Compliance and Risk Management in Woolworth: An Audit Report

This report is a brief summary of Australian major retailer Woolworth, dealing with its compliance to ASX CGC principles and its audit risk assessment. The first part of the report provides an overview of the ASX listed company followed by the explanation of the corporate governance principles. The second part of the report deals with the risk assessment of the company. It shows the calculation of ratios and identification of relevant audit risk. Inherent risk is the one which is majorly associated with the company. Measure to reduce such risk are also discussed in the later part followed by a conclusion that states the findings of the report.

RUNNING HEAD: AUDITING THEORY AND PRACTICE
Compliance and risk management

Auditing theory and practice 1
Executive summary
This report is a brief summary of Australian major retailer Woolworth, dealing with its
compliance to ASX CGC principles and its audit risk assessment. The first part of the report
provides an overview of the ASX listed company followed by the explanation of the corporate
governance principles. The first part also includes the implication of such principles and
Woolworth’s compliance with them. The second part of the report deals with the risk assessment
of the company. It shows the calculation of ratios and identification of relevant audit risk.
Inherent risk is the one which is majorly associated with the company. Measure to reduce such
risk are also discussed in the later part followed by a conclusion that states the findings of the
report.

Auditing theory and practice 2
Contents
Introduction.................................................................................................................................................3
ASX CGC Principles...................................................................................................................................3
Lay solid foundations for management and oversight.............................................................................4
Structure the board to add value..............................................................................................................5
Act ethically and responsibly...................................................................................................................6
Safeguard integrity in corporate reporting...............................................................................................7
Make timely and balanced disclosure......................................................................................................7
Respect the rights of security holders......................................................................................................7
Recognize and manage risk.....................................................................................................................8
Remunerate fairly and responsibly..........................................................................................................8
Risk Assessment..........................................................................................................................................8
Recognizing the nature............................................................................................................................8
Market overview......................................................................................................................................8
Woolworth’s strategy..............................................................................................................................9
Computation of ratios..............................................................................................................................9
Income statement ratios.......................................................................................................................9
Balance sheet ratios...........................................................................................................................10
Relevant audit risk.................................................................................................................................10
Ways to reduce the risk.........................................................................................................................10
Conclusion.................................................................................................................................................11
References.................................................................................................................................................12

Auditing theory and practice 3
Introduction
Woolworths Group Limited is a major retailer company operating its business in Australia. It is
ranked second largest in Australia in terms of revenue, after Wesfarmers. The company servers
in the areas include Australia, India and New Zealand. It reported a loss of $1.235 billion in
2016. Woolworths is publicly listed on the ASX and has ticker symbol WOW.AX. The
company totally compliance with the Corporate Governance Principles laid down Australian
Securities Exchange (Woolworthsgroup.com.au. 2017).
ASX CGC Principles
Corporate Governance set down the rules, regulations, processes and systems through which
authorities are controlled and exercised within a corporation. It lay down some principles which
are required to be complied by every ASX listed company. However, there are several impacts
also, if the principles are not complied with and are not followed (Shinewing.com.au. 2015).
They are as follows:
 Woolworth is obliged to show its director’s and management’s roles and responsibilities
in its statement.
 The company has to amend the structure of its board which includes its size, composition,
skills and commitment to fulfill the duties.
 Woolworth must act ethically and responsibly. Its operations must be ethical in nature.
 Safeguarding the integrity in corporate reporting is the responsibility of the company
which is to be fulfilled as per the principle.
 It is compulsory for Woolworths to disclose each and every matter timely with a view
that it may impact company’s securities’ prices and values.

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 Woolworth is obliged to give appropriate information to its shareholders in order to
respect their rights and allow them to exercise the same effectively.
 A risk management framework is required to be established and timely review of the
same is needed.
 Woolworth is liable to pay fair remuneration to its directors and must retain high quality
executives in the business according to the CGC principles (Asx.com.au. 2014).
Apart from the above implications, Woolworth’s Corporate governance statement clearly reflects
that the company’s key corporate governance policies and practices during the year 2017. It is
said in the report that, Woolworth has followed each of the recommendations of the ASX
Principles and Recommendations. The eight ASX principles applied by Woolworth are as
follows:
Lay solid foundations for management and oversight
The role of board of directors is been clearly represented in the governance statement of
Woolworths Group Limited. The role includes serving the shareholders in their interest,
accountable to them for the strategic direction taken to increase their value and implementing the
approved strategy and delegating it to the management through CEO. Along with the role,
responsibilities of Woolworth’s board of directors is also clearly mentioned in the statement. The
statement represents the following responsibilities of company’s board of directors. It includes:
 Reviewing and approving the strategic policies.
 Monitoring the annual budgets, activities and measuring the financial performance.
 Company’s financial statements approval; review the process of integrated reporting
followed by the management.

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 Performance evaluation of board and individual directors on annual basis.
 Performance evaluation and selection of CEO.
 Planning for the succession and remuneration for CEO, executive and non-executive
directors.
 Considering the social responsibility and ethical behavior of the company towards the
environment and society.
 Monitoring Woolworth’s activities and approving major capital initiatives and
expenditures.
 Reviewing and monitoring the Company’s governance policies and practices.
All the above listed duties are duly followed by Woolworths’ board of directors and are clearly
mentioned in firm’s corporate governance statement (Woolworthsgroup.com.au. 2018).
Structure the board to add value
Board structure
There are majority of non-executive directors in Woolworth’s board, who pursue competent
skills to fulfill all their responsibilities with due knowledge and experience.
Skills and composition of Board
Woolworth’s directors has wide range of different skills, backgrounds and experiences which are
important for taking crucial decisions for the company and making the governance effective. The
board is capable of regularly reviewing the current and desired skills and capability of the
directors along with their experience. The key skills and experience include:
 Retail market knowledge and experience of customers need in merchandise sectors.

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 Experience in defining strategic objectives, assessing business plans and commitment to
corporate governance standards.
 Commitment to CSR, sustainability initiatives and proactive management approach
towards workplace safety, mental health and physical care.
 Expertise in adopting new technology, understanding financial drivers, identifying the
legal and corporate issues or affairs and anticipating the key risk to the organization.
 Capable of making effective risk management frameworks (Woolworthsgroup.com.au.
2018).
Act ethically and responsibly
The core values and code of conduct followed by Woolworth defines the standards of behavior
expected by the people. The group’s core values include:
 People of the group care deeply
 They listen and learn
 They always do the right thing.
The code of conduct of the company is applied to all directors, employees and management of
Woolworths in order to act and work ethically and responsibly. The code of conduct ensures that
honesty, integrity and fair dealing is prevailing in the company by its people. Woolworth also
complies with its corporate responsibility by following the related strategy.
Safeguard integrity in corporate reporting
An audit and risk management committee is framed, whose chairman is Michael Ullmer. The
committee comprises of minimum three directors and majorly independent. It is responsible for
safeguarding the integrity of financial reporting. The committee overview and review the quality

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and effectiveness of the external audit. It also checks the issues related to financial reporting and
assess the appropriateness of accounting policies (Woolworthsgroup.com.au. 2018).
Make timely and balanced disclosure
Woolworth has made a process which allows the company to provide shareholders with timely
and balance disclosures. It enable them to give the relevant information as and when required.
Woolworth has continuous disclosure policy which aims at complying with the disclosure
regulatory requirements, clarifying the accountability of senior executives and promoting the
investors’ confidence.
Respect the rights of security holders
The shareholders and security holders are given all the information through the official website
of the group. The website displays the ASX announcement, financial and CSR reports, dividend
and share price history and other data important to shareholders. The Company’s ASX
announcements and related reports can also be seen on its official website.
Woolworth also has investor relations program that focuses on effective communication with
investors, analysts, media and proxy advisors.
Recognize and manage risk
Being complex group of business, Woolworth is exposed to various financial, strategic,
operational and compliance risk. It has a risk committee which recognizes and manages all the
types of risk associated with the company. It has a framework for the same which deals with
managing material risks of conducting business.

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Remunerate fairly and responsibly
Woolworth Group has a committee named as people performance, which is responsible for the
issues related to Company’s remuneration policies. It review them to ensure that it is competitive
and designed to attract, and retain employees (Woolworthsgroup.com.au. 2018).
Risk Assessment
Recognizing the nature
Woolworth Limited is a major Australian retailer, originated in 1924 in Sydney. The company
mainly focuses on the minimization of prices and increasing the quality of the products. The
group has employed many strategies to achieve its set targets and is now putting more efforts to
maintain customer satisfaction, in order to achieve growth and revenue in future. Woolworth has
a variety of products and also its position helps the business to gain future growth. Along with
this, their supply chain management is also really good (Reuters.com. 2018).
Market overview
As per the Deloitte report, Australian retail market has experienced new entries in the market
such as American retailer, The TJX Companies Inc., UK department stores John Lewis and
Debenhams and French leisure good retailer Décathlon. This is due to the strong economic
conditions of Australia and higher demand for international brands. The report also said that the
only two retailers in Australia that appeared in top 250 global retailers list are Wesfarmers and
Woolworths. However, the Australian retailer are fighting back with the investments in concept,
store design and flagship stores. Therefore, Woolworth is trying to attract customers by
providing them in store services and also enhancing their online shopping experience. This will
help the company to compete with the new competitors (Deloitte Australia. 2017).

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Woolworth’s strategy
The business strategy of the group is pretty simple. The company is focused on satisfying its
customers to a great extent. In order to achieve this goal, the group has establish a BIG W team
that will execute the new business strategy. The team is focused on upgrading the trust of the
consumer on price and delivering right and good quality products. BIG W follows a simple
strategy to achieve the predetermined goals. It deals with reduction of cost, improvement of the
process, development of single team which will work in an integrated manner and update of
product offerings. In addition to this, development of cohesive brand and refreshing the stores
are the strategies followed by Woolworths.
Computation of ratios
Income statement ratios
Gross Profit margin Gross profit /Net sales 29%
Net profit margin Net profit / net sales 3%
Operating profit margin Operating profit / Net sales -16%
Earnings per share
Net income / Number of outstanding
shares 1.19
Return on Equity Net income / shareholders’ equity 16%
(Financials.morningstar.com. 2018).
Balance sheet ratios
Current ratio Current Assets / Current liabilities 0.79
Quick ratio Quick Assets / Current liabilities 0.29
Debt-equity ratio Debt / Equity 32%
Days Sales Outstanding (Receivables / Revenue) x 365 3 days

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Days Inventory
Outstanding (Inventory / COGS) x 365 37 days
Days Payable Outstanding (Accounts Payable / COGS) x 365 47 days
Cash Conversion Cycle DIO + DSO – DPO -6.38627
Receivables Turnover Revenue / Average Accounts Receivables 32.98
Inventory Turnover COGS / Average of Inventory 2.30
(Financials.morningstar.com. 2018).
Relevant audit risk
Inherent risk, detection risk and control risk are the three basic audit risk that prevails in an
organization. Woolworth is mainly exposed to inherent risk due to the less cash balance and
reduced profit. This situation mainly arises due to the error or omission in a financial statement
because of some factors. Woolworth has a negative cash conversion cycle and has a NPR of 3%
only. Also the company has negative operating profit and high payable and inventory days in the
year ending 2017. Overall. The position of the company has degraded in last year due to the
inherent audit risk associated with it. Also being a multinational company, the various
environmental and external factors increases the group’s inherent risk (Loughran, 2010).
Ways to reduce the risk
There are several ways to reduce these risk. One of the way to reduce it is to bring harmonization
in the auditing and accounting standards followed by the company. Another is that Woolworth
can improve and enhance its internal control system by critically reviewing the roles of its Audit
and Risk Management committee. Inherent risk is basically founded in the financial statements,
so it is necessary for the company to hire qualified accountant in order to avoid such risk.

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Disclosing the proper notes to statements is another way by which a company can minimize such
risk. If the notes are properly disclosed, auditor can easily review the transactions made in
different accounts. Woolworth can also recheck its double entry system to make sure that no
omission or error is there (Knechel and Salterio, 2016).
Conclusion
The above report concludes that Woolworth Group Limited completely complies with the ASX
Corporate Governance principles. Its statement on corporate governance listed the details of its
board of directors and its compilation with the ASX eight CGC principles. The report also find
out that having such a complex structure, Woolworth is exposed to the inherent risk, which is a
type of audit risk. The risk is been assessed by calculating the relevant ratios and common size
statements. Ways of minimizing or reducing it are also explained in the later part of the report.

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References
Asx.com.au. (2014). Corporate Governance Principles and Recommendations. [Online]
Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf [Accessed 29 April 2018].
Deloitte Australia. (2017). 2017 set to be ‘fascinating’ year for Australian retail | Deloitte
Australia | Global Powers of Retailing 2017. [Online] Available at:
https://www2.deloitte.com/au/en/pages/media-releases/articles/2017-set-to-be-fascinating-year-
for-australian-retail-240117.html# [Accessed 29 April 2018].
Financials.morningstar.com. (2018). Balance Sheet for Woolworths Group Ltd (WOLWF)
[Online] Available at: http://financials.morningstar.com/balance-sheet/bs.html?
t=WOLWF&region=usa&culture=en-US [Accessed 29 April 2018].
Financials.morningstar.com. (2018). Income Statement for Woolworths Group Ltd (WOLWF)
[Online] Available at: http://financials.morningstar.com/income-statement/is.html?
t=WOLWF&region=usa&culture=en-US [Accessed 29 April 2018].
Knechel, W.R. and Salterio, S.E. (2016). Auditing: Assurance and risk. 4th ed. Routledge.
Loughran, M. (2010). Auditing for dummies. Indiana: John Wiley & Sons.
Reuters.com. (2018). Woolworths Group Ltd (WOW.AX). [Online] Available at:
https://www.reuters.com/finance/stocks/overview/WOW.AX [Accessed 29 April 2018].
Shinewing.com.au. (2015). ASX Corporate Governance Principles and Recommendations.
[Online] Available at: http://www.shinewing.com.au/thinkbig/read/asx-corporate-governance-
principles-and-recommendations/ [Accessed 29 April 2018].

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Woolworthsgroup.com.au. (2017). Annual Report. [Online] Available at:
https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 29
April 2018].
Woolworthsgroup.com.au. (2018). CORPORATE GOVERNANCE. [Online] Available at:
https://www.woolworthsgroup.com.au/content/Document/Woolworths%20Group%202017%20-
%20Corporate%20Governance%20Statement.pdf [Accessed 29 April 2018].