Auditing Assignment: Dick Smith's Going Concern and Audit Opinion

This report provides an analysis of the Dick Smith case, focusing on the company's going concern issues and the audit opinion provided by Deloitte. The report examines evidence from the annual report indicating violations of the going concern principle, such as excessive payments to suppliers, declining cash flow despite increased revenue, and inflated inventory values. It highlights the role of 'Real Activities Management' by senior management in manipulating sales and inventory figures, leading to a shortage of working capital and eventual liquidation. The report also discusses the transition from a Woolworth subsidiary, the pressure to increase profitability, and the overvaluation of shares. Furthermore, it explores the reasons behind Deloitte's unmodified audit opinion, including the difficulty in identifying real management activities and potential concerns about questioning the company for accounting fraud. The report also delves into Deloitte's legal liability as an auditor, emphasizing the importance of due care, relevant skills, and ethical conduct in providing opinions on financial statements. The conclusion suggests that Deloitte may not have fulfilled its legal liabilities, leading to an unmodified audit opinion despite material misstatements.

1
ACCT6006 Auditing

2
Part 4: Evidence from the annual report that Dick Smith might not be going concern
Going concern is an important fundamental accounting principle that provides the
assumptions that firm will remain in business for the foreseeable future. It means there is no
evidence that entity will end their operations in near future. When any entity provides that it is
going concern, then it must provide evidences of solid financial position through making
adequate disclosures in the financial statements. Auditors are responsible for true and fair views
of financial statements as their job is verify the financial statements and report any material
misstatement that has been found in the report. There are so many evidences in the annual report
that are located by the liquidator that proves the signs of violation of going concern accounting
principle (Seyam & Brickman, 2016).
In annual report of Dick Smith for year 2014-2015 it has been found that company has
paid huge amount of money to their suppliers and fails to generate substantial amount of cash
flow from the operations. It means Dick Smith has failed to provide free cash flow despite of
increase in revenue. Inventory values has increased a lot that clearly signifies that senior
management has tried to hype the values of inventory thinking that there will be increase in
volume of sales but fact shows that senior management have intentionally manipulate the sales
figure to show the increase in profits (Annual Report, 2015). The liquidator, McGrathNicol has
explained in his report that failure of Dick Smith is mainly due to actions of senior management
that is called as “Real Activities Management”. Liquidator has clearly mentioned in his report
that management at Dick Smith is involved in manipulating the sales values and inventories.
Large volume of inventory has been purchased to satisfy the demand in new stores. For this
purpose company has taken huge bank loan of $122,500 thousand and also taken bank rebates
from the suppliers in order boost the amount of sales revenue (Annual Report, 2015) (See picture
below). All these transactions has created a shortage of working capital in the company and
slowly this issues has led into the liquidation as company fails to meet liabilities even after the
reasonable time has been provided to it (The National Business review, 2016).

3
(Source: Annual Report, 2015)
Other evidence that can be easily seen in the annual report of Dick Smith is transition
from a subsidiary of Woolworth. In order to invite the investment from the private equity owners
director of Dick Smith has put the excessive pressure on the management to increase the
profitability of the company through discontinuing unprofitable business units and make
investment in profitable business using the realised funds and also from external sources of
finance. In doing so management at Dick Smith has invested huge amount of money in
purchasing the inventory and resultant profits of company has increased in year 2015. The
private equity shareholder, Anchorage Capital has made the investment in Dick Smith and
realised the significant profits from the deal. Overall the share price of Dick Smith has
overvalued at ASX attracting potential investors to invest in the company. All these transition
does not get successful in long run and eventually company fails to make profits after year 2015
and inventory that has been purchased remained with very low value as it was determined in
books as major products as low life and it has already shown on rebated value (Carrett, 2016).
Part 5: Reason for Auditor’s giving an Unmodified Audit Opinion for the Financial Year
ending 30 June 2015
Deloitte is alleged on the basis of negligence for identifying the major issues within the
accounting treatment of supplier rebates and its inventory controls within Dick Smith Electronics
during the financial year 2015. The fact that Deloitte has conducted audit rebate procedure for

4
the financial year of 2015 for the company has failed to identify and report any material
deficiencies in its business systems and processes. However, Deloitte despite of the presence of
larger accounting issues within the financial statements of Dick Smith has presented an
unmodified audit opinion. Unmodified audit opinions can be regarded as an opinions expressed
by the auditor that financial statements are correct in all material respects and are in accordance
with the financial reporting framework. Thus, as per my opinion, the possible reason for
providing unmodified auditor opinion by Deloitte during the case of Dick Smith may be due to
difficulty in identifying the real management activities as provided in the liquidator report. Also,
it may be in dilemma for referring the company for carrying for accounting fraud as it will
ultimately result in questioning its own credibility and can cause possible legal action (Lanis,
2016).
Part 6: Deloitte’s Case for Providing an Unmodified Audit Opinion for the Financial Year
ending 30 June 2015
As per the legal liability of an auditor, it is the responsibility of an auditor to protect the interest
of all the stakeholders of a firm by providing them reliable and accurate financial statements. An
auditor is legally responsible for its cline, users and the government and must provide their
opinion with due care to protect the interests of the interested parties. An auditor can be sued it
has failed to use due care for identifying the material misstatements on the basis of negligence.
As analyzed from the case of Dick Smith Electronics Ltd, the auditor of the firm, Deloitte has
provided unmodified audit opinion that reflects that financial statements are materially correct.
However, the collapse of the company during the year 2015 has identified the material
misstatements that were done in its financial reports such as manipulation of sales figure and
inventories of stock (The Conversation, 2016).
As per the legally liability of an auditor provided by the ACCA (Association of Chartered
Certified Accountants), an auditor must provide opinions on the financial statements of a firm
with due care. The due care implies the following things to be taken into consideration by the
auditor during providing their opinion on the financial statements of a firm as follows:
 An Auditor must possess the relevant skills and capabilities
 An auditor possess the duty to employ his/her skills with care and carefulness
 An auditor should carry out his role in good faith and integrity
 An auditor is liable for any negligence or dishonest means detected for carrying out
his/her roles and responsibility (Legal Liability of Auditors, 2017).
As such, it has been clearly stated that an auditor is legally liable for any type of negligence
detected as that occurred in the case of Dick Smith Electronics Ltd. This is largely because the
accounting profession is bounded by the ethical codes and it is required that accountants should
act in the public interest. The code of ethics has provided the guidelines and principles that the
accounting professionals need to follow during financial reporting. The Deloitte as such is

5
questioned on the basis of code of ethics that has directed the accounting professional to serve
the public interest. Therefore, as per my opinion Deloitte has not fulfilled its legal liabilities and
thus has a case for providing an unmodified audit opinion during the financial year 2015 of Dick
Smith Electronic Ltd (Spencer, 2016).

6
References
Annual Report. (2015). Dick Smith. Retrieved on November 11, 2018, from
https://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf
Carrett, J. (2016). Some answers, more questions over Dick Smith failure. Retrieved on
November 11, 2018, from https://theconversation.com/some-answers-more-questions-
over-dick-smith-failure-62485
Lanis, R. (2016). Some answers, more questions over Dick Smith failure. Retrieved on 11
November, 2018, from https://theconversation.com/some-answers-more-questions-over-
dick-smith-failure-62485
Legal Liability of Auditors. (2017). Retrieved on 11 November, 2018, from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/legal-liability-of-
auditors/
Seyam, A. & Brickman, S. (2016). The Going Concern Assumptions and Presentation on
Financial Statements. Retrieved on November 11, 2018, from
https://www.omicsonline.org/open-access/the-going-concern-assumptions-and-
presentation-on-financial-statements-ijar-1000123.php?aid=73762
Spencer, L. (2016). New evidence could see fresh allegations raised in Dick Smith class action.
Retrieved on 11 November, 2018, from https://www.arnnet.com.au/article/626789/new-
evidence-could-see-fresh-allegations-raised-dick-smith-class-action/
The Conversation. (2016). The ugly story of Dick Smith, from float to failure. Retrieved on
November 11, 2018, from https://theconversation.com/the-ugly-story-of-dick-smith-
from-float-to-failure-55625
The National Business review. (2016). Receiver wants to sell Dick Smith as a going concern.
Retrieved on November 11, 2018, from https://www.nbr.co.nz/article/dick-smith-put-
receivership-b-183421