Enhanced Auditor Reporting: A Critical Evaluation of Woolworths' Annual Report

This assignment evaluates the effectiveness of enhanced auditor reporting through a critical evaluation of Woolworths' annual report. It covers independence requirements, non-audit services, audit remuneration, key audit matters, audit committee, audit opinion, and more.

Audit Assignment

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By student name
Professor
University
Date: 2nd Sep 2018.
Executive Summary
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This assignment aims to draw attention towards the significance and effectiveness of enhanced
Auditor Reporting. To understand the topic with the help of a real example a set of questions has
been answered. The critical evaluation of the annual report of the Group has helped to develop
an understanding as to whether it has passed the expectations of enhanced audit reporting or not.
Eventually, it becomes clear that the auditor’s report has done satisfactorily well. The provided
information seems to have met the expectations and interests of all the shareholders and no
material information has been neglected in the report.
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Table of Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................3
Independence requirements.......................................................................................................................4
Non-audit services provided........................................................................................................................4
Analysis of the Auditor’s remuneration.......................................................................................................5
Key audit matters, and audit procedures performed..................................................................................6
Audit Committee.........................................................................................................................................8
Audit Opinion..............................................................................................................................................9
Directors’ and Management’s responsibilities..........................................................................................10
Material subsequent events......................................................................................................................10
Follow-up questions to the Auditor at the company’s Annual General Meeting.......................................12
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
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Introduction
Enhanced audit report is not fundamentally different from the conventional form of audit
report. It only places more importance on disclosures that are detailed and issues that are
material. This decade as seen a lot of incidents where companies have manipulated their
financial statements to quench their own greed of profit maximization or growth. Therefore,
there is an urgent need of introducing improvements in the quality of audit reporting. The
differential factor of enhanced reporting is the introduction of Key Audit Matters (Bachmann,
2018). This was introduced by the Auditing and Assurance Standards Board for reporting
periods ending on or after 15th December, 2016. The Annual Report that has been studied and
analysed for the purpose of this assignment belongs to the accounting period ended 25th June,
2017. It has also been kept in mind that the report has been assessed only on the basis of such
criteria that makes an audit report an enhanced audit report.
Independence requirements
The principle of “independence” is said to be met when the auditor conducts the audit in a
manner that is free from the undue influence of any party, external or internal. This may
include the company with which the audit engagement has been entered into or any supplier of
materials. The Auditor has to put to use his own judgment and professional skills to reach a
conclusion. It is only on the basis of this conclusion that the audit opinion will be formed.
Therefore this conclusion needs to be unbiased (Alexander, 2016).
The independence declaration has been given by the partners of Deloitte Touché Tohmatsu,
who are the auditors of the company. This declaration is in accordance with the specification of
Section 307C of the Corporations Act 2001 which requires the Auditors to expressly declare that
there has been no contravention of the Act with respect to the requirement of independence.
Further, there is not any deviation from the ethical code of professional conduct, as applicable
to them (Bizfluent, 2017).
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Non-audit services provided
Apart from the audit service, some non-audit related services has also been provided to the
company. These services are clearly disclosed under the head 'Auditor's Remuneration' along
with the amounts paid for it. The non audit service has been categorised into sub heads which
includes services in the nature of assistance in accounting and accounting related matters, due
diligence in financial matters, assurance services in the field of debt raisings, regulatory reviews,
tax compliance and other miscellaneous and sundry services. These services has been provided
to the other companies of the group as well (Das, 2017). Infect such services has been made
available through the international associates of Deloitte Touché Tohmatsu Australia.
Analysis of the Auditor’s remuneration
Particulars 2017 2016 Difference Percentage
Change
Remarks
Audit or Review of the
financial report
3254 2748 506 18.41 Increase
Regulatory and
Compliance Related
Services
129 239 -110 46.03 Decrease
Other Non-audit Related
Services
421 173 248 143.35 Increase
Tax compliance Services 108 113 -5 4.42 Decrease
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Total 3912 3273 639 19.52 Increase
As shown in the tabular representation, the overall audit remuneration has increased by 19.52
percent from the previous year, whereas the individual constituents do not show a definite
pattern. Some services has seen a decline while some others has seen a sharp increase. Amount
paid for tax compliance services had decreased by 4.42% (Farmer, 2018). This might have
happened because of the company's adoption of an improved strategy for compliance with
taxation laws and rules. The increase in non-audit related matters, which amounts to 143.35
percent raises a possibility of matters involving assistance and advisory service.
Key audit matters, and audit procedures performed
Key audit matters are those matters the auditor perceives as matters that are of utmost
significance to the financial statements. The key Audit matters of Woolworths are discussed in
brief in the forthcoming paragraphs (Mahapatra, et al., 2017).
⦁ Carrying value of BIG W property, plant and equipment: The consolidated financial
statement includes property, plant and equipment of BIG W. These assets are carried on the
balance sheet at a value of $514.3 million. The auditor’s focused on this area because the
determination of the net recoverable value involved a lot of judgments, estimates and forecasts
on the part of the management. Resultantly there exists a certain level of a risk that the
carrying value of stores and related property, plant and equipment and other non-current
assets may be higher than the amount that can be recovered from those. The audit procedure
adopted to respond to this matter was not limited to a single procedure but involved a mix.
Understanding the methodologies involved test of details, whereas evaluation of the Group’s
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assumption and estimates was analytical in nature (Werner, 2017). Similarly, verifying the
mathematical accuracy of the cash flow models was a test of balances. Test of controls was also
carried out to understand the assessment of carrying values of the said assets.
⦁ Inventory provisioning: the accounting policy followed by the Group is to carry
inventory at an amount which is lower of the cost or net realizable value. As disclosed in the
financial statements, the group had inventories amounting to $4,080.4 million. Since there are
a lot of factors like historical trends obsolesce, sales assumptions, the auditor put emphasis on
assessing the fairness of the same (Visinescu, et al., 2017). The audit procedure adopted in this
case is primarily test of controls. However, testing the value on a sample is test of balances.
Analytical procedures were adopted to review the historical accuracy of making provisions.
⦁ accounting for rebates: Due to the size and volume of transactions The Group receives
significant amount of incentives, discounts and rebates from its suppliers and other parties. The
company usually records these items by reducing the value of inventory or by lowering the cost
of sales, as the case may be. Understanding the logic behind recognizing these items, and their
timing, is extremely complex and sometimes difficult. It calls for an in depth understanding of
the terms and conditions of the contracts and agreements between the two parties. It is
because of these reasons that the accounting of rebates forms a key audit matter. While
responding to this matter, the auditor chose to apply the technique of test of controls and
analytical procedures (Dumay & Baard, 2017). By the test of controls technique, the auditor
examined the strength of the controls in place, by which the management monitors th ese
items, whether manually or automated.
⦁ IT Systems: The IT systems throughout the Group are multitier and there are varying
levels of integration between them. These systems are important for the ongoing operations of
the business (Félix, 2017). The assessment of the information technology system therefore
forms a vital component of the audit. If we look closely, all the other areas of audit are
somehow, and to a large extent, dependent on the IT system. The audit procedure involved
discussion with the management, at appropriate levels, an understanding the key financial
processes so that the dependence of the process of financial reporting on the IT system can be
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established. Testing the design of the Key IT tools was a substantive test of detail as well as a
test of controls.
Audit Committee
Yes, the Woolworths' group has an audit committee which comprises of five members,
including Michael Elmer, who is also the Chairman. All the members of the audit committee are
non-executive directors, namely, Gordon Cairns, Jillian Broadbent, Siobhan McKenna and Scott
Perkins (Saeidi, 2012).
The company has a charter for the audit committee which aims to streamline the
behaviour, roles and responsibilities, and duties of the members. This is done by explaining the
actions or behaviour that is expected from the committee members. The main point of the
charter is summarized under the following categories.
● Objectives: The role of the committee is to assist and advise the Board about the
applicable framework of governance. The role also includes making suggestions with
respect to risk management and internal control systems. Other areas of assistance
include compliance, accounting policies and practices, internal and external audit
functions, and the reporting of financial information (Raiborn, et al., 2016).
● Authority: Appropriate degree of authority is given to the committee to act within the
scope of this charter. They are also authorized to have access, at all times, to the senior
management and also the records of the company. No restrictions are imposed in this
regard. The Committee is also permitted to meet the auditors, whether external or
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internal, even without the presence of any member from the Board. The committee
members are allowed to take professional help from experts, if the situation demands
(Heminway, 2017).
● Composition: A minimum of three directors are required to form the committee. The
majority of the members shall be independent directors. These members are
mandatorily required to be financially literate i.e. that should be able to easily read and
understand financial reports. They should also possess business expertise. The Board
shall appoint a Chairman from the Committee’s members, who should be an
independent director. Decisions regarding appointments and reappointments to the
Committee shall be taken by the Board. The committee shall not have any executive
director. The Board shall, on a yearly basis, review the composition of the Committee to
make sure that there is an appropriate balance of skills and experience. The Company
Secretary will be the Secretary of the Committee (Linden & Freeman, 2017).
● Responsibilities:
The committee should evaluate and monitor the important corporate policies, including the
Company’s Delegations of Authority.
It should periodically review the Company’s corporate governance framework and give
suggestions for improvement (Knechel & Salterio, 2016).
Selection, appointment and reappointment of external auditors shall be suggested by the
Committee to the Board. The committee should also hold a discussion with the external auditor
about the scope of the audit and the audit fees for that particular engagement.
The committee shall also act as a bridge to coordinate the programmes of the internal and the
external auditor.
It shall also review the quality and effectiveness of the audit. The committee shall, annually,
assess the performance of the auditor.
It shall discuss and resolve the issues raised by the auditor in his report.
It shall also review the ability and effectiveness of the policies to foresee risks.
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Other areas of responsibilities are transactions with the related parties, continuous disclosure
and internal audit (Charter Audit, Risk Management and Compliance Committee, 2015).
Audit Opinion
In the opinion of the Auditors, the financial statements are prepared and presented in a way
that gives a true and fair view of the affairs of the entity. The financial report are in compliance
with the Australian Accounting Standards and the Corporations Regulations 2001.
Directors’ and Management’s responsibilities
Directors’ and Management’s responsibilities
The responsibility of the directors and the management is restricted to the preparation of the
financial report in a true and fair view. The preparation of this report, in accordance with the
specifications of the Australian Accounting Standards and the Corporations Act 2001 is also the
responsibility of the directors. The directors have to determine the level of internal controls
which is necessary to support the preparation of the financial report. In preparing the financial
report, the directors are also responsible for assessing the ability of the entity to continue as a
going concern (Grenier, 2017).
Auditor’s Responsibilities
The responsibility of the auditor is limited to expressing an opinion on the financial reports. He
expresses an opinion after obtaining sufficient assurance that the reports reflect a true and fair
view in reality. The auditor’s aim is to gather conclusive evidence that the financial report as a
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whole is free from material misstatement, whether due to fraud or error. Thereafter the
auditor is responsible to issue an auditor’s report which he addresses to the shareholders of the
company. It is to be understood here that reasonable assurance is clearly different from a
guarantee; it is only an opinion based on professional knowledge and judgment.
Material subsequent events
After the closing of the reporting date, the following subsequent events has taken place, which
is in relation to the Company’s exit from the Home Improvement business.
● The Company made a Share Sale Agreement (SSA) with Home Consortium under which
it agreed to sell off 66.7% share of Hydrox. The SSA includes 40 Masters freehold trading
sites, 21 Masters freehold development sites and 20 Masters leasehold sites, with
Woolworths obliged to acquire three Masters freehold sites and take assignment or
assume responsibility for the liabilities associated with 11 Masters leases; and
● Further, on 4Th August, 2017 Lowe’s shares in Hydrox were sold to a Trust. Home
Consortium was the beneficiary to this trust. The shares were sold for a consideration
$250.8 million, as agreed by the two parties. The JVA was subsequently terminated.
As a consequence to sell Hydrox, huge Capital losses were incurred after the balance sheet
date. It is estimated that after the completion of transaction with Home Consortium, the capital
losses would come to $1.8 billion. It is also estimated that there will be enough capital gains in
the near future, against which these capital losses would gradually be adjusted. This is the
reason that the group has not recognized any deferred tax asset in its books (Annual Report
2017, 2017).
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As an interested third party stakeholder, assessment of the effectiveness of the material
information reported by the Auditor:
The material information given by the Auditor of Woolworth’s Group would enable any
stakeholder to make a sound financial decision. I personally feel that the data provided in the
report is immensely informative, especially the part on key audit matters. The disclosure about
subsequent events too gives a helpful understanding of the affairs of the company. The
segment wise performance and other incidental information, gives out material information as
to how each segment is actually performing (Goldmann, 2016). An assessment of the same
enables me to actually understand which segment is getting more revenue for the Group, and
which is larger in terms of volume of sales. Correlations can also be established, of the segment
performance with the economic situation of the respective sector. Footnotes on critical
accounting estimates were valuable too. Financial Risk management, which was further divided
into market risk, credit risk and liquidity risk helps in decision making.
Material information which could be missing, under-reported and/or not fully explained or
disclosed in an effective way for the intended users.
The estimates and forecasts made for arriving at the carrying amount of specific assets
including property, plant and equipment could have been given a more detailed explanation.
Similarly a proper disclosure about the assumptions underlying the provisions for inventory
would have been welcomed.
Follow-up questions to the Auditor at the company’s Annual General
Meeting
The audit report gives out all the information that it is required to by the legislation and the
regulatory body. However there are few questions that I would like to ask to the auditor.
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⦁ “Was there any matter that could have been considered as insider trading, had the
magnitude be a little more? Was there an activity by the whistle-blower? If so, what was it
about, how did the entity conduct an internal investigation and what was the outcome of
such an investigation?”
⦁ “Was there any deficiency in the reports of the internal audit department? If yes, did
you discuss it with the Audit Committee? Was there any weakness in the internal control
system? Did you discuss with the management? Why are they not considered material?”
Conclusion
The analysis of the audit report, affirms a belief that the annual report has performed well on
the measures of enhanced audit reporting. All information that can be considered material
were adequately given. The notes and explanations that formed part of the financial
statements were self-explanatory (Sonu, et al., 2017). Moreover, the auditor's proper reporting
techniques makes even complex issues crystal clear. The report certainly meets the required
standards of performance. The objective of transparency and information value has been met
excellently. However there's still a long way to go before the highest standards of excellence
are met.
References
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[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
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Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge
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