ACCT6006 Auditing: Analyzing the Dick Smith Electronics Ltd Case

This case study examines the collapse of Dick Smith Electronics Ltd. through the lens of auditing theory and practice. It investigates the historical context, reasons for the company's downfall, and potential breaches of Australian Accounting Standards by its directors. The analysis includes identifying signs that auditors should have considered regarding the company's going concern status, along with an evaluation of the annual report and potential discrepancies. The study also explores the rationale behind the auditor's unmodified audit opinion for the financial year ending June 30, 2015, and delves into the auditor's legal liabilities related to this opinion. The report concludes by summarizing key findings and their implications for auditing practices.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s Note

AUDITING THEORY AND PRACTICE 1
Table of Contents
Introduction..........................................................................................................................2
Brief history and rationale for collapse of Dick Smith Electronics Ltd..............................2
Standards considered for accusations on the on the directors for the collapse of the
company...........................................................................................................................................3
The signs auditors have considered to indicate the problem of going concern...................4
Analysis of the annual report and evidence which might not be considered with the going
concern.............................................................................................................................................4
Rationale for the auditors providing an unmodified audit opinion for the financial year
ended 30 June 2015.........................................................................................................................5
Auditor’s legal liability for unmodified audit opinion for the financial year ended 30 June
2015.................................................................................................................................................6
Conclusion...........................................................................................................................8
References..........................................................................................................................10
List of Appendix................................................................................................................11

2AUDITING THEORY AND PRACTICE
Introduction
The discourse of the aims at evaluating the various articles associated to Disc Smith
Electronics which led to its collapse. The important areas of the reporting are depicted in form of
causes of the collapse of the company. In addition to this, it will further analyses the various
reasons of breaching Australian Accounting Standards which are done by the directors of the
company. Some of the other sections of the study will evaluate the major concerns which are
seen in the areas of various aspect such as standards of accounting followed in Australia. The
study will also evaluate the sighs of the auditor which indicates the problem of going concern
and provide a brief analysis from the depiction of the annual report. Moreover, the study will
identify the various onions of the auditors from the annual report published on 30 June 2015. The
study has also provided an analysis of knowledge of the auditors about the legal liability of the
auditors. This is particularly related in the context of Dick Smith. The relevant findings of the
study have been further related to the unmodified audit onion for the financial year ended 30
June 2015. This is stated with a clear explanation of the relevant outcomes of the findings from
the topics of the study.
Brief history and rationale for collapse of Dick Smith Electronics Ltd
Dick Smith Holdings Ltd founded in 1968 is considered as one of the well-recognized
Australian chain of retail stores which sells consumer electronic goods, electronic project goods
and hobbyist electronic components. The expansion of the chain was seen in New Zealand and
several other parts of the world. During the initiation of the business in 1968, Dick Smith
invested $ 610 towards the business of installing and servicing car radios. In the beginning of
1980s the company had more than 20 stores and sold 60% of working share is worth limited. In
less than two years of time, Dick Smith sold balance of the amount of A$ 25 million to

3AUDITING THEORY AND PRACTICE
Woolworths as it took full ownership of the company. In 2016, Dick Smith was acquired by
Kogan.com and since then it continued to offer great value and service to the consumers in
electronic products across Australia and New Zealand (Australia, 2018).
The main reason for the collapse of the company is mainly due to massive failures in
inventory purchase combined with costly expansion. The expansion plans of the company led to
exhaustion of surplus earnings and the customers preferences started to lose market value.
Therefore, this expansion went unchecked and by means of 2015, the company was seen to be
carrying huge amount of stock which was overvalued stock. Moreover, the cash receipts were
sufficient to meet the objectives and future commitments. It was further seen that the losses
attributable were worse than expected margin, sale, lease provisions, asset impairments and
inventory write-downs (NewsComAu, 2016).
Standards considered for accusations on the on the directors for the collapse of the
company
The consideration of the main accounting acquisitions for Dick Smith needs to be
identified with maximizing the rebates. Therefore, this is the money which the retailers got from
the suppliers to stock and promote the goods instead of knowing whether the customer is actually
wanted to buy. Moreover, the rebate can be applied over a certain period of time will allow to
redeem a percentage of the amount invested. These negotiations are highly confidential and only
made between the retailer and supplier. However, Dick Smith is also held liable for falsely
accounting of rebates to inflate profits than it actually made. Over a period of nine months the
creditors were more than $260 million short. The banks charge the company with only half of the
total amount and the shareholders were warned unless the liquidators were after the Anchorage
capital. In addition to this, the director of the company received more than $ 2 million in terms of
free cash flow after it was declared that the dividends we are not to be paid for retailer claim.

4AUDITING THEORY AND PRACTICE
These directors are now seen to be liable for compensating the company for not only the
dividend amount but also $ 28.3 million which they received in distributions. Therefore, the
accounting standard of rebate is considered as the main breach made by the company. This has
also led to the problem of going concern for the company (Paolini, 2015).
The signs auditors have considered to indicate the problem of going concern
There have been subsequent actions taken by the company which has raised several
questions about overvaluing of the inventory which is associated with the problem of going
concern (The Conversation, 2016). The auditors of the company have further pointed out that the
liquidators such as McGrathNicol has identified going concern issues as per the real activities
management. The practices relevant to manipulating the sales figures are essential for knowing
about the figures and stock inventories. This is needed for purchasing the excess amount of
inventory for rapid extension of the stores and bank rebates. The core business of the company is
seen with the business of disposable consumer electronics. These are seen to be included with the
various types of the equipment’s such as computers, mobile phones, televisions and sound
systems. The company ended up carrying a high amount of inventory which could have been
sold. The inflated prices of the inventory have led to lower amount of cash available for the
company in meeting the daily expenses like rent and payroll. In several instance this has led to
short fall in the cash flow (Anantharaman, Pittman & Wans, 2016).
Analysis of the annual report and evidence which might not be considered with the going
concern
The group of auditors at Dick Smith has ensured that they will be able to mitigate the risk
of going concern by optimization of balance of debt and equity. As per the statement of going
concern, Dick Smith had ensured that it will be able to maximize the return of shareholders with

5AUDITING THEORY AND PRACTICE
optimization of debt and equity balance. Due to this, on October 2013 the group entered into the
amendment for restatement of the deed associated with GE commercial corporation and GE
finance with a secured working capital facility. The total facility limit was created as $ 82
million and the group continued to draw resources only to meet the inventory requirements
which we are required you to peak season sales. On 29 June 2014, the group had no outstanding
facility that drawn. In addition to this, it also stated of utilizing $ 5737692 for providing bank
guarantees (Sonnier, Lassar & Lassar, 2015).
In addition to this, the capital structure of the group consists of equity holders pertaining
to the retained earnings, equity holders of the parent company and issued capital. Moreover, as
per the information published in the annual report of the company it can be clearly discerned that
the company has stated about the initiatives which it has taken such as maintaining the operating
cash flow to expand the assets of the of the group. Dick Smith has also made relevant provisions
for operating expenses. Therefore, it needs to be seen that the group is not subject to any sort of
externally imposed capital requirement. Some of the other initiatives taken by the company for
resolution of the going concern risk are depicted in form of company not subject to any sort of
externally imposed capital requirement. The board is also committed for reviewing the capital
structure which are considered with the cost of capital and risk related to each class. The treasury
function has been able to monitor and manage the financial risk related to the operations of the
group thereby analyzing the financial risk in various areas. The mitigation of the financial risk by
the company has seen in terms of various initiatives which are seen with mitigating the credit
risk, liquidity risk and currency risk. The group further seeks to minimize the currency risk and
derivative financial instruments for hedging the risk of financial exposures (Louis et al., 2015).

6AUDITING THEORY AND PRACTICE
Rationale for the auditors providing an unmodified audit opinion for the financial year
ended 30 June 2015
The declaration of the auditor’s independence report is seen for the rationale for an
unmodified audit opinion for the financial year ended 30 June 2015. The declaration of the
unmodified audit report of the company has been seen to be given by the company in from of the
declaration which is seen to be in accordance with the section 307C of the Corporations Act
2001. This is further considered with any applicable code of the professional conduct as per the
audit report. The financial report published by the company is also seen to accompanying with
the consolidated statement of profit or loss which are seen with the publishing of statement of
profit and loss along with other comprehensive and changes in the equity for the year ended on
the accounting policies along with explanatory information on the declaration made by the
directors. The independent auditors report of the company has been further able to state that the
directors are responsible for providing a true and fair view of the reporting which are adhering
to the “Australian Accounting Standards” and “Corporations Act 2001”. Due to this, the
internal control of the directors is able to be determined with the financial report which provides
a true and fair view of the report which is free from material misstatement. In the Note 2 the
directors have also stated about the relevant concerns which are related to the accounting
standards “AASB 101 Presentation of Financial Statements”. These are seen to be in comalike
with the IFRS standards (Honigsberg, Rajgopal & Srinivasan, 2018).
Auditor’s legal liability for unmodified audit opinion for the financial year ended 30 June
2015
The legal liability for the unmodified audit opinion has been depicted in form of
preparation of the auditing reports as per AASB. These standards have been seen to follow the
ethical requirements and engagement programs within the auditing which are required to perform

7AUDITING THEORY AND PRACTICE
a reasonable assurance that the financial report is free from any misstatement. The audit opinion
has been also able to include the relevant nature of the concerns which are associated to state that
the financial report is free from the material misstatement. The evidences collected from the
audit report are seen with obtaining the audit evidence and relevant disclosures stated in the
financial report. The relevant procedures inferred in the auditor’s judgement is relevant with
understanding the risk of material misstatement in the financial report. It further relates to
analyze the risk of error or fraud in a company. In considering the relevant choices it is important
to depict the internal control as well as the company’s preparation of the financial report which is
able to provide a true and fair view of the audit procedure which are in line with the internal
control. The audit opinion is also related with the evaluation of the appropriate accounting
policies which are used with the reasonable estimates of the accounting made by the directors
and necessary in the overall presentation.
The auditor’s liability is also inferred with the consolidated entities paying the debts
when the balance is due and payable. As per the opinion of the auditors it can be clearly inferred
that the class of companies affected is depicted with ASIC class order 98/1418. The overall
nature of the deed and cross guarantee is inferred in terms of the guarantee of the deeds and
ASIC class orders, which states that the group will be able to meet any liabilities and obligations
subject to the virtue of the deed of cross guarantee. This is also seen to be signed in resolution of
the directors pursuant with s.295(5) of the Corporations Act 2001. The group has been also seen
to be adopting to the revised and most appropriate standard as AASB 127 Consolidated and
Separate Financial Statement which are inferred with the interpretations of 112 consolidation of
the special purpose entities. These are further stated in terms of the application of AASB 10
changes associated to the definition of control. These changes have been prescribed with the
power it has over the investee and ability of the same which it has over the returns. The relevant

8AUDITING THEORY AND PRACTICE
declarations pertaining to the liability of the auditors are also evident with the declaration that it
is exposed to variable returns from the investee (He, Pan & Tian, 2017).
Conclusion
The overall depiction of the collapse of the company can be inferred with inventory
purchase combined with costly expansion. The expansion plans of the company led to exhaustion
of surplus earnings and the customers preferences started to lose market value. Moreover, is also
depicted that the expansion went unchecked and by means of 2015, the company was seen to be
carrying huge amount of stock which was overvalued stock. The cash receipts were sufficient to
meet the objectives and future commitments. Some of the important assertions for the Standards
considered for accusations on the on the directors for the collapse of the company has been
depicted as per the retailers getting the required stock from the suppliers to promote the goods
instead of knowing actual intentions of the customers. Moreover, over the years the company had
failed to maintained the adequate level of the confidentiality which is seen to be required for
such transactions. The different types of the indicators which the auditors have considered to
specify the problem of going concern are related to the manipulating the sales figures are
essential for knowing about the figures and stock inventories. This is needed for purchasing the
excess amount of inventory for rapid extension of the stores and bank rebates. The core business
of the company is seen with the business of disposable consumer electronics. These are seen to
be included with the various types of the equipment’s such as computers, mobile phones,
televisions and sound systems. Therefore, in several instances the increased prices of the
inventory have led to lower amount of cash available for the company in meeting the daily
expenses like rent and payroll. In several instance this has led to short fall in the cash flow. The
significant assertions on the annual report and evidence which might not be considered with the
going concern of Dick Smith has been put forward with the relevant nature of the discussions

9AUDITING THEORY AND PRACTICE
which are depicted to be based on maximize the return of shareholders with optimization of debt
and equity balance. Moreover the important considerations for the the capital structure of the
group consists of equity holders pertaining to the retained earnings, equity holders of the parent
company and issued capital. Moreover, as per the information published in the annual report of
the company it can be clearly discerned that the company has stated about the initiatives which it
has taken such as maintaining the operating cash flow to expand the assets of the of the group.
Some of the different types of the other depictions based on this has been considered with the
evaluations like commitment of the beard to review the capital structure on a regular basis.

10AUDITING THEORY AND PRACTICE
References
Anantharaman, D., Pittman, J. A., & Wans, N. (2016). State liability regimes within the United
States and auditor reporting. The Accounting Review, 91(6), 1545-1575.
Australia, D. (2018). About Us | Dick Smith. [online] Dicksmith Australia. Available at:
https://www.dicksmith.com.au/da/about/ [Accessed 19 Nov. 2018].
Backof, A., Bowlin, K., & Goodson, B. (2017). The impact of proposed changes to the content
of the audit report on jurors’ assessments of auditor negligence.
He, K., Pan, X., & Tian, G. (2017). Legal liability, government intervention, and auditor
behavior: Evidence from structural reform of audit firms in China. European accounting
review, 26(1), 61-95.
Honigsberg, C., Rajgopal, S., & Srinivasan, S. (2018). The Changing Landscape of Auditor
Liability.
Louis, H., Robinson, D., Robinson, M., & Sun, A. (2015). The effects of the extant clauses
limiting auditor liability on audit fees, auditor conservatism, and overall reporting quality.
NewsComAu. (2016). Report into Dick Smith collapse reveals management failures. [online]
Available at: https://www.news.com.au/finance/business/retail/mcgrathnicol-releases-
dick-smith-report/news-story/c2897a8cf8023b3f7490b7f16c2781c2 [Accessed 19 Nov.
2018].
Paolini, A. (2015). Auditors' Liability and Corporate Fraud in the UK: Does Corporate Size and
Structure Matter. J. Bus. & Tech. L., 10, 245.

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Sonnier, B. M., Lassar, W. M., & Lassar, S. S. (2015). The influence of source credibility and
attribution of blame on juror evaluation of liability of industry specialist
auditors. Journal of Forensic & Investigative Accounting, 7(1), 1-37.
The Conversation. (2016). Some answers, more questions over Dick Smith failure. [online]
Available at: http://theconversation.com/some-answers-more-questions-over-dick-smith-
failure-62485 [Accessed 19 Nov. 2018].
Wilson, R. (2015). The impact of auditor reputation on jurors’ assessment of auditor liability in a
limited liability regime: financially important nonpublic clients.
Ye, M., & Simunic, D. A. (2017). The impact of PCAOB-type regulations on auditors under
different legal systems.