HI6026 - Audit, Assurance and Compliance Assessment Item 1 Report

This report provides an executive summary and detailed analysis of the corporate governance principles of the Australian Securities Exchange (ASX) and their application to Lovisa Holdings Limited. It examines the company's compliance with ASX guidelines, focusing on areas like board structure, ethical conduct, financial reporting, shareholder rights, and risk management. The report also includes a comprehensive risk assessment, outlining the nature of the company, market overview, and business strategies. Financial ratios, including profitability, liquidity, operating, and solvency ratios, are calculated and analyzed to provide a holistic view of Lovisa's financial performance. The audit process and auditor responsibilities are also discussed, highlighting the importance of risk assessment in ensuring the accuracy and reliability of financial statements. The report aims to provide a comprehensive understanding of audit, assurance, and compliance in the context of a publicly listed company.

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HI6026 - Audit, Assurance and Compliance
Assessment item 1 — Individual Assignment

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Part A: Executive Summary
The report is developed to gain an analysis into the corporate governance principle
provided by ASX (Australian Securities Exchange). This is essential to ascertain that the
materialistic information provided to the stakeholders is accurate and reliable. Also, the risk
assessment procedures stated by the standard auditing procedures as per the ASA 150 is
discussed in detail in the report. The analytic procedures are established by the Board to identify
the audit risk and analysing the methods implemented by the company for minimising them.
This has been carried by analysis of the governance statement and risk assessment procedures of
an ASX listed entity, that is, Lovisa Holdings Limited.

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Contents
Part A: Executive Summary...........................................................................................................2
Part B: Analysis of ASX Corporate Governance Council Principles Compliance by Lovisa
Holdings Limited............................................................................................................................4
Part C: Risk Assessment.................................................................................................................6
References.....................................................................................................................................13

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Part B: Analysis of ASX Corporate Governance Council Principles Compliance by Lovisa
Holdings Limited
Lovisa Holdings Limited (LOV) is recognized to be fast fashion jewellery retailer having
its stores in international markets. The company has about 265 stores out of which its 145 stores
are present in Australia. The company mainly carries out its operations across Australia, New
Zealand and Singapore. The company is listed on ASX and therefore need to comply with the
corporate governance principles of the stock exchange to ensure its sustainable growth and
development within the country. ASX Council principles and recommendations as applied by
Lovisa Holdings Limited are disused in detail as follows:
Developing Solid Foundations for Management & Oversight
It is necessary for the ASX listed companies to provide details about the roles and
responsibilities of Board and management in the governance framework. The company
governance framework has provided detailed information about its compliance with this ASX
Council principle in its governance framework. The main role of Board has pointed in the
governance statement is to improve the company performance and create maximum value for
shareholders. It also has provided the information in relation to Board Charter developed by the
company for defining the roles of Board and management (Corporate Governance Statement,
2018). The procedures adopted by Lovisa Holdings Limited to examine the performance of
Board and management are also discussed in its governance framework as per ASX principles.
Board performance is reviewed on annual basis by its committees and the feedback is discussed
with an external facility and the managing director and CEO. The performance of the
management team is assessed by the remuneration committee developed by the Board (Mallin,
2016).
Structure the Board to Add Value

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ASX Council has also maintained that the Board should maintain an effective
composition with relevant size and consisting of members with high skills and expertise. Lovisa
Holding Limited governance framework has all the necessary details about Board structure.
Board of the company consists of five directors comprising of non-executive and executive
directors. The board members possess adequate skills and knowledge in relation to retail field,
strategic thinking and high level of business thinking. It also emphasis on maintaining a balance
proportion of people in the Board comprising of different diversity, gender, geographic location
and background (Corporate Governance Statement, 2018). The proportion of women employed
in relation to the men by the company in the Board in the year 2017 as compared to that of 2016
is depicted in the below table provided in its governance framework:
Proportion of Women 2017 2016
Board 20% 20%
Senior Management 55% 50%
Company 96% 94%
Ethical and Responsible Way of Acting
The Board as per the ASX Council principle of Lovisa Holdings Limited has maintained
its effective compliance with high level of integrity and ethical standards in its business
operations (Fleckner and Hopt, 2013). There is presence of a formal Code of Conduct that has
outlined the behavior and nature of business operations to be maintained within the workplace.
It provides a benchmark for the professional behavior within the workplace and all the ethical
policies and standards maintained by the company is also provided on its online website. Also,

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there is a policy maintained by the company known as Policy for Dealing in Securities for
providing the relevant standards for maintaining ethical behavior within the securities dealings
(Corporate Governance Statement, 2018).
Safeguarding Integrity in Corporate Reporting
As per the ASX Council principle, LOV has in place an Audit Committee for over
viewing the overall processes of accounting, auditing and financial reporting. The major
responsibilities of the committee are carrying out the process of external auditing regularly to
minimize the occurrence of any materialistic error in the financial statements. The Board has
also received a declaration as per the Corporation Act that all the financial statements are
developed as per the standard accounting rules and policies (Plessis, Hargovan and Bagaric,
2010).
Making Timely and Balanced Disclosure of Information
It also has adopted adequate measures for providing the relevant information to the
shareholders as per the ASX governance principles and framework. It has also adopted a
continuous disclosure policy also provided on its website to communicate the materialistic
information to the shareholders. The company in accordance with the ASX Listing rules has
maintained sufficient procedures in place as stated in its governance framework (Corporate
Governance Statement, 2018).
Respecting the Rights of Shareholders
Lovisa Holdings Limited has implemented in place a variety of communication
platforms such as forums, publications and the website of the company to regularly
communicate and interact with the shareholders. The website of the company contains all the
relevant information made by it on ASX including its annual report to provide them with all the
required information. Also, the website of the company has provided a facility for the
shareholders to elect or to receive communications via email (Nordberg, 2010).

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Recognitions & Management of Risk
The Board of the company in accordance with the ASX principle has developed a risk
committee to develop and implement a risk management policy. The specific functions of the
committee in relation to management of risk include maintaining in place adequate policies and
procedures to mitigate the potential risk. One of the major responsibilities of the risk committee
is to implement in place effective internal control policies and procedures to minimize the
operational risk present within the company (Crowther, 2017).
Fair and Responsible Remuneration
The remuneration committee developed by the Board of Lovisa Holdings Limited as per
the ASX Council principles holds the responsibility of all matters about the nomination and
remuneration of directors and the CEO. The policy objectives of the committee include
developing a remuneration structure that is attractive for retaining skilled executives and
management personnel (Corporate Governance Statement, 2018). This is achieved by the
committee with the use of short and long term incentives for providing encouragement to the
board management for improving their performance and achieving the company’s long-term
goals and objectives (Klettner, 2016).
Part C: Risk Assessment
Risk assessment is the main part of the audit process and it is performed by the auditor
before starting the process of auditing. It is performed to check any material misstatement in the
financial statements of the company. It also helps to ascertain risks that can impact the audit
process and can alter the decision on true and fair view of the financial report (ASA 520, 2009).
Auditor responsibility is not only to make audit of the financial statements but also to review the
internal controls and other important business strategies that might helps to perform audit in
more useful way. In order to verify that financial statements are free from the error and to
ascertain the risks that impact the business, there is need to perform the risk assessment process

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of the company (Gay and Simnett, 2017). Risk assessment does not contribute to the audit
opinion but it provides the base for the auditor that financial statements are free from any
material misstatement (ASA 520, 2009). The risk assessment has certain steps that auditor need
to follow. The risk assessment process is followed by review nature of company, conducting
analysis of market of company, overall business strategy of the company and performing the
analytical process to review the financial performance (Auditing Help, 2018).
Risk Assessment process in Lovisa Holding Limited
Nature of the company: Lovisa Holding Limited is the well known company in Australia and
New Zealand. This company has been engaged in the retail sale of fashion jewelry and
accessories. Lovisa Holdings has been publically listed on the Australian Stock Exchange and it
derived its revenue from the sale of fast fashion jewellery and its related accessories. There has
been more than 288 stores located in 13 countries and also has franchise operations in 6
countries. Some of the important products of the Lovisa are necklaces, chokers, wrist wear,
watches, earnings, rings etc (Annual Report, 2017). Lovisa Holding is the parent entity and also
the main controlling party in the whole group that comprises of itself and its subsidiaries. Other
related parties of the company are key management personal and directors of company (Annual
Report, 2017). There is close relationship between the Lovisa Group and BB Retail Capital,
which make it compulsory to list the BB Retail Group in related parties (IBIS World, 2018).
Market Overview of the Company: The fast fashion jewellery sector in which company
operates faces very high competition. The fast fashion retail industry is subject the ever
changing customer preferences. In this industry there is need of both time and costs to replicate
the business model, IT Systems, design team, brand recognition and store network. There are
very low barriers to make entry in the jewellery business and main competitors include retailers
selling the predominately fashion jewellery, Jewellery department stores, fashion apparel stores
that keeps the fashion jewellery section and other small retailers (About us, 2018). The product
manufactures by the Lovisa are discretionary in nature rather than necessities. So it can be said

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that financial performance of the company is highly sensitive to the future changes in the retail
segment of the fashion industry in the countries in which company operates (Annual Report,
2017).
Business strategy: Following are key objective and related business strategies of the Lovisa
Holding Limited:
Objectives Business Strategies
International
Expansion
It is company strategy to leverage the company’s capital in large
international market. To discover the option of the franchise partners for
selected territories. Aim to expand into the new international markets on
trial basis.
Streamline global
supply chain process
Company has designed well planned network of supply chain through
using the both air and sea freight while keeping the speed to market
operating model (Auditing Help, 2018)
Enhancing the
performance of
existing stores
Company has target to improve the existing store network through
continuing to target the high traffic shopping precincts and low pricing.
Brand Recognition It is the business strategy of the Lovisa to use the social media to
connect with the customers and increase the recognition of brand.
(Annual Report, 2017)
Computation of income statement and balance sheet ratios
Profitability ratio
2017 2016
Gross Margin = 140822 113562
178746 153461

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0.788 0.74
2017 2016
Net Margin = 40442 23548
178746 153461
0.226 0.153
(Putra, 2010)
Liquidity ratio
2017 2016
Current Ratio = 29486 25622
19447 16561
1.52 1.55
2017 2016
Quick Ratio = 12744 +
3615
8295 +
2293
19447 16561
0.84 0.64
Operating ratios
2017 2016
Inventory Turnover ratio = 37924 39899

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13127 15034
2.89 2.65
2017 2016
Inventory days on hand = 365 365
2.89 2.65
126 days 138 days
2017 2016
Accounts receivable turnover
=
178746 153461
3615 2293
49.45 66.92
2017 2016
Accounts receivable days on
hand =
365 365
49.45 66.92
7.4 days 5.5 days
2017 2016
Accounts payable turnover = 37924 39899
10001 8350
3.79 4.78

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2017 2016
Accounts payable days = 365 365
3.79 4.78
96.2 days 76.4 days
2017 2016
Return on assets ratio = 40442 23548
50695 42641
0.798 0.552
Solvency ratio
2017 2016
Debt-to-worth ratio = 22506 31470
28189 11171
0.798 2.817
(Putra, 2010)
2017 2016
Net sales to working capital = 178746 153461
10039 9061
17.805 16.936
Development of common size financial statements

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CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
As at 2 July 2017
COMMON SIZE
STATEMENT
Consolidated ($000s) Note 2017 2016 2017 2016
(000's) (000's) % %
Assets
Cash and cash equivalents C5
12,744 8,295
25% 19%
Trade and other receivables B1
3,615 2,293
7% 5%
Inventories B2
13,127 15,034
26% 35%
Total Current Assets
29,486 25,622
58% 60%
Deferred tax assets A6
3,275 1,823
6% 4%
Property, plant and equipment B3
15,658 13,123
31% 31%
Intangible assets and goodwill B4
2,276 2,073
4% 5%
Total non-current assets
21,209 17,019
42% 40%
Total assets
50,695 42,641
100% 100%

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Liabilities
Bank overdraft C5
1,705 3,566
3% 8%
Trade and other payables B6
10,001 8,350
20% 20%
Employee benefits - current B8
2,075 1,594
4% 4%
Derivatives C4
805 909
2% 2%
Provisions - current B7
1,042 655
2% 2%
Current tax liabilities
3,819 1,487
8% 3%
Total current liabilities
19,447 16,561
38% 39%
Employee benefits - non-current B8
608 401
1% 1%
Loans and borrowings C3 -
12,000
- 28%
Provisions - non-current B7
2,451 2,508
5% 6%
Total non-current liabilities
3,059 14,909
6% 35%
Total liabilities
22,506 31,470
44% 74%
Net assets 56% 26%

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28,189 11,171
Equity
Issued capital C1
208,526 208,526
411% 489%
Common control reserve
(208,906) (208,906)
-412% -490%
Other reserves
(461) (1,032)
-1% -2%
Retained earnings
29,030 12,584
57% 30%
Total equity
28,189 11,171
56% 26%
(Annual Report, 2017)
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
For the financial year ended 2 July 2017 COMMON SIZE
STATEMENT
Note 2017 2016 2017 2016
(000's) (000s) % %
Revenue A2
178,746 153,461
100% 100%
Cost of sales
(37,924) (39,899
)
-21% -26%
Gross profit
140,822 113,562
79% 74%
Salaries and employee benefits
expense
A3
(29,980
-25% -20%

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(45,276) )
Property expenses
(28,683) (25,881
)
-16% -17%
Distribution costs
(4,464) (4,340)
-2.5% -2.8%
Depreciation and amortisation expense
(5,539) (6,034)
-3.1% -3.9%
Loss on disposal of property, plant and
equipment (785) (162)
-0.4% -0.1%
Other expenses
(15,371) (12,943
)
-8.6% -8.4%
Operating profit
40,704 24,222
22.8% 22.3%
Finance income
142 49
0.1% 0.0%
Finance costs
(404) (723)
-0.2% -0.5%
Net Finance costs
(262) (674)
-0.1% -0.4%
Profit before tax
40,442 23,548
22.5% 21.4%
Income tax expense A6
(11,396) (6,995)
-6% -4.6%
Profit after tax 16.1% 16.9%

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29,046 16,553
(Annual Report, 2017)
Relevant audit risk and potential steps to reduce risk
The relevant audit risk as identified from the financial reporting process of the company
that can cause the occurrence of material misstatements are identified and discussed as follows:
 Market Risk: The significant audit risk relates to the potential chances of error
occurrence due to change in the external market condition such as volatility in exchange
rates, interest rates and equity prices. The company adopts the use of sensitivity analysis
for managing the foreign exchange risks and also adopts the use of forward exchange
rates and currency options against the movements in the foreign currencies.
 Liquidity Risk: The risk arises in the company due to its inability for meeting the future
obligations. The company manages the risk by ensuring that it possess sufficient
liquidity to meet its liabilities and also continually monitors its cash flow forecast (Gay
and Simnett, 2017).