It is well mentioned in the report that the auditors are engaged in the provision of non-
audit services to the client along with the appraisal work. This thing is mentioned with a
specific headline in the annual report. Further, the directors have taken the recommendations
of the audit committee too regarding this provision of the services by the auditor. The non-
audit services extended by the auditor also comply with the requirements of the corporation’s
act 2001. It is completely analysed by the management that in no case the provision of these
non-audit services has harmed the independence that the auditors need to comply with. For
the financial year ending on June 30, 2017 the auditors have provided tax compliance
services worth $205,803 and other services worth $71,756 as non-audit services to the client
(Bell, Causholli, and Knechel, 2015). There are several other non-audit services which is
offered by auditors to Harvey Norman Holdings Limited such as advising the management
about the legal compliance and preparing the financial statement as per the applicable
accounting standards and harmonization with the international and domestic accounting
standards (Harvey Norman Holdings Limited., 2016).
AUDITER REMUNERATION
The remuneration of the auditors includes the payment that is either made or has to be
made to the auditors for the services they have provided to the client. The services include
both the audit and non-audit services (Choong, and Leung, 2015). In the case of Harvey
Norman Holdings Limited, there is an audit committee too. The remuneration in this case is
bound to be finalised by the audit committee after it gets decided either in the general
meeting or gets fixed by the board of directors. The following table represents the
remuneration that is paid to the auditors for the financial years 2016 and financial year 2017.
The changes that have taken place in the remuneration are also shown in percentage form
(Harvey Norman Holdings Limited., 2016).
AMOUNTS RECEIVED OR
DUE AND RECEIVABLE BY
ERNST & YOUNG FOR:
JUNE 2017
($)
JUNE 2016
($) % change
1. the audit and review function 1955946 1709834 14.39%
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carried for the financial reports of
the entity and the other entities in
the consolidated entity
2. tax services extended to the
entity and other entities in the
consolidated entity
205823 191160 7.67%
3. other services provided to the
entity and the other entities in the
consolidated entity (Harvey
Norman Holdings Limited., 2016).
71756 116123 -38.21%
KEY AUDIT MATTERS
The auditors in their report have mentioned certain key audit matters that are relevant
for the shareholders to obtain a better understanding of the entity and the environment in
which the entity operates (Sirois, Bédard, and Bera, 2018). The following table highlights
those key audit matters. The procedures that have been undertaken by the auditor in order to
gather sufficient and appropriate audit evidences have also been discussed. A decision is
made in light of those audit procedures. However, no separate opinion is expressed by the
auditor on these key audit matters (Harvey Norman Holdings Limited., 2016). They are just
those issues that in the judgement of the auditor are of high significance for the purpose of
audit. These all are the key audit matters which need to be analyzed by the auditors which
have been given in the audit report of the Harvey Norman Holdings Limited (Harvey Norman
Holdings Limited., 2016).
KEY AUDIT MATTER AUDIT PROCEDURE
PERFORMED
CLASSIFICATION OF
AUDIT PROCEDURE
1. Assessment of control for the The auditors have observed Test of control: Enquiry &
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purpose of consolidation the judgements on which the
consolidations are based.
Enquiries are made with the
directors and their external
lawyers with respect to the
interactions of the
franchisees and the groups.
Further, questions are also
raised for the changes
effected in the year in these
agreements. Meetings are
arranged with several sample
franchisees to gather the
knowledge regarding the
actual operation. The control
arrangements are also looked
after.
Observation
Substantive test of details
2. Recoverability of receivables
from franchisees
Evaluation of the process and
controls related to the
recoveries from franchisees
is made. Sample franchisee
loans are selected and
confirmation is made for the
pending balances. For the
sample franchisees the
controls are tested to get
confirmation regarding the
value of assets held as
security and their existence
(Mala, & Chand, 2015).
Test of Control: External
Confirmation & Enquiry
Substantive test of Details
3. Valuation of investment Assessment of the valuation Analytical Procedures
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properties and the owner-
occupied properties
policies is made and it is
considered whether the work
done by the directors and the
specialists can be relied on.
Comparisons are made with
the market data available and
the variations are analysed.
The reasonableness of the
key assumptions used in the
valuations is assessed
(Harvey Norman Holdings
Limited., 2016).
Substantive test of details
AUDIT COMMITTEE & AUDIT CHARTER
There are both audit committee and audit charter formulated in the Harvey Norman
Holdings Limited. All the three members of the committee are the non-executive directors
(Czerney, Schmidt, and Thompson, 2014)
STRUCTURE
The structure of the audit committee has been determined on the basis of the corporation act
and Australian listing rules and regulations. There is below given the members of the audit
committee include:
 Graham Charles Paton: Chairman of the Harvey Norman Holdings Limited and a certified
practicing Accountant.
 Christopher Herbert Brown: an experienced solicitor
 Kenneth William Gunderson – Briggs: an experienced Chartered Accountant (Harvey
Norman Holdings Limited., 2016).
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FUNCTIONS
 Audit committee is bestowed with the function of oversight. This includes overseeing the
function relating to the appointment and review of the external auditor.
 The other parties needed to be overseen include internal auditor and the management
(Badolato, Donelson, and Ege, 2014).
RESPONSIBILITIES
 As far as the external auditors are concerned, the audit committee is bound to make decisions
regarding the selection, evaluation and replacement of the external auditor. It is the duty of
the committee to review the audit engagement letter and the audit plan. Determining the
nature of non-audit services and considering the communications that take place between the
management and the auditor also comes in the purview of this. Reviewing the independence
of the external auditor and his effectiveness (Beck, and Mauldin, 2014).
 When the internal audit is concerned, it is the duty of the audit committee to make decisions
regarding the person who shall be considered as the head of the internal audit function. The
committee is expected to help the board in reviewing and approving the annual budget and
annual internal audit plan. The committee is responsible for assessing the effectiveness of the
function of internal audit and helping the board to assess the performance of the internal audit
head (Khelil, Hussainey, and Noubbigh, 2016).
 Other responsibilities as relating to the review of risk assessment and management policies,
handling of accounting and related complaints, and those related to financial reporting
(Harvey Norman Holdings Limited., 2016).
AUDIT OPINION
The auditors have issued a clean and unmodified opinion on the financials of the
Harvey Norman Holdings Limited. In their opinion the financials of the Harvey Norman
Holdings Limited are prepared fairly and comply with the requirements of the Corporations
Act 2001, Australian Accounting Standards and, the Corporations Regulations 2001.
However, the audit report, auditors have given no disclaimer and passed non-qualified audit
report. It has stated that company has complied with the all the applicable rules and
regulations and maintained proper corporate governance program. This audit opinion is very
much required for the business sustainability and increased business outcomes in long run
(Jans, Alles, and Vasarhelyi, 2014).
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DIFFERENCE BETWEEN THE RESPONSIBILITIES OF MANAGEMENT AND
AUDITOR
As far as the financial reporting is concerned, it is the duty of the management to
prepare the financial reports that comply with the requirements of the applicable accounting
standards, and corporation act 2001. It is the duty of the management to assess whether the
entity is able to continue operations as a going concern or not. Management is expected to
ensure that enough controls exist in the entity that provides for preparation of the financial
information free from any sort of misstatements (Hammer, 2015). The differences between
the auditor and management is very much needed to keep the business more transparent and
effective in long run (Eilifsen, Hamilton and Messier., 2017).
However, the auditors are responsible to behave professionally and provide a reasonable
assurance regarding the presentation of the financial information by the management. The
auditor is required to state whether the regulations are complied with or not. Further, the
auditors are required to assess the viability of the going concern assumption laid by the
management (Murphy, and Hogan, 2016). If auditors perform their responsibilities
effectively then it will not only strengthen their overall outcomes but also result to increased
business outcomes in determined approach. This helps in strengthen the overall outcomes and
business efficiency (Harvey Norman Holdings Limited., 2016).
MATERIAL SUBSEQUENT EVENTS
As per the declaration given by the directors in the annual report, there has been no
observation of any material subsequent events. In the opinion of the directors, there are no
transactions or events happening after the balance sheet date that can have or had a
significant effect on the Harvey Norman Holdings Limited’s operations, or the results of
company’s operations, or the state of affairs relating to the entity or the consolidated entity in
the future financial years. These are the subsequent events and material sections which
reflects how well company has been performing its business. Harvey Normal needs to
increase the transparency of its business by complying with the international and domestic
reporting compliance program (Harvey Norman Holdings Limited., 2016).
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CONCLUSION
When the assessment of the audit report issued by the external auditor is made from
the view of a third party stakeholder, the material information reported by the auditor seems
perfectly fine. The auditors have clearly mentions the key areas which as per their judgement
are of the highest significance for the stakeholders. These areas are explained as well as the
audit procedures followed to reduce the risk persistent in them is mentioned in the report. The
presentation seems highly effective. From the reading and understanding of the report, it can
be easily concluded that there is no material information that has been missed by the auditor.
The report is presented in a manner that is able to fully explain and disclose the required
information to the users. There seems no doubt regarding the professionalism with which the
reports are prepared and hence the need to ask any follow up questions is also ruled out. The
main crux of this report is that auditors are the key person who performs the fiduciary
position in the best interest of the stakeholders. The transparency and true and fair view of the
assets and liabilities of company depends upon the audit program and activities undertaken
by the auditors.
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REFERENCES
Badolato, P.G., Donelson, D.C. and Ege, M., (2014). Audit committee financial expertise and
earnings management: The role of status. Journal of Accounting and Economics, 58(2-3),
pp.208-230.
Beck, M.J. and Mauldin, E.G., (2014). Who's really in charge? Audit committee versus CFO
power and audit fees. The Accounting Review, 89(6), pp.2057-2085.
Bell, T.B., Causholli, M. and Knechel, W.R., (2015). Audit firm tenure, non‐audit services,
and internal assessments of audit quality. Journal of Accounting Research, 53(3), pp.461-509.
Choong, K.K. and Leung, W.Y., (2015). Auditor remuneration, corporate governance and
auditor independence, 2nd ed, Hong Kong, Pearson.
Czerney, K., Schmidt, J. J., and Thompson, A. M. (2014). Does auditor explanatory language
in unqualified audit reports indicate increased financial misstatement risk?. The Accounting
Review, 89(6), 2115-2149.
Eilifsen, A., Hamilton, E. L., and Messier Jr, W. F. (2017). The Importance of Quantifying
Uncertainty: Examining the Effect of Audit Materiality and Sensitivity Analysis Disclosures
on Investors’ Judgments and Decisions. 8(6), 215-219
Hammer, M., (2015). What is business process management?. In Handbook on business
process managemen, 3rd ed, Springer,Berlin : Heidelberg.
Harvey Norman Holdings Limited., (2016). Annual report. Available at
http www harveynormanholdings com au reports announcements:// . . . / - -1/., Accessed on 12th June
2018
Jans, M., Alles, M. G., and Vasarhelyi, M. A. (2014). A field study on the use of process
mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5),
1751-1773.
Khelil, I., Hussainey, K. and Noubbigh, H., (2016). Audit committee–internal audit
interaction and moral courage. Managerial Auditing Journal, 31(4/5), pp.403-433.
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Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., and Thibodeau, J. C.
(2015). Auditing & assurance services. 3rd ed, USA: McGraw-Hill Education.
Mala, R., & Chand, P. (2015). Judgment and Decision‐Making Research in Auditing and
Accounting: Future Research Implications of Person, Task, and Environment
Perspective. Accounting Perspectives, 14(1), 1-50.
Murphy, L. and Hogan, R., (2016). Financial Reporting of Nonfinancial Information: The
Role of the Auditor. Journal of Corporate Accounting & Finance, 28(1), pp.42-49.
Sirois, L.P., Bédard, J. and Bera, P., (2018). The informational value of key audit matters in
the auditor's report: evidence from an Eye-tracking study. 2nd ed, Austdralia: Accounting
Horizons.
Tepalagul, N. and Lin, L., (2015). Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
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