Analytical Review of Woolworths: A Practical Audit Scenario

This report provides an analytical review of Woolworths, focusing on areas of concern and relevant audit procedures. It also discusses the corporate governance of the company.

Subject Code: ACC302
Subject Name: Auditing & Assurance
Assessment Title: Assessment 3: A Practical Audit Scenario

Woolworths
Executive Summary
The analytical overview of the company can be done with the aid of the annual report
provided by the company. The area of concern can be easily checked with the aid of the
report. In this report, the major emphasis is on the area of concern and assertions. To conduct
this study, Woolworths has been selected, listed on the ASX. The report revolves around the
analytical review of the financial report followed by the relevant audit procedure taken by the
auditor. Further, the corporate governance of the company is dealt with in an effective
manner
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Contents
Introduction................................................................................................................................4
1. Analytical Review...............................................................................................................4
Assumption, Assertions & Judgements......................................................................................6
2. Relevant Audit Procedure..................................................................................................7
B. Corporate Governance...........................................................................................................8
1. Reporting under corporate governance..................................................................................8
2. Audit Committee....................................................................................................................8
3. Benefits of Audit Committee...........................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12
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Introduction
The first step in an audit process is audit planning which includes various steps like
understanding the client and nature of their business, assessing risks and materiality,
formulating an audit strategy and deciding on the type of evidence to be collected on the basis
of risk levels (Merchant, 2012). Audit planning is important for identification of the areas
where there may exist the risk of material misstatements, for designing audit procedures to
address those risks and obtaining sufficient audit evidence, for minimizing audit costs, etc
(Osuala, 2015).
1. Analytical Review
In the case of Woolworths Group Limited for the year ended 2018, following are few of the
areas of concern which were noted while doing audit planning:
a. Area of Concern-
Rebates from the suppliers – the Group receives rebates from the suppliers which include
normal purchase discounts, discounts based on purchase or sales volume and based on
contribution towards any product promotions done for the suppliers. Such discounts need to
be shown either as reduction from the inventory value or reduction from the cost of sales as
per the nature of rebate received.
The main concern in this account is the authenticity and accuracy of rebate figures which
need to be checked, especially those of nonstandard nature. Also, the recording and
accounting treatment of the rebates are of concern matter.
Further, the Group has shown the Supplier Rebates as an inclusion in the trade receivables of
an amount equal to $100m which is a very substantial amount. The inclusion of supplier
rebate indicates that the rebates have only been booked as receivable and have not been
received in the current financial year. The rebates receivable should have been shown as a
separate figure in the balance sheet to encourage transparency in the balance sheet items.
The supplier rebates are likely to affect the trade and other receivables account, inventories
account, cost of sales (CAANZ, 2016).
b. Area of Concern-
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Total Shareholders Returns- the total shareholder's returns comprise of changes in the share
prices, dividends, and other re-investible capital returns in the company. Although from the
table below we can see that individually the share prices, dividends and Basic EPS are
showing a rise as compared to the previous year the Total Shareholders Returns have gone
down (Klien, 2018).
The same will have an impact on the further investment decisions of the shareholders.
c. Area of Concern-
Foreign Currency Risk-
Due to changes to foreign currency rates, the company will be required to pay higher amounts
on account to imports, this will lead to higher amount of import payments and lead to more
losses to the company (Lapsley, 2012). In case the payment to lenders in foreign currencies,
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the difference between the agreed amounts and paid amount will be an actual Loss to the
company and that loss is to be booked in the profit & loss Account. The company can make a
provision for fluctuation in currency rates. (Woolworths limited, 2018).
Changing the ratio
With the aid of the financial statements, the financial ratios can be computed that helps in
knowing the status of the company. Going by the profitability ratios, it can be seen that the
sales of Woolworths has fluctuated and this is the main reason why the gross profit and net
profit has fluctuated in the past three years. Secondly, the liquidity of the company indicates
that the company has a lower level of liquidity as indicated by the current and quick ratio.
Further, the leverage of the company is high that is exposed to huge debts and this is one of
the prime reason the company is failing to have funds (Daviss, 2018).
2. Relevant Audit Procedure
The audit procedure for the above-said areas of concern shall include but not limit to the
following:
i) Rebate from Suppliers-
• To understand the nature of discounts, rebates, and incentives provided by the suppliers to
the Group,
• To obtain evidence with regard to the rebates and discounts accounted for on a sample
basis, like confirmation statements from the suppliers which shall include written approval of
discounts given by them (Matthew, 2015)
ii) Total Shareholders Return-
• To understand the procedure for calculation of total shareholders return,
• To understand the reason behind fall in the return.
• To check for any mathematical inaccuracy in calculation of shareholders returns.
iii) Foreign Currency Rates changes.
• The auditor should first assess the methodology of the company to book the currency rates
changes.
• The auditor then should assess the record dates on which Loss/Profit is booked.
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• In case the change in currency is permanent, the asset or Liability can be written off. The
procedure should be well documented and disclosed in notes to accounts.
• The effect of changes in foreign currency rates should be properly disclosed in the
financial statements. The stakeholders are entitled to know the extent of Losses or profits on
this font .
iv) Analysis of the ratio
The auditor should check the sales pattern and the reason why the sales increased with the
increment in inventory level. This difference should be ascertained by having an insight on
the sales made by the company and the stock left behind. The drop in the liquidity ratio
should be provided adequate attention and the reason for the falling current assets should be
traced by comparison with the old figures (Melville, 2013)
B. Corporate Governance.
1. Reporting under corporate governance
Yes, Woolworths Group Limited has a process of Corporate Governance. The Group’s
Board & its Management team are deeply committed to policies and practices that can be
seen from its level of disclosures and compliances. The Group follows all the
recommendations of ASX Corporate Council’s Corporate Governance Principles &
Recommendations which it has followed throughout the year ended 2018 which can be
seen from the Corporate Governance Statement issued by the Group (Woolworths limited
CG, 2018).
2. Audit Committee
Yes, the Group has an Audit committee with the name Audit, Risk Management &
Compliance Committee.
Under the ASX Listing Rules and Corporate Governance Guidelines, there are various
recommendations for the listed companies on the Australian Stock Exchange. One of the
recommendations of ASX Rules namely Principle 4 states that a listed company needs to
have formal and set processes for independent verification and safeguarding of the
integrity of its corporate reporting (Woolworths limited CG, 2018). For this an Audit
Committee is formed which should meet the following composition criteria:
i. The audit committee should consist of only non-executive directors,
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ii. It should have a minimum of three members,
iii. It should have a majority of independent directors and iv. It should be chaired by
such an independent chairperson who is not the chair of the board.
With respect to the above said criteria, it can be said that the Group’s Audit Committee is
having correct composition, except one criteria.
(Woolworths limited CG, 2018)
As we can see, the Group’s Audit, Risk Management and Compliance Committee has the
following composition-
 At least three directors are there,
 Majority are independent directors,
 Chair is held by independent director
But it is not mentioned here whether or not there are all non executive directors in the audit
committee. Further, in the list of members also, all the non- executive directors are not
mentioned. So, the composition of Audit Committee is incomplete (Woolworths limited CG,
2018).
3. Benefits of Audit Committee
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The Audit Committee has various roles and responsibilities which provides benefits to
various persons like auditors, company, the auditing profession and the society as a whole
(Oshry, Hermalin & Weisbach, 2010).
The roles and responsibilities of the Audit Committee have been mentioned in the Corporate
Governance Statement by the Company which directly or indirectly benefit the auditors,
company board, society, etc (Woolworths limited CG, 2018). The audit committee makes
recommendations about the external auditors and about the lead audit partner for the audit of
the relevant period to the Board of the company. Further, the committee is responsible for
monitoring and reviewing of the key policies of the company which benefits the company
(Woolworths limited CG, 2018). The committee reviews and monitors the internal control
processes for its nature, extent, and effectiveness. The committee helps the Board by
reviewing the performance of external auditors on an annual basis. With regard to the internal
audit, the committee keeps a check on the quality of work and effectiveness of work of the
internal audit team.
Conclusion
From the overall analysis, a clear picture about Woolworths that the financial report provides
a complete information regarding the company’s functioning. Furthermore, from the analysis
it is clear that the financial performance of the company is lacking the momentum as all ratios
are not able to perform or meet the desired target. Hence, it is imperative for the management
to spot the weak areas and work on it in an effective manner. In terms of disclosure, the
company has provided adequate data and the corporate governance of the company is
effectively laid down.
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References
CAANZ. (2016) Auditing, and Assurance Handbook 2016 Australia. Australia: John Wiley
& Sons.
Cooper , B. and Coram, P. (2015) Modern Auditing & Assurance Services. 6th ed. Australia:
Wiley.
Daviss, A. (2018) Woolworths Growth Hits Two-Year Low. Available from:
https://www.powerretail.com.au/news/woolworths-growth-slows/ [Accessed 15 May 2019]
Klien, M. (2018) Woolies showing signs of better performance. Available from:
https://www.moneyweb.co.za/news/companies-and-deals/woolies-showing-signs-of-better-
performance/ [Accessed 15 May 2019]
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management. 9(3), pp. 291-292. https://doi.org/10.1111/1468-
0408.00081
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. 90(2), p. 495-527. Available from:
https://doi.org/10.2308/accr-50871 [Accessed 16 May 2019]
Melville, A. (2013) International Financial Reporting – A Practical Guide. 4th edition.
Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific
Accounting Review. 24(3), 1-34. Available from
https://pdfs.semanticscholar.org/6ccf/f78a452763f17ed5e4f4ddc6b96703801403.pdf
[Accessed 16 May 2019]
Oshry, B., Hermalin, B.E. & Weisbach, M.S. (2010) The role of boards of directors in
corporate governance: A conceptual framework and survey. Journal of Economic Literature,
48(1), 58-107. Available from:
https://cpb-us-w2.wpmucdn.com/u.osu.edu/dist/8/7843/files/2015/01/AdamsHWJEL2010-
2ff7jzc.pdf [Accessed 15 May 2019]
Osuala, C. (2015) Introduction to accounting theory, 3rd Edition. Enugu, Africana First
Publishers Limited
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Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
NJ: Wiley. Pearson, Education Limited, UK
Woolworths limited CG. (2018) Woolworths limited Corporate governance 2018. Available
from: https://www.woolworthsgroup.com.au/content/Document/2018%20Corporate
%20Governance%20Statement.pdf [Accessed 16 May 2019]
Woolworths limited. (2018) Woolworths limited Annual Report and accounts 2018. Available
from: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/
Reports/Annual_Reports [Accessed 16 May 2019]
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Appendix
Profitability
2016-06 2017-06 2018-06
Net profit -1235 1534 1724
Sales 58276 55669 56726
NP margin = NP/Sales *100 -2.11923 2.755573 3.039171
2016-06 2017-06 2018-06
Gross profit 42677 39740 40256
Sales 58276 55669 56726
GP margin = GP/Sales *100 73.23255 71.38623 70.96569
Return on Assets 2016-06 2017-06 2018-06
Net profit -1235 1534 1724
Average assets 23209 23237 11779
ROA -= Sales/Avg Assets*100 -5.32121 6.601541 14.63622
Liquidity
2016-06 2017-06 2018-06
Current assets 7427 6994 7181
Current liabilities 8993 8824 9196
Current ratio
= CA/CL
0.825865 0.792611 0.780883
2016-06 2017-06 2018-06
Current assets 7427 6994 7181
Inventories 4558 4080 4233
CA-inv 2869 2914 2948
Current liabilities 8993 8824 9196
Quick ratio 0.319026 0.330236 0.320574
Gearing ratio
2016-06 2017-06 2018-06
Total liabilities 15032 13390 13077
Equity 8471 9526 10481
Debt equity ratio 1.774525 1.405627 1.247686
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