Woolworths Auditor's Report: Independence, Remuneration, & Key Matters

This report provides a comprehensive analysis of an auditor's report, focusing on auditor independence, non-audit services, auditor remuneration, and key audit matters. It examines the Woolworths Group audited report for the period ending June 25, 2017, detailing compliance with independence requirements, the nature and scope of non-audit services provided, and the factors influencing auditor remuneration. Key audit matters, such as the exit of the home improvement business and the carrying value of Big W PPE, are discussed, along with the audit procedures used to assess them. The report also elaborates on the role of the audit committee, the distinction between management and auditor responsibilities, and the treatment of material subsequent events. The analysis highlights the essential elements that auditors consider during an audit exercise, providing insights into the complexities of financial statement auditing and the importance of independent oversight.

Executive Summary
This report generally focuses on the audit report an auditor prepares after an audit exercise.
It will put emphasis on auditor’s independence, non-audit services offered by the auditor as
well as the auditor’s remuneration. The report captures key audit matters encountered during
the audit exercise. It further explains the audit committee as a crucial vital element to an audit
exercise.
An independent opinion is normally expressed by an auditor after the completion of an audit
exercise which normally takes into consideration all the material subsequent events after the
reporting period. It’s the responsibility of the auditor to give the findings from his analysis and
the report will not let go of what role the management play in the success of an audit exercise
as well as differentiate the role for the two parties.

Content Page
Executive Summary……………………………………………………………………………………………………………………1
Introduction……………………………………………………………………………………………………………………………3
Main Body....................................................................................................................................4
Auditors Independence Requirements....................................................................................4
Non Audit Services...................................................................................................................4
Auditors Remuneration............................................................................................................5
Key Audit Matters.....................................................................................................................6
Audit Committee......................................................................................................................7
Audit opinion............................................................................................................................8
Directors and Management Responsibility Versus Auditors Responsibility............................9
Material Subsequent events....................................................................................................9
Conclusion..............................................................................................................................10
References..............................................................................................................................11

Introduction
Auditors are generally concerned with analyzing Company accounts and to give a report as to
whether according to their analysis the reviewed information is error free and show the true
state of affairs of a company opeartions.
This report will focus on Woolworths Group audited report for the period ending 25th June
2017. It will try to elaborate the key elements that are essential in an auditor’s report such as
independence, any non-audit services the auditors may offer to the company, the auditors
remuneration and the factors that may lead to the differences in the pay an auditor is entitled
to from one year to another.
There are crucial matters that auditors pay attention to during an audit that require special
assessment and treatment to avoid making wrong conclusion. The report will discuss some of
this key audit matters as stated by the executive committee which is a representative of the
management. It will also elaborate the distinction between the role of an auditor and the
management during an audit exercise.
Subsequent events are also a crucial element in an audit exercise. The report will look into the
subsequent events from Woolworths Group and try to explain whether they were adjusting or
non-adjusting events.
In brief it will explain crucial elements for one to pay attention at as far as accounts auditing is
concerned (Abdoli and Eftekhari, 2010).

Main Body
1. Auditors Independence Requirements
An audit exercise is normally carried out by an independent person who is not involved in the
business of the company they intend to audit. Independence calls for auditors to ensure that
they don’t have an interest in the business of their clients but are solely carrying out the
exercise with utmost integrity and professionalism (Mat Zain, Wahab and Foo, 2010).
The auditor of Woolworths Limited has complied with the independence requirements as seen
in his declaration stating that there were no contraventions whatsoever as far as auditor’s
independence requirements as given by the corporations Act 2001 is concerned and neither
was there contravention of professional conduct (Sultana, Singh and Van der Zahn, 2014).
The directors’ report also confirms that the auditor did not compromise with independence
requirement even in the provision of non-audit services.
2. Non Audit Services
According to Ra, Kim and Jeon (2016) non-audit services refer to any task that an auditor maybe
involved in during an audit exercise that does not involve the review and analysis of financial
statements. Such services are vital as they help identify weaknesses in operations and auditors
give guidance on the appropriate measures to undertake to correct deficiencies or measures
that will ensure the business enjoys competitive advantage (Malek and Saidin, 2013).
The auditors of Woolworth provide the following non audit services to their client:
From the auditors pay it is evident that the auditors provided the following non audit services:
i) Services in relation to regulation and compliance.
ii) Tax adherence services.
iii) Other services not in relation to the audit of financial statements.
This are further explained below.
a) Risk Assessment
The auditors assessed the four types of risks the business could face (Strategic, Financial,
operational and compliance) and further stated how the same could be mitigated.

a) Corporate Governance analysis.
The auditors also carried out research and found out that Woolworths group had adhered with
the requirements good corporate practices as far as governance is concerned throughout the
period they were reporting on (Shim, Lee and Rho, 2015).
b) Analysis of board
The auditor’s report also gave an analysis if vital skills and knowledge among the members of
the board that was important for the operation of the company.
It further gave the composition of the board as per gender composition as well as the
composition in terms of the duration the board members have been acting in that capacity in
the company (Ratzinger-Sakel and Theis, 2017).
3. Auditors Remuneration.
Remuneration of an auditor is normally set in a general meeting or by the board if they are the
first auditors of the company and includes the fee they are paid for carrying out the audit
exercise and any other services they might offer in the process of carrying out the audit exercise
which is not an audit related service.
The auditors’ remuneration for the current and prior year is as below:
Description Year
2016 2017
$ 000 $000
Auditors of the Parent Entity
Audit of books of accounts 3254 2748
Regulatory and compliance related Services 129 239
Other non-audit Related Services 421 173
Tax adherence services 108 113
3912 3273
Other Auditors
Audit of books of accounts 305 218

Other non-audit Related Services 83 44
Tax adherence services 154 160
542 422
Total Auditor’s Remuneration 4454 3695
There is a 21% increase in auditor’s remuneration between the two years. It should be noted
that auditor’s remuneration is not normally a fixed figure but is governed by factors such as
scope of work and the profit of the company. For instance from above it seems like the tax
compliance services offered by the auditors in 2016 was broader in scope than the service that
was offered in 2017 hence the reduced pay. The vice versa applies for other non-audited
services in the two years for both auditors.
The review of financial statements pay is determined by the scope of the work as well as the
profits the company has made. It can thus be said that more profits were made in 2017 as
compared to 2016 and thus a high pay to the auditors for this service in the current year
(Yuliarini, 2016).
4. Key Audit Matters
These are regarded as matters which are essential in an audit exercise and require attention
because errors can easily be made in their interpretation.
a) Exit of the home improvement Business
This matter had interrelated components that required consideration and estimation that was
critical e.g the estimation of the value of assets and liabilities that were disposed during the
business exit, treatment of the Lowe’s put option as per accounting terms etc. These activities
were complex and thus termed as key (Asbahr and Ruhnke, 2017).
b) Carrying Value of Big W PPE
The auditors noted that the performance of Big W had gone down in the recent years and thus
there was a risk that the balance sheet value of $514.3million could be higher that the
recoverable value. This was key matter because estimation of the recoverable value required
crucial estimates and judgment from the management (Bentley, Lambert and Wang, 2017).
c) Inventory Provisioning.

This was an area of focus to ensure that inventory was to be stated at lower of cost as
compared to the expected value after sale.
The audit procedures that were carried out in assessing the key audit matters explained above
fall in the following categories:
i) Tests of controls
These are controls used by a client to help them detect the effectiveness of the internal
controls set by a client to detect any errors, frauds or misstatements in operations. Stronger
controls indicate that clients can rely on them as part of his evidence.
 Evaluation of management and board set controls of the balance sheet values of non-
current assets as well as BIG W’S PPE to see if impairment provisions were necessary.
 Evaluation of the company’s management procedures and the record of assumptions
that they operate with.
 Testing controls associated with inventory valuation.
ii) Substantive tests of detail
These are tests that assure the auditor that the stated values in the financial statements are
correct.
 Assessing the worth of a section of inventory to check if it is held at a lower cost and
net realizable value, through evaluation of vendor invoices and sales prices.
 Analyzing the suitability of the accounting with regards to the sale of Home Timber and
Hardware as indicated in the sales agreement.
 Agreeing the total carrying value of assets captured in the financial statements to the
Home Consortium Share Sale Agreement.
iii) Substantive test of balances
 Evaluation of the appropriateness in account treatment of the Lowe’s Option.
 Evaluation of the effect of tax and accounting treatment used in the home
improvement exit transaction.
 Carrying out analysis on key assumptions used with emphasis on crucial matters such as
discount rates, growth rates and growth margins used in the impairment models.
iv) Analytical procedures.

This procedure help an auditor to identify potential risk areas that will call for his attention to
avoid wrong reporting.
 Evaluation of the provisions for inventory write offs to ensure that the provisions are
worthwhile.
 Having the knowledge of the inventory provisioning policy giving special considerations
to outdated inventory, seasonality, and also inventory turn calculations as well as sell
through rates(Chu, Dai and Zhang, 2010).
5. Audit Committee
Audit committee normally helps auditors to remain independent and they normally give an
independent view of the operations of management and the company as a whole (Grenier,
Ballou and Philip, 2011).This committee in Woolworths limited is referred to as the Audit, Risk
Management and Compliance Committee.
The committee is made up ofnon-executive directors and majorities are independent non-
executive directors. The committee is governed by a charter that states its structure, function
and responsibilities.
a) Structure
Woolworths Limited charter dictates that the Audit committee should have at least 3 members
who must be non-executive directors. At least a single member is required to have financial
qualifications and experience which will be stated by the board. The members to the committee
are appointed by the board who also determine the chairman to the committee (Klueber, Gold
and Pott, 2018).
The chairman to the committee should not be the board chairman. The chairman has the
responsibility to report to the board issues discussed during the meeting. He also acts as a link
between the committee and other parties of interest in the company which may need
information from him such as the Chief Executive Officer, the finance director, external auditors
etc.
The committee meeting can only be done with at least two members. The overall Company
secretary acts as the secretary to the Audit committee and takes minutes for the meeting. If the
chairman is not present during the committee meeting, one of the members will be appointed
to chair the meeting (Karim, Robin and Suh, 2015).
The committee is required to meet frequently and not less than 4 times in a year. The
committee is also permitted to invite any other person to attend the audit committee meeting.
b) Functions and responsibilities

i. Overseeing the appointment as well as performance of external auditors and ensuring
their independence is upheld.
ii. Risk management through identification, effective control measures and reporting the
same to interested parties.
iii. Evaluating and reporting on risky events or incidences the company may face.
iv. Assist the board to ensure compliance with set rules, processes and procedures as well
as reviewing and updating of the compliance framework to ensure that it is effective.
v. Review of the company financial reports with external auditors and reporting findings to
shareholders.
vi. Ensure financial policies are in compliance with set regulatory and statutory
requirements as far as accounting standards are concerned.
6. Audit opinion
This can be explained as the overall conclusion an auditor give as a general view after the
evaluation of the books of accounts as well as activities of the company.
For the audit report of Woolworths limited the auditor has given an unqualified opinion. This is
stated in the auditor’s report where they state that the financial report gives the true state of
affairs of the Company and that the company complied with Australian Accounting Standards
and the Corporations Regulations 2001(Habib, 2013).
7. Directors and Management Responsibility Versus Auditors Responsibility
The directors and the management are charged with governance of the company. They are thus
supposed to ensure that proper books of accounts are kept in accordance with the set
accounting standards. They should also ensure completeness and correctness of accounting
information to be audited. They also set internal controls and ensure they are effective and
workable (Jaber and Abu Fadda, 2016).
The auditor on the other side has a duty to analyze or examine financial statements to ensure
that they show the true state of affairs of the company and also to ascertain that they have
been prepared as per the accounting provisions set. Auditors also review internal controls to
determine their reliability and could give advice to the management on the level of its reliability
(Hegazy and Stafford, 2016).
8. Material Subsequent events

These are activities that may take place after the end of a reporting period of a company but
before audited accounting statements have been issued.
Woolworths Ltd had one subsequent event which was the home improvement bit which was in
relation with the home improvement business exit. This happened on the 26th Of June where
the company entered into an agreement to sale shares with home consortium subject to the
sale of Lowe’s shares. Woolworth was to assume some assets as well as responsibilities (Little
et al., 2011).
Further on 4th August Lowe’s shares in Hydrox were sold by a trust with home consortium as
the beneficiary in exchange for a consideration (Herda and Lavelle, 2014).
Subsequent event Treatment
This has been treated as a non-adjusting event. It has thus not been included in the current
audit exercise.
Conclusion
The auditors in their capacity have given concrete material information on their analysis and
findings. The report is straight forward and leaves no loophole that raises unanswered
questions.
To get more clarifications on the company operations as an interested party I would request the
auditor to answer the following follow up questions in the general meeting.
 The effectiveness of the Audit committee as per their assessment.
 Any internal control deficiencies the auditor may have identified and the extent of its
damage to the operations.
 Any material disagreement they had with the management during the audit process.
 Do they propose any changes in the management of the company and if yes why.
 For how long have they been auditing the company accounts and what can be his
explanation for his re appointment (Hay, 2014).
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