ACCT20075 Auditing: A Financial Analysis of Harvey Norman Limited

This report presents a financial analysis of Harvey Norman Limited, focusing on the company's audit assessment. It covers materiality quantification using gross profit, equity levels, total assets, and net profits, along with a review of the company’s disclosures and draft notes from the annual financial reports. The analysis includes a review of the firm’s financial ratios and their trends over the past four years, alongside considerations of audit assertions and procedures. Specific attention is given to the balance sheets and profit & loss statements, highlighting key accounts that require further scrutiny. The report also discusses the company's cash flows, including operating, investing, and financing activities, and reviews the audit report provided by Ernst & Young, emphasizing adherence to accounting standards and key audit matters such as the recoverability of receivables and investment property valuation. The analysis concludes with an overall assessment of Harvey Norman’s financial performance, noting improvements in profitability and solvency while suggesting areas for further enhancement.

Running Head: HVN AUDIT ANALYSIS 1
Harvey Norman Limited Company Audit Assessment
Name
Institution

HVN Audit Analysis 2
Background
Actually, this financial, analysis report is intended for the Harvey Norman Company which is
a reputable company in Australia. It’s a multi-national retail entity that provides furniture,
computers, and customer products linked to electrical gadgets and many more. The main
objectivity of the reports creation if assisting the company’s audit and evaluation of the
company’s materiality, which will be effective for auditors in assessing vital financial
accounts utilizing precise quantifiable materiality approximation techniques. Moreover, other
detailed data on the company’s disclosures highlighted in the annual financial reports have
been critically assessed taking into account the major issues based on the auditing
perspectives (ACCC. 2011). Consequently, there will be a concise review of the firm’s ratios
and its trend in variance where data from the last 4 years were computed. Hence,
consideration of accurate audit assertions and the audit procedures have also been included in
the report. Lastly, the report will specifically highlight on the balance sheets, and profit &
loss account statements, pointing out if there is an acute account which must be pointed out
(CARTWRIGHT, 2012).
Discussion and Analysis
Thus the company in our topic discussion is Harvey Norman limited operating in Australia.
Moreover, the company operates HVN including other branded stores within the Australian,
Singapore, New Zealand, Slovenia, Singapore, Ireland, and Croatia. Thus section
incorporated revenue acquired through the company’s franchise business. The company is
currently the largest retailer in provision of computer hardware, furniture and other products.
Consequently, the company takes hold of portfolio assets investments that entice rental
income based from the third parties and the franchise business. Additionally, HVN comprises
of 5420 employees and ranked as number 124 amid 2000 firms in Australia. Most of the
company’s income comes from the store-based retail business.

HVN Audit Analysis 3
Quantification of Materiality level
Generally, materiality for a business organization specifically entails something crucial and
essential which has the capability of influencing stakeholder’s decisions. Therefore for audit
evaluation, materiality is very crucial in achieving its objectives in a concise manner since
this is always the first step that should be considered during audit event planning. Moreover,
materiality aids auditor in comprehending the opportunity of an entity specifying the level,
and foreseeing the samples, vouching, and other additional assessments which are required to
be executed. It additionally aids in pointing out the crucial elements, thus cannot be handled
to unimportant. Therefore, with the objectives and intention of stating and computing
materiality, certain bases and benchmarks should be incorporated. Therefore according to
HVN’s materiality assessment, bases such as the gross profit, equity levels, total number of
assets, net profits and the percentage gross revenue will be considered. The below table
illustrate a computational analysis of Harvey Norman materiality estimate. Therefore, the
averagely range for HVN materiality level is 9968 to 19937.6. Such limit selected is an ideal
materiality limit since it aids in revealing vital accounts and verify that none of the accounts
are missing.
Criteria Employed Base Amount Level of materiality
0.5% to 1% of the gross revenue Gross revenue 1,993,760 9968.8 to 19937.6
1% to 2% of the total assets Total assets 1,317,618 131176.18 to 26352.36
1% to 2% of gross profits Gross profit 667,421 6674.21 to 13348.42
2% to 5% of shareholder’s equity Shareholder’s equity 2,927,932 58558.64 to 146396.6
5% to 10% of net profit Net profit 380,050 19002.5 to 38005
(Source: Annual report, 2018, Harvey Norman Limited)

HVN Audit Analysis 4
Draft notes and Disclosure review
When assessing the disclosures and draft notes of HVN company, it is evidently shown that
the core segment of the company’s expenses has been utilizes in distribution, marketing,
occupancy, administrative and other expenses, thus it is significant assessing the cogency of
the material source, whether HVN company is distributing is products rightfully and if there
is need of any assurance policies to be employed. Moreover, based on the company’s report it
is shown that there has been adjustments in the assets and liabilities with noticeable change in
receivables, inventories and other current assets while a change in payables and other current
liabilities not forgetting the income tax payable. Thus in order to proof these elements,
auditing must be done. Consequently the auditor is required to evaluate the investment
properties and revaluation of listed securities and it trend over the years. Moreover, the HVN
Company has displayed contingent liabilities such as guarantee in normal course of the
business linked to operating leases, normal lease business obligation to the payment of lease
for specific leased franchised complexes in Australia, and financial performance guarantee
for entity enabling. Thus there is no provision made within the financial statement focused on
the stated contingencies since the possibility of a prospected overflow under the guarantees is
considered to be remote.
Analytical review, Assertions, and Audit procedures
Below is a comprehensive analytical review of HVN considering years from 2015 to 2018
Balance Sheet Formulae 2018 2017 2016 2015
Assets Liabilities + Owner’s equity 18.05 16.95 16.27 14
Liabilities Assets – owner’s equity 2.2 1.75 1.25 0.80
Owner’s
Equity
Assets - liabilities 0.0 0.0 0.0 0.0
(Source: Annual report, 2015-2018, Harvey Norman Limited)

HVN Audit Analysis 5
Profit & Loss
ratios
Formula 2018 2017 2016 2015
Gross profit
margin
gross profit ×100
sales
3.2% 2.5% 1.11% 0.66%
Net profit
Ratio
net profit before tax ×100
sales
6.7% 4.3% 3.48% 2.68%
Stock rate
turnover
cost of goods sold
0.5 ×( opening∧closing stock)
9.32% 7.86% 6.25% 438%
(Source: Annual report, 2015-2018, Harvey Norman Limited)
An analytical review of these ratios is crucial in the auditing process as it effectively assists in
creation of market trends of the company thus being able to evaluate the rise and falls of the
business. With the balance sheets underpinned to be constantly increasing from 2015 to 2018
that company is in a position of providing tactical support where required in order to preserve
the company’s brands and its competitive nature and position. As a result this exhibits
positivity in the business. On the other hand, the net profit ratio has constantly increased from
2015 to 2018 which delivered a consolidated increase in the net asset of the business which
shows that the company executive management is specifically aligned with that of its
stakeholders. Considering the profitability, the gross profit, net profit, and stock rate turnover
augmented significantly in 2018. Thus, the firm is top averaged and this exhibits that
stakeholder’s anticipation is being attained. Gross profit margin increase as a result if the
increase in the cost of goods sold while the net profit margin augmented considerably due to
high control costs, diminishing write backs and advantages gained from income tax.
Moreover, the cash flow to sales ratios decreased based on the low cash flow rate within
operating activities. Considering the solvency extent for the company, the debt equity ratio
and the debt to asset ratio decreased, showing that there was limited dependence of the

HVN Audit Analysis 6
company on the debt capital thus a positive implication for the company’s success. Moreover
the company capital management is assessed through the debt to equity ratio
(borrowings/total equity). Thus the targeted consolidated entity’s debt to equity ratio is
effectively tolerated up to 50%. Based on the company’s efficiency, the inventories, payables,
and receivables, increased or decreased with limited changes done. Hence, HVN Company
should work on the inventories and supply chain management so that the efficiency of each
franchise within the supply chain in line with the clients service standards entirely within
three years.
Assertions and Audit procedures
Important assertions made by the company managerial team that are exhibited in the report
were majorly focused on the cut-off dates stating the transaction carried out. This is so as the
company is engaged in franchise business operations. Therefore, the auditor should employ
effective auditing tests in order to assess the validity of the stated claims. Moreover, valuation
as an assertion is significant as all assets, liabilities, and the equity balances should be
recorded using an effective valuation which avoids inconveniences. There is equal
duplication of disclosure assertions and presentation. This is essential in auditing as a sole
assertion can significantly alter the quality of the report and thus this should be prioritized by
an auditor utilizing vast analytical tools.
Analysis of Cash flows
Pleasingly, the company’s cash flows increased which included cash and cash equivalent
increased by $90.32M which was majorly contributed by the operating activities and net
cash flows and the primarily increase in the net receipts. On the other hand, the cash outflows
basically came from the net cash financing activities which constantly diminished due to
consecutive borrowing of syndicated facilities in funding various acquisitions and
refurbishment of investment properties, and equipment assets. On the other hand, the

HVN Audit Analysis 7
principal cradle for the cash receipt was from franchises which in turn have decreased due to
mobility of aggregate amount of financial accommodation issued by the franchise business
(HVN. 2012c). This decrease was accompanied by the decrease in inventory reserves held by
the franchise business. Thus the major cash line products relating to investment and financial
activities were included property plant and equipment, payment of purchase of units in unit’s
trusts, and payment to purchase of equity accounted investments. The evidence of impairment
may include indicators in which the debtor or rather a group of debtors has been encountering
financial challenge, default, or delinquency of interest or core payment that they will be
insolvent (COMMONWEALTH, 2010). Operating activity cash flow shows that supplier and
employee payment has been enhanced unlike the customer receipt. Due to the fact that
operating activities is on the rise it is prospected that the company is on a going concern
which shows that the company is on the right track.
Review of HVN Company Audit Report
The auditor of the HVN’s Company audit report is Ernst & Young, as they provide
consolidated data of the financial position of the company. Moreover, they have highlighted
the trends in equity and cash flows for the year ended 30 June 2018. Important accounting
rules and policies have been highlighted and the director’s declaration. Thus the entire audit
report is in adherence with the corporation’s act of 2001 which include:
 Providing precise and equitable outline of consolidated financial position of a group
for the year ended 30 June 2018 and alongside its financial performance
 Adhering to the Australian Accounting Standards (AAS) and the Corporation
regulations 2001

HVN Audit Analysis 8
(Source: Annual report, 2018, Harvey Norman Limited)
Therefore the major opinion reflected in this audit is that key financial rules and regulations
have been adhered to thus making it logical and investors can take hold of that. Moreover, as
stated in the report that the company is an independent group, they follow ethical procedures;
it is efficient as it increases the company’s repute. Subsequently, various crucial segments
whereby the auditors used additional steps in explaining the rationale are shown below. They
are also included in the key audit issues, they include:

HVN Audit Analysis 9
Recoverability of receivables from franchises – recoverable are essential to the group, this
was a key audit matter provided the value of the matter and the prospected judgement
implemented by the group.
Investment property valuation and owner occupied assets – various asset samples were
collected which was subject to internal valuation during the period. Moreover, the use of
director’s nature was effective. Moreover there was consideration of different disclosures
which included note 1, note 14 and note 15 of the financial report.
Conclusion
In this paper, extensive analytical review has been executed focusing on Harvey Norman
Company, and thus it is prospected that the company’s performance is top notch. This was
accomplished by careful consideration of materiality, cash flows, balance sheets, and profit
and loss statements. Generally, the company enhanced ominously in the aspect of
profitability and solvency although there should be improvements on the profit and loss
ratios. Also the cash receipt and the audit report was also assessed in the paper.

HVN Audit Analysis
10
Reference
ACCC. 2011. Harvey Norman holdings ltd penalized $1.25 million for misleading
advertising [Online]. Available: http://www.accc.gov.au/media-release/harvey-norman-
holdings-ltd-penalised-125-million-for-misleading-advertising [Accessed 22 April
2013].
Annual Report, 2015, Harvey Norman Company Limited
Annual Report, 2016, Harvey Norman Company Limited
Annual Report, 2017, Harvey Norman Company Limited
Annual Report, 2018, Harvey Norman Company Limited
CARTWRIGHT, M. 2012. CHOICE research exposes price discrimination [Online].
Available: http://www.choice.com.au/media-and-news/consumer-news/news/choice-
lodges-submission-on-it-price-discrimination.aspx [Accessed 1 May 2013].
COMMONWEALTH. 2010. Competition and Consumer Act 2010 [Online]. Available:
http://www.comlaw.gov.au/Details/C2011C00003 [Accessed 20 April 2013].
HVN. 2012c. 2012 HVN Annual Report [Online]. Available:
http://www.harveynormanholdings.com.au/pdf_files/2012_Annual_Report_Final.pdf
[Accessed 3 May 2013].