Audit and Assurance (ACC3AUD): A Case Study of JB Hi-Fi Limited

This case study provides an analysis of the operational environment of JB Hi-Fi Limited, identifying its key competitors and relevant laws affecting its operations in both Australia and New Zealand. It assesses the impact of these laws on the company's business model and sustainability. The study focuses on inherent risk factors impacting the audit of JB Hi-Fi, identifying five key accounts with potential risks of material misstatement. Based on these identified risks, the study recommends control mechanisms to mitigate potential issues, covering aspects such as revenue fluctuation, inventory valuation, technological obsolescence, and leasing arrangements. The analysis considers the Australian Consumer Law, competition laws, and environmental sustainability laws, providing a comprehensive overview of the audit and assurance landscape for JB Hi-Fi.

AUDITING AND ASSURANCE: A CASE STUDY ON JB HI-FI LIMITED

Executive Summary:
The current paper describes the operational environment of JB Hi-Fi Limited. At the outset of the
study, operational areas of the company have been identified, followed by the identification of its
four major competitors. Gradually, this paper moves into identifying laws concerning to the
business and its significant impact on the company’s operating model and overall sustainability.
Apart from Australia, the company has major existence in New Zealand as well. Therefore,
considering the international business platform and concerning laws, an assessment has been
conducted on how the international laws can affect its overall business scenario.
Later on, the study shifted its focus to evaluating the inherent risk factors of the company that are
impacting on the audit and its impact on material misstatements. Five key accounts have been
identified that could have a potential risk. Finally, based on the identified risk factors the study
recommends control mechanism so that potential risks can be mitigated.
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Table of Contents
1.0 Introduction:..............................................................................................................................5
2.0 Operational areas of JBH...........................................................................................................6
3.0 Primary competitors of JBH in Australia:.................................................................................7
4.0 Laws affecting JBH’s operations and its description................................................................8
4.1 Employment Law...................................................................................................................8
4.2 Consumer Laws (ACL)..........................................................................................................9
4.3 Competition Law....................................................................................................................9
4.4 Environmental sustainability law.........................................................................................10
5.0 Key inherent risk factors impacting on the audit of JBH........................................................11
5.1 Overview of inherent risk....................................................................................................11
5.2 Assessment of identified risks leading to potential material misstatements........................11
6.0 Evaluating accounts of significant risks..................................................................................14
6.1 Overview of accounts with significant risk..........................................................................14
6.2 Identification of the key assertion at risk for each account:................................................14
7.0 Placing the control:..................................................................................................................17
7.1 Overview of control environment........................................................................................17
7.2 Identification of the likelihood of potential reliance............................................................17
8.0 Conclusion:..............................................................................................................................18
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References:....................................................................................................................................19
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1.0 Introduction:
Analysis of financial reporting of a business has always been a crucial aspect of accounting and
auditing studies as the same involves consideration of lots of factors relating to both the business
as well as the audit subjects (Griffiths, 2017). The instant report briefly focuses on the case study
of JB Hi-Fi Limited, a retail home appliance company based in Australia and its financial reports
and auditing process. The subsequent sections of the paper throw light on the business aspects of
the given topic in brief with a concluding statement at the last.
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2.0 Operational areas of JBH:
JB Hi-Fi operates in Australian and International retail market of consumer goods. The company
is operating across 303 locations. The type of the organization is ‘Public’. The company is
headquartered at Chadstone Shopping Centre, Melbourne. The company is also publicly listed in
ASX and trades as ASX: JBH (Jbhifi.com.au, 2018). The operational areas are as follows:
 Electrical home appliances
 Hardware and electronics devices
 Telstra services
 Gaming
 Drones and robotics
The Australia wide store locations are as follows:
 New South Wales
 ACT
 Queensland
 Northern Territory
 South Australia
 Victoria
 Tasmania
 Western Australia
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3.0 Primary competitors of JBH in Australia:
Competitor Name Business Areas
Harvey Norman Online retailing in:
 Computers
 Communications
 Furniture
 Bedding and
 Consumer electrical products
IKEA Operates in the retail industry. Offered products and services
are:
 Ready-to-assemble furniture
 Home accessories
 Kitchen appliances
Betta Home Living Independent retail franchise group in Australia and offer
products and services are:
 Home appliance
 Furniture
Bing Lee Bing Lee is an Australian chain of superstores. The offered
services and products are:
 Computers
 Telecommunication goods
 Consumer electronics
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4.0 Laws affecting JBH’s operations and its description:
4.1 Employment Law
The Equal Opportunity Law 2010of Australia and Human Rights Act 1993 of New Zealand
The Equal Opportunity Law 2010 of Australia and Human Rights Act 1993 of New Zealand
provide legal bindings to govern employer and employee relationship. This law includes
standard wages, flexible working environment, and fairness at organization so that
discrimination against employees can be prevented. Considering the case study of JBH, the
company has adopted diversity policies to improve the competitive advantage since FY 2012
(Emerson, 2015). However, the set action plans and control have not yet been totally
implemented in the diversity policies in both the locations (Barr-Pulliam et al 2017). Improving
the percentage of female to male staffs and board members are still found partially implemented.
In order to adhere to the Equal Opportunity Law 2010, the governance body hired and engaged
female staffs in the board as well, due to which the overall operation model got changed. Since
FY 2013, the company has extensively focused on policy alteration and business model
reshaping (Castles, 2013). As a consequence, the overall operation and trading value got
changed. In addition, the firm’s business had been found impacted by separate Fair Work Act
2009, as the overall remuneration of the employees has increased by 14.5% in last three financial
years (Fair Work Ombudsman, 2018). However, higher sales volume and growth have
potentially balanced the overhead cost and enabled the firm maintaining consistent profitability
(Taylor and Richardson, 2014).
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4.2 Consumer Laws (ACL)
According to the Australian Consumer Act (2010), the company is bound to conduct fair trading
and provide protection for the consumers. Since the company operates under different business
lines, the complexity of maintaining consumer right is higher. The statistical data also indicated
that JBH has experienced sales growth of 13.7% in the last financial year within the Australian
territory, along with the increment on the online sales growth. On the contrary, the company has
experienced sales decrement since FY 2013 from the New Zealand business operations.
Consumer buying pattern and the integration of Consumer Law (Consumer Guarantees Act New
Zealand) has affected the operating module of the company, which has been found the major
reason behind the sales downturn in New Zealand (Davis and Hay, 2017).
4.3 Competition Law
Australia's core competition law contains the Competition and Consumer Act 2010 (CCA) to
separate prescriptions and relation to anti-competitive behaviour in the business industry. In
order to maintain the competitive position and avoid any biased situation during operation, the
chosen firm named JB Hi-Fi has reviewed a major competition law and policy introduced by the
Australian government (Austrade.gov.au, 2018). The Competition and Consumer Amendment
(Competition Policy Reform) Act 2017 followed by the firm helps in price maintenance,
exclusionary supplies and resale value maintenance (www.australiancompetitionlaw.org, 2018).
In addition, Competition and Consumer Amendment (Misuse of Market Power) Act 2017
introduced by the Australian government directs the firm to substantially decline the effect of
market competition. However, the company is bounded to maintain the law enforcement
provided by the Australian Competition and Consumer Commission (ACCC) while operating in
the global market. In this regards, Raitt (2016) also supported that the extensive power of ACCC
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laws has made the firm to make an Anti-competitive agreement while trading in the New
Zealand market. Moreover, the firm is able to maintain all the compliances and enforcement
policies outlined by the Australian government to make the business performance stable and
healthy.
4.4 Environmental sustainability law
The Department of Environment Protection and Biodiversity Conservation (EPBC) Act
introduced by the Australian government covers the valuation and endorsement process of
national ecological and cultural alarms for all types of business sectors (Richardson et al, 2015).
Therefore, each department of JBH is confined to follow the acts that can cover the activities in
importing, exporting, hazardous waste, sea operations and legacy issues while trading with other
business partners in the local or global marketplace. According to the view of Marsden (2017),
the Environmental Protection Act 1997 maintained by the firm shields the eco-friendly
legislation and the codes of business practice while operating in Australian territory. On the other
hand, the chosen organization has developed voluntary codes of practice for the New Zealand
operation so that all the environmental impact can be addressed by following the Government
agency’s rules and industry group’s protocol (www.business.gov.au, 2018). Moreover, in order
to profoundly delivering its innovation, JBH is the follower of all the regulations directed by
Department of Environment and Energy to avoid the issues of ozone-depleting elements or
artificial greenhouse gases through the products.
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5.0 Key inherent risk factors impacting on the audit of JBH:
5.1 Overview of inherent risk
Inherent audit risks are those audit risks that may arise due to the fact there are some material
misstatements in the financial statements of the company which will not be caught while
auditing. A financial audit involves a complex process of checking the veracity of the assertions
made by the management in the books of accounts. Singh et al (2013) are of the opinion that the
nature of business transactions plays a vital role in determining the audit process. In the case of
the complex nature of business transactions, auditors generally undertake the sampling process to
conduct the audit. However, there may remain the probability that the sampling process may not
detect some of the errors or omissions that may be present in the books of accounts.
5.2 Assessment of identified risks leading to potential material misstatements
As far as the case of JB Hi-Fi is concerned, the business may run the significant amount of
inherent risk in its audit process. The section below briefly touches upon those 4 areas of
inherent business risks.
Revenue fluctuation
First and the foremost risk factor is the fact that the business belongs to a highly fluctuating
industry where the revenue fluctuation is high. In this context, it is to be noted that the business
in retail home appliance industry in the country generally faces such seasonality issues for which
the management may need to chalk out the marketing and promotion strategy effectively so that
the business may get the highest benefit in the seasons. As an auditor, the responsibility relates to
the assessment of such seasonality and implications in the same on the material misstatement in
the books of accounts. In other words, the susceptibility of business operations to such market
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fluctuations may lead to a significant amount of risk that the auditor may run while designing its
sampling procedures (Grundmann, 2011).
Inventory valuation
Secondly, the very fact that the business is seasonal, the valuation of inventory may also be
crucial especially at the time of closing the books of accounts, since the balance sheet reflects the
value of closing inventory at the balance sheet date, the valuation may be performed at the
realisable value. However, it may be assessed that the audit process should involve a fair amount
of analysis and evaluation on the inventory valuation conducted by the management in order to
design the audit procedure accordingly. It may so happen that the valuation of inventory may be
performed at a value higher than the market value which denotes the fact that the financial
statements are reflecting the inflated profit.
Technological obsolesce
Thirdly, the business needs to adopt the newer and lasts technology in order to be in the
competitive market condition. In the opinion of Maas et al (2014), however, while doing so, the
management may need to consider the fact that the rate of technical obsolesce is very high in the
DVD industry and hence, the proper provisioning and depreciation may need to be performed.
The auditor should pay attention to the given fact while determining the nature, extent and timing
of audit procedures.
Unsuitable leasing arrangements
Lastly, it may also be noted that the business majorly depends on the physical stores with
suitable leasing arrangements with the parties. The absence of such suitable leasing agreements
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