Wesfarmers - Business & Human Rights Resource Centre (PDF)

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Auditing & Assurance

Wesfarmers
Executive summary
This report assists in offering information on the new ASA 701 (communicating key audit
matters) in the report of Independent auditor accounting for the impact of global financial
crisis and revision towards ASA 570 (going concern). Further, with the help of this report, the
key audit matters of Wesfarmers will be highlighted. Moreover, an enhanced study of the
company’s audit report for the year 2016 also assists in reflecting no ASA 701 standard has
been adopted. Thus, this company can serve as the best example for this report. Further, other
companies that are in the top ASX 100 like Woolworths, The A2 Milk company, Graincorp
Limited , Coca Cola is taken into consideration. Nevertheless, this report reflects three
significant key audit matters and offers brief reasons and description for the same. Overall, an
enhanced discussion of the company’s annual report highlights that such possible KAM’s
may be selected by the auditor’s in the upcoming tenures because these are effective and
relevant.
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Contents
Introduction...........................................................................................................................................3
Reasons for revising ASA 570................................................................................................................4
Major concepts of ASA 701 in the independent report of auditors.......................................................4
Related matters for auditors and directors...........................................................................................4
Disadvantages and advantages of ASA 701 standard............................................................................5
Review of the company’s annual report and focus on Consumer Staples Sector..................................5
 Rebates through suppliers.............................................................................................................6
Impairment of the company’s non-current assets that also included intangibles.................................7
Finalization of the acquisition accounting of Homebase.......................................................................8
Conclusion and recommendations......................................................................................................11
References...........................................................................................................................................13
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Introduction
The influence of global financial crisis reverberated the entire world that has resulted in the
introduction of new accounting standards. The accounting standard related to financial
instruments lacked the urgent and revision on the part of IASB. This is the reason why
revision in accounting standards was held quite remarkable given that many companies were
just getting accustomed to business reporting in the context of present standards (Moroney &
Trotman, 2016). Moreover, the past standards were faced with an issue of significant
decrement in earnings owing to extensive losses being identified on the fair value
remeasurement of derivative instruments. Furthermore, the aftermath of such global financial
crisis can also be observable till date and the reason behind this can be attributed to the
inefficacies prevalent in the past accounting standards. Therefore, new accounting standards
like ASA 701 and ASA 570 have been introduced by the IASB that played a major role in
eradicating such issues (Petty et. al, 2012). Besides, key audit matters remained unreported in
the prior years, thereby costing huge amounts to the investors. Nonetheless, with the
assistance of this report, annual report of Wesfarmers will be studies wherein the reasons for
revising these standards will be highlighted. This will be followed by directors and auditors’
concerns regarding the same and lastly, the disadvantages and advantages of ASA 701 will
also be discussed.
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Reasons for revising ASA 570
The emergence of global financial crisis paved a path for various disturbances in the entire
economy that affected many stakeholders. It emerged in the year 2008 and created mass
destructions throughout the world. The reason behind this can be attributed to inappropriate
disclosures in association to financial issues of an organization’s capability to continue as a
going concern (AUASB, 2015). Nevertheless, the revision of such standard assisted in
eradicating many issues like simplifying the scenarios that can impact the assumptions of
going concern. However, this term has been substituted by going concern basis of accounting
in the current phase but the auditors’ base approach has not been changed (Parrino et. al,
2012).
Major concepts of ASA 701 in the independent report of
auditors
This standard was first issued by the AUASB in the independent auditors’ report in the year
2015. Further, such standard has regulatory power under section 336 of the Corporations Act
that assisted in framing proper auditing standards. In addition, such standard is primarily
based upon the ISA 701 that signifies communication of key audit matters in the independent
auditors’ report. Moreover, this standard can be implemented for financial reporting tenures
ending on or after December 15, 2016.
Key audit matters are the major concept or approach of this standard as these are accounted
by the auditors based on their professional judgement while undertaking audit processes.
Hence, the professional judgement of auditors is important to ascertain such KAM’s. Further,
communication on the part of auditors is also necessary for identification of these KAM’s
(Hoffelder, 2012).
Related matters for auditors and directors
Directors pursue best knowledge of the key audit matters and it is their responsibility to
convey or communicate these to the auditors. Moreover, it is notable that often few
information may be useful to the financial position and overall health of a company and
therefore, directors may hesitate in revealing such details. Hence, in these situations, the role
of auditors plays a very significant part as he requires vouching for such key audit matters
and thereafter, report the same. Besides, paragraph nine of the standard highlights that it is
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the auditors’ duty to ascertain such key audit matters (AUASB, 2015). Further, paragraph
eleven states that the auditors must endeavour in describing these key audit matters under
proper subheadings so that the same can be aligned with the disclosures prevalent in the
financial statements. Nevertheless, the auditors must be very careful in restricting himself
from disclosing sensitive or confidential details to unwanted parties. Nevertheless, under few
situations, the auditor may also decide not to disclose specific key audit matters owing to
legal boundaries or requirements of public interest (Dauber, 2009).
Disadvantages and advantages of ASA 701 standard
The introduction of new ASA 701 standard played a key role in enhancing the transparency
of financial reporting. This is because it facilitates in offering insight into various key audit
matters that can pave a path for decision-usefulness of auditing and financial reporting.
Therefore, in this way, stakeholders can be offered benefits on a whole. Furthermore, it can
also be feasible that the auditors’ liabilities are increased owing to the emergence of such
standard (Knechel, 2017). Besides, it is also feasible that the auditors offer relevant
disclosures only to address the requirements of the standard, thereby defeating or surpassing
the very sole objective of the standard. Nevertheless, these feasibilities are very remote in
nature and auditors being from a self-monitored profession must adhere to the standard in
true sense.
Review of the company’s annual report and focus on
Consumer Staples Sector
In relation to Wesfarmers Ltd, the same is regarded as the top companies of the Australian
Stock Exchange and thus, been selected for attaining the objectives of this report. In page
number 123 of the company’s annual report, the report of independent auditors has been
presented or reflected in appendix one. Moreover, the auditors of the company are Ernst and
Young. However, it is notable that the company has not adopted the ASA 701 standard
within its framework in advance and therefore, no key audit matters have been effectively
communicated in the auditors’ report. Nonetheless, a brief discussion on the company’s
financial statements, notes to financials, and the overall annual report can assist in attaining
various aspects regarding this context (Dauber, 2009). Firstly, is the rebate through suppliers,
secondly is the impairment of non-current assets that also comprises of intangibles, and lastly
is the finalization of the company’s acquisition accounting of Homebase.
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 Rebates through suppliers
Rebate through suppliers is a major KAM and that is observed in the industry of consumer
staples. This may be the first feasible key audit matter present in the company’s annual report
because it purchases various products and services from suppliers and sometimes, it also
offers volume rebates to such suppliers under several types of schemes. This can be a major
KAM as these are identified in the company’s financial statements as income and any
alteration in the key assumptions can also alter the company’s income in a relevant way. The
top companies in the ASX 100 Woolworths, The A2 Milk company, Graincorp Limited,
Coca Cola are considered in this scenario. Further, the quantity of such rebates is also on a
higher scale that makes it important to consider as a key audit matter. Nevertheless, the
amount of such rebate relies on various factors like recognition time, commercial terms of the
suppliers’ contract, nature of rebate, etc.
The previously mentioned disclosure associated to rebates from suppliers have been disclosed
in note 6 of the company’s financial statements. Overall, few suggested approaches that can
check such key audit matter consists of:
 Evaluation of credits to supplier and its reconciliation with earlier rebates offered.
 Test verification of supplier rebates from the entire sample population so that
documentation can be facilitated.
 Study of terms and conditions of the suppliers with a primary supplier.
 Assessing the efficiency and design of controls while ascertaining and identifying the
rebates from suppliers (Knechel, 2017).
 Inquiry with the purchase managers, procurement staff, and supply chain managers in
association with non-standard agreements.
 Inquiry in relation to other rebate contracts that may not a significant part of the main
contract.
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 Comparison of rebate agreements with the past year agreements and evaluation of
ageing analysis and attaining material evidences.
Impairment of the company’s non-current assets that
also included intangibles
The first feasible key audit matter can be impairment of the company’s non-current assets
that also consisted of intangible assets. The reason why this matter can be regarded as a
significant KAM is attributable to the fact that it can easily affect the company’s financial
performance of the consumer staples. Further, it can be noted that the impairment loss in
relation to this context is a deductible cost and therefore, it can minimize the company’s
profitability. Moreover, if such companies intend to attain higher profits, it can easily conceal
its impairment losses. Therefore, it is vital for the auditors to exert due care while accounting
for the efficacy of such impairment losses (Geoffrey et. al, 2016). Nevertheless, it is also
notable that based on the accounting standards especially AASB 136 (impairment loss), the
company must compute all its impairment losses at the termination of every reporting period.
This also comprise of testing or verifying all non-current assets comprising goodwill for
impairment losses. Overall, an evaluation of the company’s annual report and financials play
a key role in reflecting that there is no material default or flaw in relation to impairment
losses (Cooper & Coram, 2015).
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The previously mentioned disclosure can be attained or witnessed in note 17 of the
company’s annual report. Further, it also offers key assumptions in relation to the impairment
of the company’s non-financial assets. Moreover, the primary cash-generating units of the
company are Curragh and Target and if there exist minimal variations in such assumptions
associated with the computation of impairment losses, then these may depict impairment loss
on a whole (Needles & Powers, 2013). Overall, the recommended auditing approaches in
relation to the same comprise of assessing the appropriateness of financial disclosures of the
company’s reporting, assessing the assumptions that are associated with the rate of growth,
discounting rate, and ascertainment of cash-generating units (CGU’s), and evaluation of the
assumptions that are associated with the flow of cash.
Finalization of the acquisition accounting of Homebase
This may be considered as the third feasible key audit matter that is prevalent in the annual
report of the company. In relation to this, the company has procured Hampden Group
(Homebase) based on the principles laid under AASB 3 (business combination).
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The previously mentioned disclosure can be witnessed from note 20 of the annual report of
the company. Moreover, this can be a feasible key audit matter owing to the massive
acquisition size and its influence on the company’s balance sheet. Nonetheless, the total
acquisition value is $665 million and therefore, it may be an enormous amount. Besides, it is
notable that proper judgement is needed during determination of assets fair value and
acquired liabilities and therefore, changes in the assumption may also change the net fair
value of recognizable liabilities and assets (Porter & Norton, 2014).
Overall, the recommended measures for encountering this key audit matter are:
 Consultation with the external experts like real estate agents, valuers, etc.
 Assessment of alterations in estimation and key judgements.
 Evaluation of alterations in the fair value during the provisional tenure of one year.
 Evaluation of acquisition accounting methodology and policy of the company.
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Conclusion and recommendations
The company must be adopting the standard (ASA 701) from the financial period ending
June 30, 2017. Therefore, the judgement on the part of auditors for choosing the KAM’s may
be observable at that time itself. Besides, at present, this report assists in suggesting few
KAM’s. Further, the choice of three key audit matters primarily relies on the evaluation of
the company’s annual report that is assisted by both non-financial and financial reasons.
Further, the reasons for selecting these key audit matters can be attributed to the fact that
these are logical as they form part of the auditors’ report, thereby facilitating in enhanced
decision-making on the part of users of financial statements. Besides, such users become
aware of the reasons why such KAM has been opted by the auditors.
Moreover, it is not only about the primary reasons for selecting the key audit matters but also
the methodology of audit selected by the auditor together with his observations and
reservations. Nevertheless, the auditor must offer in brief the auditing measures and processes
undertaken by him for such key audit matters (Arens et. al, 2016). The first possible KAM
was associated to supplier’s rebate and the reason why auditors chose this is because such
rebates are identified as income and any variation in the assumption can possess a material
influence on the company’s income statement. The second possible key audit matter is related
to the impairment of the company’s non-current assets that also comprised of intangible
assets. The reason behind this can be attributed to the fact that these transactions possess
greater sensitivity towards impairment losses (Arens et. al, 2016). Besides, effective auditing
processes can assist in catering to the problems of such key audit matter. The third possible
KAM was associated with acquisition of Homebase that was a primary procurement and
auditors have vouched for the effectiveness of the accounting transactions associated with
this procurement. Further, the auditors must also have consulted with various experts to make
sure that the transactions are based on proper accounting standards.
Therefore, it is significant that these auditing measures or approaches must be accounted for
catering to key audit matters for the consumer staples. Furthermore, it must be noted that
auditing processes are a major portion of regular auditing and therefore, enhanced
implementation is significant. In relation to this, the standard of ASA 701 can assist in
offering a framework that can enable disclosure of key audit matters and therefore, an extra
duty is cast upon the company’s auditors. Overall, in the current scenario, these aspects are
being given due weightage and with due passage of time, the same will increase in the future,
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thereby paving a path for assisting stakeholders and investors in their decision-making
procedures.
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References
Arens, AA., Best, P.J., Shailer, GEP., and Loebbechke. (2016) Auditing Assurance and ethics
in Australia. Pearson Australia
AUASB. (2015) Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report[Online].
Available at: http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
[Accessed 22 May 2018].
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.
Dauber, N. (2009) Wiley The Complete Guide to Auditing Standards, and Other Professional
Standards for Accountants. NY: John Wiley & Sons.
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors [online].
Accounting Horizons, 30(1), p.143-156. Available from https://doi.org/10.2308/acch-51309
[Accessed 21 April 2018]
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Knechel, W.R. (2017) Auditing Assurance and risk. Routledge: New York
Moroney, R., and Trotman, K.T. (2016) Differences in Auditors' Materiality Assessments
When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research. [online]. 33(2), p.551-575. Available from: https://doi.org/10.1111/1911-
3846.12162 [Accessed 22 May 2018]
Needles, B.E. and Powers, M. (2013) Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker.
Texas: Cengage Learning
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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 21 May 2018]
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