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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with the lesser, the management may run the risk of the product being unsold and lying in the
inventory or excess holding cost because of lower supply. Moreover, the supplier relationship
may be adversely affected which may result in inefficiencies in the supply chain of the business.
The auditor may need to assess the impact of the same as the event may considerably affect the
selling and distribution related overheads and expenses for the business.
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6.0 Evaluating accounts of significant risks:
6.1 Overview of accounts with significant risk
As far as the annual report of 2017 is concerned, the key audit matters, as identified by the
auditor of the company, are of two types. One is related to the acquisition of “The Good Guys”
and the second one relates to the determination of carrying a value of New Zealand cash
generating unit (CGU). However, apart from these two items, the auditor has not yet identified
any more key audit matters.
However, a perusal of the financials and another report as contained in the annual report of the
company for the year 2017 may reveal that the business may possess some additional risk areas
where the auditor could have thrown some lights. These matters are primarily based on the
previous discussion on inherent audit risks. The matter along with the key audit matters as
identified by the auditor is briefly described below.
6.2 Identification of the key assertion at risk for each account:
Acquisition of The Good Guy
In the year 2016-17, the company acquired 100% stake in The Good Guy for a total
consideration of $860 million. Accounting for such acquisition was complex and the
management undertook a fair amount of judgment and assumptions while assessing the
valuation. Since the volume of the transactions was huge involving the sizeable amount of
valuation in the business context in terms of the determination of the fair value of identified
assets and liabilities, the audit team used to consider the same as a key audit matter and placed
the reliance upon its accordingly in terms of vouching, verification and valuation. It is to be
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noted that the complex assertions need to be cross-checked by the auditor as part of their
professional duties and responsibilities (Porter, 2015).
Determination of carrying a value of New Zealand cash generating unit (CGU)
During the given financial year under review, the business conducted an impairment of goodwill
to the extent of $14.7 million. As per the management, the said impairment was conducted
assessing the recoverable value of New Zealand CGU under the discounted cash flow method.
However, there also, the business used a significant amount of assumptions for the purpose of
determination of discounting rate to value the carrying amount of such CGU. As a result, the
audit team also considered the same as a key audit matter and critically assessed the
management’s approach in using discounting rate, projected cash flow and value-in-use
technique.
Revenue fluctuation
As outlined in the previous sections of the report, the business suffers from fluctuating revenue
position. This is because of the fact that the industry of retail home appliance has been primarily
based on changing demand landscape of customers and hence the stiff competitive market puts
much pressure on the business itself in terms of top line and bottom line as well (Petrin, 2016).
The fluctuation in revenue and profit puts the auditor into the e4ffort of extending the nature,
timing and extent of audit procedures.
Inventory valuation
The business may need to have a proper inventory management policy so that the carrying cost
and inventory holding cost may remain at a decent level. However, considering the fluctuant
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nature of the business, the management may face challenges of managing inventory in a most
efficient manner (Oliveira, 2009). The impact of the scenario is directly on the financial
statements in terms of inventory valuation, As a result, the audit team may also need to consider
the same and evaluate the strategy of inventory valuation as performed by the management and
challenge any assumptions that the management may have made in this regard.
Cost increase
Finally, it may also be observed that the industry faces a cut-throat cost pressure and the firm is
no exception to the same. In the option of Ferran (2016), the rising energy costs and latest Fair
Work Award Wage Review shows that the cost of doing business is considerably high and hence
the same may impact the bottom line as well. The auditor may need to stress more on cost items
in the statement of profit and loss of the company for the given year.
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7.0 Placing the control:
7.1 Overview of the control environment
The control environment as employed in the business has been assessed by the auditor in terms
of its existence and effectiveness. The audit team, in their audit report, has mentioned their
reliance on the internal control mechanism as engaged by the management in their operations. In
this context, it may be worth to note that the assessment of the client's internal control
environment largely helps the auditor team to design their audit procedure. Effective and sound
internal control exhibits the validity and reliability of management provided data that an auditor
may consider in his sampling process to carry out the analytical procedure.
7.2 Identification of the likelihood of potential reliance
Mohseni (2014) opines that since the audit is a process of attestations of assertions made by the
management, the auditor may need to put reliance on the internal control system of the client. In
the given case, also, the auditor has evaluated the efficiency of the JBH’s internal control
environment and found the same to be satisfactory. However, it is to be construed that the risk of
not detecting any error either due to omission or commission of fraud may remain within the
audit process because of override of internal control (Yin, 2017).
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8.0 Conclusion:
Based on the discussion and analysis performed in the preceding sections of the report, it may be
concluded that the financial reporting of JBH has been fair and satisfactory as far as the opinion
of the auditor is concerned. The audit report establishes the fact the internal control system has
been in existence, operative and effective. In the opinion of Antikarov (2012), the assertions
made by the management may involve certain assumptions. These assumptions are being tested
against the backdrop of established accounting conventions and rules. As a result, the financial
statements depict a true and fair position of the state of affair of the business in terms of profit or
loss or event the asset and liabilities position of the business. Finally, it may be communicated
that the audit team should join hands with the management in conducting the audit process so
that the mutual collaboration will result in smooth and efficient auditing without hampering the
independence of the audit teams.
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