ACCT6006 - Auditing Assignment: Dick Smith Electronics Case Study

This report analyzes the failure of Dick Smith Electronics, a publicly listed Australian company dealing in consumer electronics. The assignment investigates the reasons behind the company's collapse, including market changes, high network costs, falling sales, and aggressive business expansion. It examines the accusations against company directors and banks, highlighting issues of poor leadership, flawed business strategy, and accounting irregularities. The report delves into the auditors' assessment of the company's financial statements, particularly the going concern concept, and scrutinizes the impact of rebate maximization strategies. Furthermore, it provides an analysis of the financial statements, including the consolidated income statement and balance sheet for 2014-15, to identify key financial performance indicators and the company's debt-related problems. The report also discusses the auditors' unmodified opinion and the significance of accounting treatments, concluding with an overview of the auditing standards applied in the case and the factors contributing to the company's downfall.

Running head: AUDITING THEORY AND PRACTICE
AUDITING THEORY AND PRACTICE
Name of the student:
Name of the university:
Author Note:

1AUDITING THEORY AND PRACTICE
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
In Response to Question 1......................................................................................................3
In Response to Question 2......................................................................................................4
In Response to Question 3......................................................................................................5
In Response to Question 4......................................................................................................6
In Response to Question 5....................................................................................................10
In Response to Question 6....................................................................................................11
Conclusion................................................................................................................................12

2AUDITING THEORY AND PRACTICE
Introduction:
The assignment deals with the reason behind the failure of the business of Dick Smith
Electronics Limited which is further significant for the company to identify the life cycle of
the business based on the current performance of the company. The failure of the business is
due to the internal and external factors in the management system of the company. The
detailed reason behind that is completely depicted in the conducted study. The criticality in
the accounting issues of the company during the time of dissolution or winding up of the
company have been shown by the process of detailed evaluation and interpretation in that
case is made accordingly.
Dick Smith holdings is a publicly listed Australian Based company which further
shows the good corporate governance. The business of the company is based on the
electronic consumer goods which was facing huge competition in the market. The reasons
behind the downfall of the company along with the role played by the significant auditors of
the business have been depicted in the conducted study. Further from the annual report of the
company during the year 2014-15 the evaluation have been made in order to find the reason
behind the threat of the going concern concept of the company.
Discussion:
In Response to Question 1
The assignment is based on the chosen company which is the dick smith holdings
limited which is originated in Australia. It is basically a retail store which deals with the
goods which are the electronics consumer goods, electronics related components and project
goods. The company has also expanded the business in the region of New Zealand and many
other countries. The company is closed in the year 2016 which is further acquired by the
company in the later years by Anchorage capital Partners.

3AUDITING THEORY AND PRACTICE
The main reasons behind the collapse of Dick Smith is depicted bellow:
 Market Change – The competition in the electronic department is very high which is
further tough for the company to meet the requirements based on the current demands
of the electronics.
 High Network Cost – Dick Smith network related cost is much higher than the as the
company deals with the larger amount of network in that case. It was becoming
difficult for the company to maintain such huge cost in the business.
 Fall in market shares and sales – The shares of Dick Smith was falling due to the fact
that the revenue growth of the company was declining in that case which is the reason
behind such decline the market shares of the company (Zietlow et al., 2018).
 Fast business commitment – The commitment towards the business of Dick Smith
was higher as it utilized all the resources in the business effectively and efficiently.
Dick Smith tried to expand the line of the business and for that reason made huge
borrowings from the bank. Due to such kind of debt trap is the reason behind the fall
of the company in such kind of commitment.
 Fall in Sales – The sales of the company was also decreasing which is another big
reason for such kind of business collapse.
In Response to Question 2
The directors of the company are being accused for the collapse of Dick Smith and in
that case the directors of the company further accused the banks. The reason for accusing the
banks are reckless disregard for all the shareholders and blamed the chief executive for the
collapse of the electronic retail chain. One of the directors of the company made an argument
that the company was insolvent and it was not the breach of accounting standard. The reason
behind the bank to commit such kind of fraud is that the bank lost trust in management of
Dick Smith.

4AUDITING THEORY AND PRACTICE
The company actually failed to meet the requirement as per the overdraft of the bank
which further means that the borrowings of the company was pretty high in that case. The
upper level management of the company further failed to meet the obligations of the business
in that case. The management of the company further states that it is not about the illegality
or deceit and the fact is that the management of Dick Smith is incompetence. The company in
case of financial terms failed to meet the significant requirements in that case. Actually the
chief executive of the company was the wrong man for the job and due to the fact that there
was problem in meeting the supplier’s demand of material. The reason behind the collapse of
the dick smith is that breach of trust, poor leadership and poor business strategy.
In the year 2014-15, the company made a loss of about the $119 million and there
were huge consequences of the accounting treatment of rebates is further a reason behind the
collapse of dick smith (Whittington, 2016). The principles of accounting applied in the
financial statement of the company was wrong which is another reason behind such kind of
collapse in that case. The accounting profession is related with some of the code of conduct
which plays significant role in case of the public interest. The directors in this case made
some of the major decisions which hampered the overall business of the company in that
case. There were lots of internal mistakes which are made within the system of the company.
The directors needed a proper audit regarding the financial statement of the company and
further changes in the accounting policies were needed in order to meet the obligations at
appropriate time (Otley, 2016).
In Response to Question 3
The auditors of the company analyzed that there were problems regarding
maintenance of positive accounting theory. On the other hand the normative accounting
theory deals with the appositive approach in the accounting policies which is basically a
theoretical principle applied in most of the companies. The company follows the going

5AUDITING THEORY AND PRACTICE
concern concept of the business which further means that the company will carry on its
business and will never fall under the trap of dissolution. The generally accepted accounting
principle is the reflection of the financial statement of the company. The significant element
which must be taken into consideration is that the liquidation of the business must be
effective (Gitman, Juchau & Flanagan, 2015).
The auditors faced many accounting errors which is the reason behind the collapse of
the company (Shoup, 2017). This further reflected major problem in the going concern
concept of the company. The poor performance of the company is the reason behind such
collapse of the company and posed a threat in the going concern concept of the company. The
management system were suffering problem in maintaining the performance of the retail
stores. The accounting practices along with the theories of the business must be checked by
the auditors in order to find any scam related to the adopted accounting polies of the business
(McKinney, 2015). As per the audit report of the company the earnings of the company were
inflated by the process of the rebate maximization strategy which further forced the managers
to make the purchase decisions which is further based on the rebates instead of the customers
demand.
The upper level management of the company failed to implement the adequate
practice, procedures and systems in order to monitor the impairment and purchase by the
group of the Dick Smith. In the procedures the auditors found many various problems
regarding the inventory control of the business along with that there were material deficiency
in case of recording, recognizing and evaluating rebates. The allegations was made by the
auditors and the consulting firm came under fire for some of the serious factors leading to the
damage of the retail electronics business (Barr & McClellan, 2018).

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In Response to Question 4
The analysis of the financial statement of dick smith have been conducted accordingly
and the consolidated income statement and balance sheet for the year 2014-15 have been
provided bellow (Pilbeam, 2018):

7AUDITING THEORY AND PRACTICE

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From the above evaluation of the annual report of the financial statement in the year
2014 and 2015. There significant degradation in terms of the financial performance of the
company. From the cash flow statement of the company it can be analyzed in quite a detailed
manner which is in the year 2014the cash flow from the operating activity of the company
was positive but on the other hand in the year 2015 it has significantly dropped to the
percentage of 108% (Scott, 2015).
The significant decrease in the cash flow from the investing and financing activity of
the company is also negative in the year 2015 (Horst, 2018). From this kind of performance it
can be interpreted that the company was in a huge problem in meeting the basic requirement
which is the reason behind such kind of downfall in the system (Koszegi & Matejka, 2018).

9AUDITING THEORY AND PRACTICE
As most of the figures in the financial statement of the company is negative which means that
the company is in danger of liquidation or rather winding off. This further indicates the
company might not be following the going concern concept in that case. By analyzing the
balance sheet of the company it can be interpreted that the company is further facing the huge
debt related problem as the debt of the company was higher to 475%. This indicates that the
leverage of the company is much higher and it is quite threating for the company to make a
comeback in terms of managing the debts in that case ((Barr & McClellan, 2018).
The major change in the income statement of Dick Smith is that the operating
expenses of the company was also higher on term of a larger percentage compared to the
previous year. As the operating expenses of the company is higher is the reason behind such
kind of downfall in the performance of the company. The major downfall of the company can
be highlighted in the particular areas which are the operating expenses, debts and many more.
This highly reflected in the percentage change which is evaluated in the cash flow statement
of Dick Smith (Arcand, Berkes & Panizza, 2015).
The management of the system didn’t take care of such kind of downfall in the system
of the company and hence it is the fault of the upper level management to find the reason
behind such kind of financial performance of the company (Vollmer, 2019). The banks and
the auditors were responsible for such degradation in the financial statement of the company.
The reason behind that is the bank sanctioned too much loans for the business where the
business on the other hand were such a failure in order to make a proper return out of the
investment made in the system of the company. Due to this reason the company went to debt
trap which is clear reason of incompetence in the procedure of the company (Härdle, Chen &
Overbeck, 2017).

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In Response to Question 5
The unmodified business opinion made by the auditors regarding Dick Smith and the
voluntary administrators of the company were further appointed due to this reason. The
significance of the accounting treatment of the rebates and the advertising strategy of the
business were a huge loss in the system of the company. The reason behind the unmodified
opinion of the company is that the company were involved various kind of frauds and whistle
blowing activity of the business (Burtonshaw-Gunn, 2017).
The interpretation of the auditors regarding the accounting standard falls under
numerous jurisdiction. The auditing is further based on the International Financial Reporting
Standard (IFRS). The information of the company was not ravel by the auditors in that case
Dick Smith collapsed and later the company faced some of the significant consequences. The
accounting profession further brings expertise and value to the business and society is
gathered with the trust in the community of the business (Renz, & Herman, 2016). The reason
behind such kind of unmodified audit is that the company faced some of the problems
regarding audit to address and understand the shortfall in the audit quality of the company. As
per the new accounting standard, the principles or rather the norms has been into effect form
the year 2018. There were lots of loopholes in the system of the company which is the reason
behind the collapse of the company which is not disclosed by the auditors accordingly
(Fisher, 2018).
In Response to Question 6
The auditors of Deloitte felled into the legal battles regarding the regarding such
failure in the business of the company. The collapse of the retail business in the year 2015 is
the reason behind the closure of the stores. The auditors made the unmodified opinion due to
the fact of maximizing the rebate which is made in order to save the line of the business. The

11AUDITING THEORY AND PRACTICE
auditors analyzed the business prospects in a detailed manner and further made disclosed the
facts which best supported the reports of the company (Finkler, Smith & Calabrese, 2018).
The auditors knew the main reason for such kind of degradation of the company
which is the management of the company was not enough strong to meet the requirement
based in that case. As per the legality of the auditors, they performed the respective duties in
order to provide the relevant facts and further provide assistance to Dick Smith in order to
help the company get rid over from such kind of downfall. There were lots of loopholes in the
upper level management of the company and further it is beyond the reach of the auditors to
manage the downfall in the system of the company (Karadag, 2015).
Conclusion
From the above discussion it can be concluded that the due to the adoption of the
wrong accounting practice of Dick Smith is the main reason behind the collapse of the
business. If the upper level management and the accounting norms of the company is
effective then the company would have been more successful based on the long term
activities of the firm. The accounting theory and accounting practices of the company also
plays significant role in that case. As per the evaluation of the financial statement of the
company the overall financial position of the business in the year 2015 compared to the year
2014 was much more critical. This is the reason the company went to dissolution or rather the
winding up of the company is performed accordingly.