Wesfarmers Ltd: Auditor's Responsibility and Annual Report Analysis

This report analyzes the annual report of Wesfarmers Ltd and highlights the auditor's role in ensuring effective corporate governance and ethical mechanisms. It covers topics such as adherence with independent requirements, non-audit services, audit committee, key audit matters, and more.

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HI6026 Audit, Assurance and Compliance
Trimester 2 2018
Individual Assignment

Wesfarmers Ltd
Executive summary
The auditor’s responsibility has a very important place in the corporate world because it
facilitates in the fulfilment of effective corporate governance and ethical mechanisms. With
the help of this report, the annual report of Wesfarmers Ltd has been selected. The
company has been listed on the Australian Stock Exchange and this report highlights the
auditor’s role in a proper way for better understanding. Nevertheless, this report starts with
the independence of auditors, audit committee, and the key audit matters. Lastly, the entire
report has been diversified on several aspects that has necessitated the relevance of audit
opinion.
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Contents
Introduction...........................................................................................................................................4
Adherence with independent requirements.........................................................................................5
Non-audit services.................................................................................................................................5
Evaluation of the remuneration of auditors..........................................................................................6
Audit Committee...................................................................................................................................6
Amount of non-audit services...............................................................................................................7
Key audit matters..................................................................................................................................7
The contrast between the management’s and auditors responsibilities...............................................8
Material subsequent events..................................................................................................................8
Efficacy of the auditor’s report..............................................................................................................9
Under-reporting or missing material information?.............................................................................10
Questions that can be asked to the auditor........................................................................................11
Conclusion...........................................................................................................................................12
References...........................................................................................................................................13
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Introduction
In relation to an organization’s performance, there is a requirement that auditors must
focus on internal control mechanisms so that risks of material misstatements can be
identified. In relation to Wesfarmers, the company has been capable of reflecting a true and
fair view of its financial performance. Audit functioning is the prime reason why this has
been achieved. Moreover, since Wesfarmers has been able to comply with necessary
statutory requirements like the Corporations Act 2001, the importance of auditors in
verifying the same can also be observed through this research.
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Adherence with independent requirements
Wesfarmers has been able to comply with various necessary guidelines that have allowed it
to thrive in the market. The necessary accounting standards have been followed by the
company that is a positive sign. Furthermore, all independent requirements have been
complied by the company and the same has been reflected in the auditor’s report in the
financial statements of the company. Besides, such independence requirement was based
on the APES 110 code of ethics especially for the professional accountants and the
Corporations Act 2001 that assures a true and fair view of the company’s performance
(Wesfarmer, 2017). Nevertheless, all other matters significant to the compliance with
independence requirements has also been fulfilled.
Non-audit services
The company’s audit committee has played a key role in offering legal and ethical
suggestions for the provision of non-audit services. Furthermore, the same has been offered
in a written manner to adhere to the resolution passed for the committee. In addition, the
risk on the part of risk committee has also been accounted for by the board and they are
effectively satisfied by the ideology that the decision of providing non-audit services are
compatible on the auditors’ part (Geoffrey et. al, 2016). Hence, it can be seen that the
offering of non-audit services in addition to the audit services have also been properly
regarded by the auditors and the same has been disclosed properly in the annual report so
that users can make effective decisions. Nevertheless, there are different kinds of standards
required to be accepted to make decisions based under the Corporations Act 2001:
1. The audit committee of Wesfarmers have properly scrutinized the non-audit services
for enhancing their objectivity and integrity towards the company. This is because
they do not intend on affecting and policies of corporate governance that are
implemented by the organization (Wesfarmer, 2017). Moreover, the decision to
doubt the integrity of an auditor’s opinion is not a good part even after their
independence declaration copy has also been offered.
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2. The auditors will not be permitted to monitor any affair that they have undertaken
and therefore, they are not going to offer any review on such provision of non-audit
services
Evaluation of the remuneration of auditors
Audit or fees 2017 2016 % %
Review and audit of financials
Ernst & Young (Australia) 5723 5780 72.30575 66.55919
Ernst & Young (Overseas) 702 577
8.869236 6.644404
Assurance services
Ernst & Young 1272 2215 16.07075 25.50668
Other audit firms 218 112 2.754264 1.289728
Total 7915 8684
Non-audit services
Ernst & Young (Australian & overseas):
- Compliance of tax 1088 1096 47.16081 55.4095
Others 1219 882 52.83919 44.5905
Total 2307 1978
Payment to auditors 10222 10662
Audit Committee
Yes, Wesfarmers have it s own Audit committee that is structured to provide support in the
functioning of the company and to look after the governance segment that contains internal
and external audit, control mechanism, compliance system and financial reporting of the
company.
Further, the audit committee functions within the power entrusted so that it can aid the
management in its work. The committee has the proper access to the records of the
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company and helps the management in carrying out the duties with ease and flexibility
(Hoffelder, 2012).
Amount of non-audit services
Wesfarmers Ltd is liable to receive a certain amount for the provision of non-audit services
provided to its consolidated company. The company has provided audit services for around
$2307000 that is almost 23.1 % of the fees paid to the other corporate for the year ending
June 2017 (Wesfarmer, 2017).
Key audit matters
Wesfarmers Ltd incorporated numerous procedures and processes so as to assess the audit
plan to make assumptions so to evaluate and calculate growth rates, forecast cash flows,
comparable industry valuation multiples, CG use, discount rates and such other factors that
may allow the organisation to extend its business (Wesfarmer, 2017). Wesfarmers have
assessed various elements with the help of an impairment test to find out their suitability
and worthiness. These various factors are discussed below-
Wesfarmers had incorporated new material contracts not just before but also after the
statements were balanced. It truly indicates that an evaluation is required in context of the
treatment followed by the organisation and also helps in determining the worthiness of the
procedure. The comparison of various discounted arrangements after learning from the last
year’s budget. This helped Wesfarmers to consider aging profiles using analysing them
(Kaplan, 2011).
Forecast exchange rate assumptions.
Impairment testing approach, key assumptions, and sensitivities are disclosed to analyse the
efficiency of the financial report prepared by Wesfarmers. The commercial income earned
by Wesfarmers was as a result of specific auditory tasks taken up by Wesfarmers. Such
auditory responsibilities included valuation of all types of material that has in a way allowed
the organisation to generate commercial income and regulation of corporate and designing
of the relevant and efficient control system.
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The discount provided to suppliers was supported by certain documents that were also
analysed and examined to determine credits strategies. Various business facts that included
products, merchandisers, supply chain manager and the staff in order were also assessed to
determine the presence of any nonstandard agreement made in the name of the
organisation outside the contract (Wesfarmer, 2017). The organisation needs to determine
the matters discussed above to overcome future contingencies.
The contrast between the management’s and auditors responsibilities
The responsibility of an auditor is to give his opinion on the organisation’s financial report
that is primarily managed by the directors of the organisation. The job of an auditor is to
examine and assess the financial statements and perform audit process with an objective to
achieve an accurate and fair view of the organisation’s financial statements. It is the
responsibility of an auditor to assess the company’s financials in such a manner to eliminate
corruption of data and confirm the authenticity of the same (Elder et. al, 2010). The
management of the organisation mainly looks after adopting sound accounting policies that
are beneficial for the organisation and implementing internal control functions that can be
of great help in initiating, recording and processing transactions to record them in the
financial statements. The management directly controls and regulates the organisation’s
operations and the related assets, liabilities along with the equities (Wesfarmer, 2017). The
auditor in the context of these transactions and internal control mechanisms most likely be
aware of only those matters that are provided to him or that are obtained by him during the
audit process.
Therefore, it is solely the responsibility of the directors and the management of the
organisation to fairly represent the financial reports following the accounting principles. The
duty of an auditor is limited to the representation of his opinions on the financial
statements that are audited by him (Lapsley, 2012).
In Wesfarmers Limited, the auditors were seen as less responsible for performing audits
efficiently. It is because of the auditor’s negligence to label the mishaps found in financial
statements as frauds or errors (Wesfarmer, 2017). Thus, it is very much clear that the
responsibilities of the directors and management from that of the auditors are poles apart.
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Material subsequent events
Material subsequent events are events that occur before the financials for the period is
already issued or is going to be released but after the date of reporting. The annual report of
the Wesfarmers limited depicts two subsequent significant events (Livne, 2015). These
events were so following that could have allowed the financials of the company to get
primarily affected. From the company’s annual report it can be seen that the Wesfarmers
limited faced one of the subsequent significant events during the time it had a fully franked
and final ordinary dividend after its reporting period. The company’s financial statements
and overall performance is mostly affected by the payment of dividend. It is because
payment of dividend depicts the company’s ability to make profits and achieve adequate
earnings per share and return on investment that makes way for the company to declare a
dividend to its shareholders. In 2017, Wesfarmers limited has paid a profit of 120 cents per
share after its reporting period. Financial performance of the company could have been
hugely impacted if the same had happened before the reporting period. Also, a dividend of
$1361 million was announced to be paid in September 2017 by the company. Wesfarmers
limited failed to pay a dividend for 2017 that might have negatively impacted its financials
as well.
Another subsequent material event is when Kmart, a department store of Wesfarmers
limited earned its brand name in Australia and New Zealand. It was considered following
because of the license agreement that was long-term for the company to hold these
departmental stores that amount them some $100 million (Wesfarmer, 2017). This event
did not, however, affect the earnings of Kmart as reported in the company’s financial
statements but it would have primarily impacted the share prices and earnings if it
happened before the reporting date.
Efficacy of the auditor’s report
The effectiveness of the auditor’s report in Wesfarmers limited was barely seen. The
auditors claimed to have audited the organisation’s financial statements adequately, and
compliance with the Corporations Act 2001 and AAS was also taken due care of. One of the
main reasons attributing to this ineffectiveness is the fact that the auditors have depicted
crucial minimal audit matters in their audit report along with mentioning the audit process
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incorporated by them to account these essential audit matters. The auditors only
highlighted why these essential matters have been addressed by them but have not
substantially explained these matters (Wesfarmer, 2017). As these essential audit matters
were not appropriately described, there is a probability for the complications that users
might face in determining the nature of these matters and will impact their decision-making
ability. The auditors have somehow managed to explain the process substantially regarding
how crucial such audit matters has been considered which might be helpful for the users.
The auditors however missed to highlight such materialistic issues in the reports that were
required to be labelled as material information which affects the users in making decisions
(Church, Davis & McCracken, 2008). The auditors failed to proper backup details of
problems that were highlighted as material information. It must be understood that
labelling an issue as material information calls for appropriate and legitimate information as
well which was skipped by the auditors in the Wesfarmers audit report. This might hamper
decision making on the users part. Footnotes and notes were provided by the auditors
where one can quickly get the related information instead of providing adequate and
complete in details in context with the key audit matters (Matthew, 2015). The efficacy of
the auditor’s report can be labelled as unacceptable for it is difficult for the users to rely
upon such details to make legal decisions (Gay & Simnet, 2015).
Under-reporting or missing material information?
Wesfarmers failed to present certain vital aspects and critical matters in its reports that
were substantial and required to be disclosed. This not only affects the users in making
appropriate decisions but also impacts the goodwill of the company. The credibility and
worthiness of the company are put into question. Failure to disclose essential aspects and
information can be complicating on the users part to understand the performance of the
company and thus makes it difficult for them to take appropriate decisions. The most
prominent example of such discrepancy is the failure to provide footnotes and notes in the
financial statements on the company’s part. This troubles the users from determining a
transaction and its nature (Wesfarmer, 2017). The absence of required references in the
financial statements creates an issue for the intended users in their decision making.
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The company has however provided notes in its financial statements and has adequately
detailed it which in itself is noteworthy. There are many other details under-reported by
Wesfarmers Limited. The company has not sufficiently and correctly highlighted the crucial
affairs of entities in the context of its consolidated group (Merchant, 2012). The company
only disclosed little information and slightest of the activities that may not be useful or just
incomplete for the users. To make decisions, users demand proper, substantial and
complete disclosure. The company’s report also missed recording the actual details of the
company’s diversity. But the website of the company provides the details of the company’s
difference. This also calls for the absence of significant information. Also, the company has
significantly mentioned such other material information such as risk factors, sustainability,
corporate governance, etc. in its financial statements that might allow the intended users in
making adequate and appropriate investment decisions (Cappelleto, 2010).
The auditors of the company have inappropriately disclosed the key audit matters of the
company in the reports along with the issues stated above. All this combined might mostly
affect the organisation’s financials and impact the users in investing in the company. It also
changes the goodwill of the company. The auditors could have made way for further
information related to crucial audit matters instead of the significance of all these
information (Wesfarmer, 2017). It could have made the report more reliable and ease the
users in understanding the performance of the company and in taking appropriate
decisions.
Questions that can be asked to the auditor
i. Has the company reported the problem or issues noted in the risk management?
ii. Are the weaknesses in the management projected in a detailed fashion?
iii. How the complicated matters have been dealt by the committee?
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Conclusion
Based on the previously mentioned analysis, it can be seen that the company has fulfilled its
auditors’ requirements in a proper manner that is a positive indicator. Furthermore, the
compliance with guidelines like Corporations Act 2001 and APES 110 Code also sheds light
on the fact that the prevalence of auditors is necessary for the survival of a company
because without a true and fair view of financial performance, sustenance in such
competitive environment is not feasible. Nevertheless, the duties of the auditors has also
been properly highlighted in the auditors’ report that plays a role in shedding light on the
fact that all risks of material misstatement whether intentional or not, has been duly
identified for facilitation of effective corporate governance practices.
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References
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ,
Melbourne
Church, B., Davis, S & McCracken, S. (2008) The auditor’s reporting model: A literature
overview and research synthesis. Accounting Horizons. 22(1), 69-90. Doi:
https://doi.org/10.2308/acch.2008.22.1.69
Elder, J. R, Beasley S. M. and Arens A. A. (2010) Auditing and Assurance Services. Person
Education, New Jersey: USA
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House
and Outsourced Internal Audit Positions: Views from External Auditors. Accounting
Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309
[Accessed 12 September 2018]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and
practice. The Accounting Review [online]. 86(2), pp. 367–383. Available from
https://doi.org/10.2308/accr.00000031
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management. [online]. 9(3), pp. 291-292. Available from
https://doi.org/10.1111/1468-0408.00081
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online]. Available
from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full [Accessed 12 September 2018]
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?.
The Accounting Review. [online]. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 12 September 2018]
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Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific
Accounting Review. [online]. 24(3), pp. 1-34. Available from
https://doi.org/10.1108/01140581211283904 [Accessed 12 September 2018]
Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), pp. 767-
796. Available from https://doi.org/10.1080/09638180.2012.671465 [Accessed 12
September 2018]
Wesfarmer. (2017) Wesfarmer annual report and accounts 2017 [online]. Available from:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0 [Accessed 12 September 2018]
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