Report on Dick Smith Liquidation

Running Head: REPORT ON DICK SMITH LIQUIDATION
Report on Dick Smith liquidation
Auditing and Assurance

Report on Dick Smith liquidation
1
Contents
Introduction............................................................................................................... 2
Internal Control Weaknesses.......................................................................................... 2
Inventory Management and Rebate Strategies.....................................................................4
Key Stakeholders and their Returns..................................................................................5
Violation of Ethical Auditing Standards............................................................................ 7
Evaluation of the Annual Reports of Dick Smith Holdings.....................................................9
Inherent Risk Factors................................................................................................. 11
Conclusion.............................................................................................................. 13
References.............................................................................................................. 14

Report on Dick Smith liquidation
2
Introduction
Dick Smith Holdings was a wide- chain of retail stores in Australia, which deals in
consumer electronics. The company was founded in 1968 by a well-known entrepreneur Dick
Smith. In 1981, the founder sold 60% of its shares to Woolworths limited and after two years
that is in 1983, the remaining 40% was also sold to Woolworths. After having almost 30
years of ownership, Woolworths sold the company to an investment firm operating in
Australia named as Anchorage Capital Partners in November 2012. The sale price was $115
and only $10-15 million were being paid by Anchorage with their own money and the
remaining amount was derived through the liquidation of the company’s assets (Anon, n.d.).
Later in 2013, DSH issued the offer to the public for sale of share at $2.20 each. This
initial public offering was highly successful and resulted in the capitalization of the market of
$520 million. The company went into liquidation after two years providing various causes for
its failure such as over purchasing of the inventory, the surplus it earned in 2013 get invested
in its expansion plan which was not successfully implemented, changes in the consumer
preferences and many more to it (Anchorage Capital, n.d.). This report contain the analysis of
the different reasons which led to the liquidation of the company. Evaluation of internal
control measures, key auditing standards and various other things are mentioned in the report
which gives an overview about the dissolution of Dick Smith Holdings.
Internal Control Weaknesses
Weakness in internal control system of DSH was also a reason for its failure. Lack of
adequate controls in the management of the financials decreased the company’s performance
and became a cause for its break down (Goh, 2009). Internal control issues with dick smith

Report on Dick Smith liquidation
3
were that they provided dissimilar financial information to the investors on irregular intervals
of time. The policies adopted by the company gave them the uneconomic results and the
clashes between the directors or the conflicts of interest also became the reason for weakness
in internal control. Incompatible accounting of the transactions was done. Proper
documentation was not there due to which it was impossible to track who was responsible for
which action, final accounts were not prepared as per Australian standards of accounting and
tracking of employees’ authorization for certain functions was neglected. All these factors
became the weakness of the system and led to the liquidation of DSH (Mahadeen et al. 2016).
Final accounts of DSH was audited by the auditors of Deloitte. The main internal control
weakness was that the directors of DSH rely on the audit reports provided by the auditors
without giving a management review to them. Falsifications of the accounts was done and
manipulations were being there in the figures of final statements. According to the case filed
in NSW Supreme Court, Abboud puts a cross claim on Deloitte for the damages and the
involvement in the case. The financial statements of 2014 and 2015 of DSH was audited by
the Deloitte. The claim stated that during the period, the auditors did not aware the
company’s directors about the issues related to the inventory control and accounting
treatment of the rebates. The documents also said that the decisions were taken on the basis
of the description of the audit report of 2015, given by Deloitte, which did not show any kind
of variances or errors in the control system, calculation of rebates and recording them
(Spencer, 2017). Manipulations in the rebates led to the rapid increase in the sales of the
company in year 2015 which raises various allegations on DSH that if management had
performed well then there would have been a loss or decrease in profits in 2015. Sudden
increase in revenues forces the company to pay dividends which they actually cannot afford.
It was also said that the accounting done for rebates was not according to the Australian
Accounting Standards. The reports showed the profits, EBIT, depreciation at an increased