Management and Auditor Responsibility in Fraud Prevention and Detection at JB Hi-Fi

This report discusses the responsibility of management and auditors in preventing and detecting fraud, potential revenue recognition fraud, and case examples of revenue misstatements. It also covers the core business of JB Hi-Fi, identifies major business risks, and provides financial ratios analysis.

JB-Hi-Fi

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART – A........................................................................................................................................3
Identification of Management and Auditor Responsibility in Relation to the Prevention and
Detection of Fraud.......................................................................................................................3
The Misconception That Exists in Society..................................................................................4
Reasons for Potential Revenue Recognition Fraud.....................................................................4
Case Examples of Revenue Misstatements.................................................................................5
Part B...............................................................................................................................................6
Describing Core Business of JB Hi Fi Limited and Explain the Significance of Deep
Understanding of Client’s Business for an Auditor.....................................................................6
Identifying The Four Major Business Risks of JB Hi FI and Providing Explanation of Each
Factor Being Identified as A Risk...............................................................................................7
Results of Analytical Procedures.................................................................................................8
Inherent Risks..............................................................................................................................9
Key Account and Key Related Assertion..................................................................................10
Determining Various Methods that can be implemented by company for overcoming the high
control risk.................................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
The term auditing means to conduct an official inspection over the financial aspects of a
company. The current report is divided into 2 parts. The part - A of the report will be explaining
the difference between the responsibility of management & the individuals that are in charge of
governing them and auditor’s responsibility with respect to the detecting and preventing of
frauds. In the current report discussion of misconception of the society regarding an auditor’s
role with regards to auditing of financial statements will be done. The report will be including
two key reason for presuming of risks of potential frauds by auditor in relation to revenue
recognition. Further two case examples of revenue misstatement will be covered. The part B of
the report will be based on JB Hi Fi. It is an Australian origin company that functions in the
retailing sector whose core business will be discussed and importance of it for auditor will also
be explained. In the report four major business risks will be identified along with four inherent
risks. Financial statements of the company will be analysed on the basis of financial ratios.
Various methods implementing which the company can overcome high control risk will be
determined.
MAIN BODY
PART – A
Identification of Management and Auditor Responsibility in Relation to the Prevention and
Detection of Fraud
As per ASA 240 - The Auditor's Responsibilities Relating to Fraud in an Audit of a
Financial Report, the primary responsibility rests with the management as well as the TCWG
(Those Charged with Governance) to prevent and detect frauds. Fraud prevention has to be
strongly focussed on which will eventually result in reduction of opportunities leading to the
occurrence of fraud along with deterring the fraud happening which will compel individuals to
not engage in the fraudulent activities knowing the risk of being detected and punished (David
and Abeysekera, 2021). Such a system will need creation of a work culture in the organisation
fulfilling the aspects of honesty and ethical behaviour. Such culture will involve strict and
continuous maintenance of oversight by those charged with governance which will include its
duties and responsibilities including consideration of potential overriding of the controls existing
in the organisation or influencing inappropriately over the process of the financial reporting.
Such inappropriate influence includes managing of the earnings of the organisation by its

management for the sole purpose of influencing the analyst’s opinion on the profitability and
performance of the entity.
Also, the auditor responsible for conducting of audit of the organisation has a crucial
responsibility of obtaining the reasonable assurance that the financial statements are free from
misstatements which are essentially material no matter whether these misstatements are either
caused by error or a fraud (O'Connell and et.al., 2020). But, due to the presence of certain
inherent limitations in the conduct of audit, there is a risk which is also inherent or unavoidable
that some of those material misstatements may not be detected or corrected even after effective
planning and performance of the audit.
The Misconception That Exists in Society
Following the large scale and frequently occurring corporate failures, corporate frauds,
and significant financial and administrative losses, the main individuals who always comes under
the radar of inefficiency, extensive scrutiny and high criticism. It is also extensively believed by
the layman that these failures and frauds occurs due to gap that has been created between the
shareholders and users of the financial statements and the auditors whose roles as well as
responsibilities are clearly defined (What is the Risk of Material Misstatement? 2022). But it
shall be noted that these collapses and failures cannot be entirely be connected to the roles and
responsibilities of the auditors as ISA says that the future transparency of the entity or even the
effectiveness or efficiency of the organisations’ affairs are not assured by the opinion of the
auditor in the independent auditor’s report. Such affairs also include financial standing of the
organisation, financial or any other kind of risk, etc. According to certain legislations, auditor is
just a watchdog whose responsibility is to ensure that the financial statements are free from any
material misstatements but such collapses or failures are ultimately the responsibility of the
management since it is the one who has the primary responsibility towards preparation and
maintenance of the financial statements and also implementing a strict and effective internal
control system to be able prepare and maintain such financial statements adhering to various
standards and other regulations.
Reasons for Potential Revenue Recognition Fraud
Now, there is no denying that there are very strong and potential risks of happening of
frauds in relation to the recognition of revenue in the organisations (de Comptes, 2022).
Therefore, such fraudulent reporting of the financials related to the revenue recognition may be

made possible through various unethical practices by the organisations like recording of the
fictitious revenue by overriding the controls set by the organisation, showing of sales and
revenues which haven’t actually taken place for the organisation, etc. Thus, criteria of revenue
recognition shall also be considered by the auditors as a fraud risk factor. This is done to:
 Evaluation of the types of revenue or the transactions related to such revenue or even any
other assertions which may lead to such risks. Thus, the auditors need to consider these
material misstatement risks caused due to the frauds as significant risks. This is effectively
done through keeping a check on any schemes of recognition of fictitious and improper
revenues.
 Another reason why an auditor needs to consider happening of fraud in relation to the
revenue recognition is that improper recognition of the revenue may often lead to risk of
fraud due to material misstatement (Szentpeteri, 2018). This is because the management may
very easily override the controls that are implemented by itself and the one who forms and
implements the control can also very easily override such controls for its own personal
interests.
Case Examples of Revenue Misstatements
1. First case of the revenue misstatements includes the case of Michael Issakidis who was
sentenced to jail by the supreme court for 10 years and 3 months which included non – parole
period of 7 years and 6 months as he was involved in the fraud case of tax prosecution in the
history of Australia. He along with his co – conspirator named Anthony Dickson absorbed
income of $450 million which was otherwise assessable by creating fake or false losses for
evasion of $135 million of tax through utilization of tax provisions relating to tax havens and
structures of complicated international trust. Both Dickson and Issakidis were punished with
severe penalties by SFCT (Serious Financial Crime Taskforce). It was accounted as one of
the most complicated investigations of the fraud related to tax and revenue in the history of
Australia. It was also publicized in the form a harsh warning that those involved in
exploitation of the public funds for the personal gains will be approached and shut down by
the AFP and its partners in the SFCT.
2. Another case of revenue and benefits fraud related to the year 2018 – 2019 in Queensland. It
involved lodging of online returns of income tax by Mr. McCarthy. These returns resulted in
issue of refund in his bank account. He used to place fake job advertisements and thus, steal

the identities of those individuals who applied for the job. In such a way, he had access to
their personal details like full name, address, phone number, date of birth and e – mail
address along with other details like driver’s license, details of bank account and tax file
number. He lodged around 62 fake returns online and thus, was ordered to a fine of
$167,000.
Part B
Describing Core Business of JB Hi Fi Limited and Explain the Significance of Deep
Understanding of Client’s Business for an Auditor
Core Business of JB Hi Fi Limited
JB Hi Fi Limited is a company that operates in retailing sector. It is an Australian origin
company dealing in home appliances & consumer electronics products. This is a public company
which is publically owned, employing 13200 people approximately. The company is
administered from its head office that is situated in Southbank, Victoria and it is functioning
currently in Australia as well as New Zeeland. It is listed on Australian Stock Exchange under
the code name JBH. There are 300 plus stores of JB Hi Fi Limited in all over Australia & New
Zealand. There is not any specific type of store of the company instead there are multiple types
of stores, having both online and offline presence (Jeppesen, 2019). It also provides IT and
Consulting services. It has two main retail outlets, one with an extension as JB Hi Fi Home and
other is The Good Guys. The retail outlet having JB Hi Fi Home as an extension is concerned
with selling computer, cameras, tablets, TVs, speakers, portable audio, home theatre, games,
DVD movies & music, recorded music, TV shows, and Blu-Ray. The Good Guys which is
another major retail store of JB Hi Fi is a leader in retail sector selling home appliances and
consumer electronics goods such as TVs, cooking appliances, fridges, freezers, dishwashers,
laundry, heating & cooling technology, etc. There are 105 stores of Good Guys and 197 stores of
JB Hi Fi.
Importance of Understanding Client’s Business for an Auditor
During the process of auditing it is very crucial for auditor to have sufficient amount of
information regarding the business of their clients. It helps them in expressing their view points
with respect to the concern truly and with utmost fairness. The sufficient knowledge gaining of
the auditor further helps the auditor in protecting any kind of misleading and pitfall assertion of

the financial statements of the company. There are certain points that are important from the
perspective of an auditor to gain required amount of knowledge such as entity’s ownership,
capital structure, objectives, philosophy and strategy of management, MIS, control over internal
environment, markets, products, operations, suppliers, stock, financial performance, past &
projected future trends, regulatory environment, etc. (Mökander and Floridi, 2021). Having
complete knowledge of such factors helps the auditor in their function of risk and problem
assessment, planning for auditing and performance of functions. It is further important as it helps
in development and formulation of plan & programme for audit, assessment of evidences,
identification of audit areas that are special and requires auditor’s attention and transactions of
party, evaluation of management and accounting representing data and taking account the fraud
and risk factors.
Identifying The Four Major Business Risks of JB Hi FI and Providing Explanation of Each
Factor Being Identified as A Risk
Business risk is defined as the factors to which a business is exposed to and that have the
potential to lower down the profits of the company and even be a reason behind its failure.
Anything imposing threat to company’s ability of meeting its goals for the financial aspects is
known as business risk. There are multiple reasons that can leads a company into facing such
risks, these factors can be internal or external to the company. According to the analysis the risk
score of the company is 6, which means that it is at comparatively higher risk as compared to its
competitive firms in the industry (Risk Analysis of JB Hi-Fi Limited (JBH | AUS), 2022). Below
are the four main business risk of the JB Hi Fi:
 Systematic: The systematic risk for the company is the totality of the risk that are
imposed over the company as a result of its combination of risks existing in its external
factors such as economic, political and sociological. Such risks cannot be managed,
avoided or minimized by the company’s management (Schmitz and Leoni, 2019). These
risks in context of the JB HI FI are fall in the purchasing power of its customers,
fluctuations in the interest rates, high unemployment etc.
 Industry: Industry Risk for the company is referred as those risks to which the company
gets exposed because of the industry. There can be both positive as well as negative
impact of a company’s industry risk. Such factors can impact the company volatility,
profitability and growth to a great extent. For instance, the company operates in an

industry with high supplier bargaining power, then the profitability of the company is
always at risk.
 Unsystematic Risk: Unsystematic Risk to a business entity are defined as the sum total of
all the risks to which the company is exposed as a result of its internal processes. As these
risks are having the main reason the internal functioning of the firm such risks can be
managed, avoided and / or mitigated by the managers of the company. In context of the
JB Hi Fi Ltd the examples of unsystematic risks are high operational costs, financial
risks, increasing labour turnover.
 Performance of The company: Performance is one of the major type of business risk that
is faced by most of the business organization. JB Hi Fi always have the risk of being out
of the industry with it becomes unable to perform well.
Results of Analytical Procedures
Key Financial Ratios of JB Hi Fi Ltd
Particulars 2021 2020
Current Ratio 1.07 0.93
Quick Ratio 0.38 0.38
Gross Profit Ratio 22.18% 21.39%
Net Profit Ratio 5.68% 3.82%
Return on Capital Employed 26.64% 16.73%
Stock Turnover Ratio 7.39 8.42
Debtors Turnover Ratio 42.14 35.95
Creditors Turnover Ratio 9.18 8.15
Debt Equity Ratio 0.45 0.63
Identification and Explanation of Changes in The Financial Ratio Analysis That Would Be
Triggering Further Investigation in The Audit for The Company
The changes in the financial ratios of the company that are most likely to trigger the
auditor in investigating it further is the fall the in the debt to equity ratio of the company. Further
the ideal amounts of current and quick ratios are not maintained by the company it is also an area
of investigation. Return of capital employed has seen a major change this area will also trigger

auditor to investigate further. Change in debtors’ turnover ratio is also an area of concern for the
auditor’s auditing.
Inherent Risks
Inherent risks are the risks embedded in the financial statement of the entity which cannot
be prevented or detected even after implementing all the internal controls in the entity.
Therefore, such inherent risk occurs either by an error or an omission in the statements of the
entity due to any possible reasons but not due to the failure or ineffectiveness of the internal
control system. Such risks are bound to happen in the financial audits when the transactions
involved are highly complicated and the circumstance or situation demands high degree of
personal judgements for the financial estimates. Such inherent risks by default, is the part of the
organisation and cannot be prevented by the auditor or management even by implementing
appropriate controls or devising internal control system. There are 3 types of audit risks i.e.,
inherent risk, control risk and the detection risk. Control risk occurs due ineffective internal
control system and detection risk occurs when auditor s fails to detect an error or an omission.
Four inherent risks identified in any organisation are as follows:
 Risk posed due to manual intervention – Manual intervention due to humans will always
result in errors or omissions in processing of the data as humans are bound to be imperfect
and thus, probability of mistakes and errors increases.
 Complexity of transactions – Transactions occurring in the organisation will not always be
straight forward and direct. Many a times certain transactions occur which are highly
complicated and requires extensive process for their understanding and correct recording
which is another inherent risk of any business organisation.
 Complexity of structure of the organisation – Many organisations have very complicated
structure due to its large scale operations and also the type of goods and services in which it
deals (Hoque and Pearson, 2018). This structure also includes having subsidiaries and joint
ventures in foreign countries. Thus, this complicated structure leads to difficulty in
transaction recording and its understanding.
 Collusion among employee – Collusion or collaboration of the employees with unethical
intentions who are provided different duties and responsibilities for reduction of frauds and
errors leads to overriding of the internal control of the organisation and thus, is an inherent
limitation for such organisation.

Key Account and Key Related Assertion
There are various assertions on the basis of which the claim is made that the financial
statements i.e., balance sheet, income statement and cash flow statement are fairly and accurately
prepared and presented (Kend and Basioudis, 2018). These assertions are existence, occurrence,
right & obligation, completeness, cut – off, accuracy and valuation & allocation. Therefore, key
account and the key assertions related to each inherent risk are as follows:
The inherent risks identified above are as follows:
 Risk posed due to manual intervention – Such a risk is associated with the inherent
limitation of humans to commit errors and omission. The key auditor related assertion which
are at the risk of material misstatement are accuracy, completeness and valuation &
allocation. Key account at such risk of material statement is cash account, sales account, etc.
 Complexity of transactions – This risk is associated with the recording and interpretation of
the complicated transactions in the financial statements of the organisation. The key auditor
related assertion which are at the risk of material misstatement are completeness, accuracy
and valuation & allocation. Key account at such risk of material misstatement can be lease
account, financial liability account, equity account, etc.
 Complexity of structure of the organisation – This includes the complicated structure of
the organisation which poses certain inherent limitations regarding. The key auditor related
assertion which are at the risk of material misstatement are existence, occurrence and right &
obligation. Key account at such risk of material misstatement are loan to directors, share of
profit by the partners, etc.
 Collusion among employee – This inherent risk involves collusion of the employees to
commit an unethical task for their personal interest. The key auditor related assertion which
are at the risk of material misstatement are cut – off, existence, occurrence, accuracy and
valuation & allocation. Key account at such risk of material statement are salaries and wages,
loans to employees, etc.
Determining Various Methods that can be implemented by company for overcoming the high
control risk
 Reducing or Eliminating handling of cash – Handling of cash is having high amounts of
risk associated as compared to electronic ways for payments. The company should

always opt for electronic payment processes where ever possible in place of cash method.
This will be helpful in minimizing of security and logistical risks.
 Enhancement of inventory management – Another method for overcoming the control
risks is to make improvements in the inventory management (Munoko, Brown-Liburd
and Vasarhelyi, 2020). It is one of the most important way for prevention of risk & loss
in the business. The management of inventory should be such that it involves high
amount of stock purchasing. More the number of times stock is purchased better will be
the control over it.
 Identifying the Hazards – For controlling the risk it should be at the priority of the
company to first identify what all are the factors that could potentially harm the business
operations. For this the instructions by manufactures should be checked, consideration of
non – routine operations must be done.
 Evaluation of Risks – Mere identification of risk areas is waste of time if it is left as it is.
The next step by the company having identified the risks should be the evaluation of such
risks (Raji and et.al., 2020). This will reflect which risks will entail what amount of
impact over the company.
 Recording of Findings – After the evaluation of risk the next step is to write down all the
findings. This is done for assessment of risk and formulation of strategies for it.
 Reviewing risks timely – The risks should be reviewed by the company on regular basis
so that the company can take corrective measures on time.
CONCLUSION
On the basis of the above report the meaning of auditing has been made clear. Based on
the information gathered from ASA240 the explanation of difference between the managerial
responsibility and governing authorities’ responsibility has been given. The report has discussed
the misconception of society concerning the role of auditor, auditing financial statements of the
company. Key reasons for an auditor to presume the potential risks have been provided in the
report. The report has included two of the case examples for the misstatements of revenue. The
importance of understanding the core business of the client for the auditor has been highlighted.
Major business and inherent risks have been covered in the report. Lastly the methods to
overcoming of control risk have been determined.

REFERENCES
Books and Journals
David, R. and Abeysekera, I., 2021. Auditor judgements after withdrawal of the materiality
accounting standard in Australia. Journal of Risk and Financial Management. 14(6).
p.268.
de Comptes, C., 2022. Auditing Practices in Local Governments: An International
Comparison. Power. 53. p.54.
Hoque, Z. and Pearson, D., 2018. Accountability reform, parliamentary oversight and the role of
performance audit in Australia. Value for Money Budget and Financial Management
Reform in the People’s Republic of China, Taiwan and Australia. p.175.
Jeppesen, K. K., 2019. The role of auditing in the fight against corruption. The British
Accounting Review. 51(5). p.100798.
Kend, M. and Basioudis, I., 2018. Reforms to the Market for Audit and Assurance Services in
the Period after the Global Financial Crisis: Evidence from the UK. Australian
Accounting Review. 28(4). pp.589-597.
Mökander, J. and Floridi, L., 2021. Ethics-based auditing to develop trustworthy AI. Minds and
Machines. 31(2). pp.323-327.
Munoko, I., Brown-Liburd, H. L. and Vasarhelyi, M., 2020. The ethical implications of using
artificial intelligence in auditing. Journal of Business Ethics. 167(2). pp.209-234.
O'Connell, B. T. and et.al., 2020. Impact of research assessment exercises on research
approaches and foci of accounting disciplines in Australia. Accounting, Auditing &
Accountability Journal. 33(6). pp.1277-1302.
Raji, I. D. and et.al., 2020, February. Saving face: Investigating the ethical concerns of facial
recognition auditing. In Proceedings of the AAAI/ACM Conference on AI, Ethics, and
Society (pp. 145-151).
Schmitz, J. and Leoni, G., 2019. Accounting and auditing at the time of blockchain technology: a
research agenda. Australian Accounting Review. 29(2). pp.331-342.
Szentpeteri, C., 2018. Woolies puts spotlight on auditing of contract labour. Australian and New
Zealand Grapegrower and Winemaker. (655). p.12.
Online
What is the Risk of Material Misstatement? 2022. [Online]. Available through: <
https://corporatefinanceinstitute.com/resources/careers/map/accounting-careers/risk-of-
material-misstatement/ >
Risk Analysis of JB Hi-Fi Limited (JBH | AUS). 2022. [Online]. Available through:
https://www.infrontanalytics.com/fe-EN/31454AA/JB-Hi-Fi-Limited/gprv-risk
1

APPENDIX
RATIO ANALYSIS
Particulars Formula 2021 2020
Current Ratio
Current
Assets/Current
Liabilities 1.07 0.93
Current Assets 1449.3 1245.8
Current Liabilities 1355.3 1345.9
Quick Ratio
Liquid
Assets/Current
Liabilities 0.38 0.38
Liquid Assets
Current Assets -
inventories -
prepaid
expenses 510.5 506.5
Inventories 938.8 739.3
Prepaid Expenses 0 0
Current Liabilities 1355.3 1345.9
Gross Profit Ratio
Gross Profit/Net
Sales X 100 22.18% 21.39%
Gross Profit 1977.2 1694.1
Sales 8916.1 7918.9
Net Profit Ratio
Net Profit/Net
Sales X 100 5.68% 3.82%
Net Profit 506.1 302.3
Sales 8916.1 7918.9
Return on Capital
Employed Ratio
Net Profit after
Taxes/ Gross
Capital
Employed X 100 26.64% 16.73%
Net Profit after Taxes 506.1 302.3
Gross Capital
Employed
Total Assets –
Current
Liabilities 1900 1806.4
2

Total Assets 3255.3 3152.3
Current Liabilities 1355.3 1345.9
Stock Turnover
Ratio
Cost of Goods
Sold / Average
or Closing
Inventory 7.39 8.42
Cost Of Goods Sold 6938.9 6224.8
Average Inventory 938.8 739.3
Debtors Turnover
Ratio
Total Sales /
Account
Receivables 42.14 35.95
Total Sales 8916.1 7918.9
Account Receivables 211.6 220.3
Creditors Turnover
Ratio
Net Credit
Purchases /
Average
Accounts
Payable 9.18 8.15
Net Credit Purchases 7138.4 6964.1
Average Accounts
Payable 777.4 854.1
Debt Equity Ratio
Total Long Term
Debts /
Shareholders
Fund 0.45 0.63
Total Long Term
Debts 591.6 700.7
Shareholders Fund 1308.4 1105.7
3