Key Audit Matters & ASA 701: Retail Industry Analysis, ASX Top 100

This report explores the rationale and implementation of the new auditing standard ASA 701, focusing on communicating key audit matters in the independent auditor's report. It examines the impact of the global financial crisis on auditing standards and the subsequent development of ASA 701 to enhance transparency and provide investors with more insights into the companies they invest in. The analysis is conducted within the retail industry, selecting Wesfarmers Limited, Woolworths Limited, and Grain Corp Limited from the ASX 100 listed companies. The report details the requirements of ASA 701, analyzes the key audit matters reported in the annual reports of the selected companies, and discusses the audit procedures employed to address these matters. It covers areas such as impairment of non-current assets, supplier rebates, business combinations, discontinued operations, and the valuation of property, plant, and equipment. The report concludes with recommendations and insights into the significance of ASA 701 in improving the quality and relevance of audit reporting.

RETAIL INDUSTRY
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SYNOPSIS
Contents
EXECUTIVE SUMMARY................................................................................................................................ 3
INTRODUCTION............................................................................................................................................. 4
INDUSTRY INFORMATION AND ITS OPERATED COMPANIES.................................................................................5
INDUSTRY DETAIL.........................................................................................................................................................5
OPERATED COMPANIES SELECTED FROM INDUSTRY.............................................................................................................5
AUDITING STANDARD –ASA 701.......................................................................................................................... 6
WHY ASA 701?..........................................................................................................................................................6
DETAILS AND SIGNIFICANCE............................................................................................................................................6
ANALYSIS OF AUDIT’S REPORT OF SELECTED COMPANIES....................................................................................7
FIRST COMPANY - WESFARMERS LIMITED.........................................................................................................................7
Key Audit Matters in Annual Report.......................................................................................................................7
Response by Audit procedures...............................................................................................................................8
SECOND COMPANY - WOOLWORTHS LIMITED....................................................................................................................8
Key Audit Matters in Annual Report.......................................................................................................................8
Response by Audit procedures...............................................................................................................................9
THIRD COMPANY - GRAIN CORP LIMITED..........................................................................................................................9
Key Audit Matters in Annual Report.......................................................................................................................9
Audit procedures..................................................................................................................................................10
RECOMMENDATION AND CONCLUSION............................................................................................................ 10
REFERENCES...................................................................................................................................................... 11
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EXECUTIVE SUMMARY
Auditing is the key which helps in regulating the industry. If there has been no practice of the
auditing than the companies will work in their own manner without considering the interest of
the public. This is the concept which is necessary for all the stakeholders of the different
companies. The report has been revolved around the matter of the audit and the importance of
the same has been highlighted. The report has been framed with three basic purposes. The first
purpose of the report has been to discuss the meaning and the importance of the key audit
matters as reported by the auditor in his independent auditors report and the second purpose of
the report is to know how these key audit matters if any mentioned by the auditor help the
company in assessing the risk that have the risk of the material misstatement and how the auditor
deals with such situation so as to provide the true and fair view of the operations and the working
of the company. The third purpose is to discuss as to how the same has been evolved and has
gained importance across the globe. The report has been presented and has come up with the
detail of the achievement of the aforesaid objectives and the purposes.
INTRODUCTION
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The auditing concept has gained the importance when the incident of the global financial crisis
have happened which have occurred in the middle of the 2007 and has been ended in the year of
2009 but has the after effects for so many years. Earlier the auditor was not bound in any manner
for the reporting of the matters that can have the significant impact on the reporting of the
financial statements have now been bound with the introduction of the new auditing and
assurance standard on communicating the key audit matters with the client having the number of
701. In this report, the importance of this new auditing standard has been detailed. For the
purpose of furtherance of this report, the industry that has been selected is the retail industry and
from those industry three companies has been chosen from the list of the ASX 100 companies
which are Woolworths Limited, Wesfarmers Limited and Grain Crops Limited (ASX, 2017).
The report has started with the description of the industry and the company chosen therein and
then the details of the new auditing standard have been given with regard to its disclosures and
the requirements. With respect to the companies so chosen, the annual report of each company
has been deeply analyzed and in case any key audit matter has been mentioned then the same has
been analyzed in detail in the report and the appropriate considerations have been mentioned.
The report has then summed up with the concluding paragraph along with the proper
recommendation.
INDUSTRY INFORMATION AND ITS OPERATED COMPANIES
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Industry Detail
For the furtherance of the study, the industry which has been chosen is the retail industry.
Although there have been many industries like mining and finance industry, but this have been
chosen only because of the fact that the due to number of the goods and services, the industry
will be having more areas to study. Also the sector of retail is the classification sector. The
industry which has been selected in normal course of business deals with the goods which are the
needs of every house which includes the food, fruits and other dairy products and other similar
items. As this sector belongs to the daily food items it is therefore considered as the major sector
by the investors and the other stakeholders to invest in the companies operating in that industry.
Therefore, the role of the new auditing standard 701 can be understood and discussed under this
industry in true and fair manner.
Operated Companies selected from industry
The companies from the Retail industry under consumer staple sections are six as per the list of
Top 100 ASX listed companies. Among this three companies- Wesfarmers Limited, Woolworths
Limited and Grain Corp Limited has been selected for meaningful preparation of the report.
1. Wesfarmers Limited – Largest retail Sector Company since 1914 involved in super
markets and home improvements of daily needs.
2. Woolworths Limited – Second largest company working in Australia and New Zealand in
consumer staple sector
3. Grain Corp Limited – Operating since 1917 in Malt, Marketing, Oils, Storage and
Logistics of Food grain under retail industry.
AUDITING STANDARD –ASA 701
Why ASA 701?
All across the Globe, in 2007 crisis has happen in corporate sector which continues till 2008 in
which all major corporate of the world become insolvent and the respective government of
different countries was not able to prevent its economy to fall. The global crisis made major
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player of Australia like HIH Insurance, Lehman Brother, One Tel to fallback and hamper the
financial condition of people and the country (Bajada and Trayler, 2010). The major reason
behind the crisis has been analyzed as non reporting of significant events by auditor as there was
no guideline that can bound the report to report any matter apart from giving opinion which may
been clean, modified and qualified. It has been seen from the crisis analysis that auditor had also
involved in manipulation of the treatments of items by the company by not reporting the same.
For instance, in HIH insurance the company has done major investments in Fire and Marine
insurance which are highly risky insurance and claims of these insurance created the shortfall of
funds in the company which has been manipulated by the company by recording the liability as
income and the auditor has not reported the fact. When the auditor has caught then auditor has
safeguard himself by saying that there is no such law which bound auditor to report the matter
(Xu, 2011). This situation of auditor open eye of auditing standard creation board eyes and the
birth of new auditing standard 701 has taken place. This new standard help the authorities to
bound the auditor to report the significant event (Cordos and Fülöpa, 2015).
Details and Significance
According to the judgment in professional terms of the auditor, all the events or transactions
creating significant influence on the financial reports of the company are termed as Key Audit
Matter (AASB, 2015). The auditor has to show these events in their independent auditor’s report
so that it can come in knowledge of person those charged with governance. The following areas
as per ASA 701 are generally classified as Key audit matter:-
 Areas of high risk as per ASA 315 and requires auditor to put his professional judgment
(Thomson, 2008).
 Areas in which substantive detailed evidences cannot be obtained due to deficiency in
company’s process.
 Areas where the internal control systems failed and corrective measures not taken by the
company (Masytoh O, 2010).
ANALYSIS OF AUDIT’S REPORT OF SELECTED COMPANIES
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Auditor has to comply with the requirements laid in the Australian Auditing Standard 701, to
show all significant events which can impact the decisions of users of financial statements. The
compliance of ASA 701 in retail industry has been analyzed using the annual report of the
companies operated in this industry. The following are the different key matters reported by the
auditor in the annual reports of the companies operated in retail business along with the audit
procedures which has been performed by auditor to consider the particular event as key audit
matter:-
First Company - Wesfarmers Limited
Key Audit Matters in Annual Report
Following are the matters regarded as Key Audit Matters which has been reported by auditor in
annual report for the company for the period ended in June, 2017:-
a) The first key matter reported by auditor is assessment of impairment of non currents
including intangible assets. The calculation of recoverable amount involves high
professional judgment by the management of the company making it as significant event
for auditor. No material impairment has been recognized during 2017 but the amount of
investment involve in Property, Plant and Equipment making the impairment testing as
key audit matter.
b) Second key audit matter is supplier rebates received by the company and recorded as
commercial income in statement of profit or loss. It is the amount received from suppliers
which are connected with retail operations of the company. It is considered as key event
by auditor because of the high amount which is recognized as income and which involves
judgment on the part of the company’s management.
c) Acquisition of Homebase by entering into the business combination agreement with
Hampden Group Limited. The company has not fulfilled the provision of AASB 3 of
initial recognition of identifiable assets and liabilities within 12 months of acquisition
date. The auditor includes it as key audit matter as it requires attention of stakeholders
and huge judgment is involved on the part of company.
Response by Audit procedures
Following are the audit procedures taken auditor for above mentioned Key Audit Matters:-
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a) The auditor has taken the help of valuation specialist to check the validity of discount
rate, growth rate, future cash flows, currency exchange rate, and commodity rate used in
calculation of recoverable amount. Also auditor has done assessment on cash generating
unit selection by company’s management.
b) Auditor has checked in detail all the agreements which had been entered by the company
in regard to commercial income. Comparison of current rebate income with budget and if
there was any material difference then detail evidence has been obtained by the auditor
and his team (Wesfarmers Limited, 2017).
Second Company - Woolworths Limited
Key Audit Matters in Annual Report
Following are the matters regarded as Key Audit Matters which has been reported by auditor in
annual report for the company for the period ended in June, 2017:-
a) The first important matter reported in Auditor’s report was exit of Home Improvements
line by the company. The discontinued operations of Home improvements during the
financial year results in many subsequent events which can affect financial assets and
liabilities of the company in future and very complex in nature. The closure of put option
and sale of Home consortium transactions results in financial loss to the company. It is
regarded as key matter because of the complexities involved in recording the interrelated
components for Home Improvements (McKee, 2015).
b) The next key audit matter reported in annual report is about the BIG W division of the
company and its related Property, Plant and Equipment. The working of the company’s
unit in terms contribution towards profitability has been decreasing from past few years
resulting in decreased value of technologies used in BIG W unit. The auditor was in the
opinion that carrying value of Property, Plant and Equipment of BIG W unit was less
than its recoverable amount. The impairment calculation involves huge amount judgment
in relation to future cash flows and discount rate taken for calculation of recoverable
amount of BIG W unit of the company making this event as key audit matter
(Kachelmeier, Schmidt and Valentine, 2016).
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Response by Audit procedures
Following are the audit procedures taken auditor for above mentioned Key Audit Matters:-
a) Audit procedures include assessment of sale of assets of Home Improvement unit with
their sale agreements. Evaluation of terms and conditions of Inventory master also
accounting treatment of revenue and cost of sales by liquidator. Assessing the tax
treatments done are appropriate and all the material disclosures has been done by
company’s management.
b) Assessment of Board and management methodologies in terms of controls and
assumptions taken in calculation of carrying amount of BIG W PPE. Tested the cash
flows calculation on sample basis and perform sensitivity analysis (Xu, 2013).
Third Company - Grain Corp Limited
Key Audit Matters in Annual Report
Following are the matters regarded as Key Audit Matters which has been reported by auditor in
annual report for the company for the period ended in June, 2017:-
a) The first and major key audit matter reported was adequacy of provision for customer
claims. As the company is involved in storing and transporting of grains on behalf of its
customers, customer claims arises when there is loss or tear of grains or its quality at the
time of storage or transportation to customers location. It was regarded a key audit matter
as the provision was created for the future potential purchases for covering the claims
was on purely estimate basis.
b) The second key matter was Assessment of Impairment of Goodwill. The company has
huge amount of Goodwill worth $ 427.2 on 30th September, 2017 lying in the books. It is
regarded as Key Audit matter because of involvement of estimation of future cash flow,
calculation of discount rate. The impairment has been tested annually by company of the
identified cash generating units.
c) The third key audit matter relates to reporting of Retirement Benefit Plan which involves
plan assets worth $ 167.1 million and present value of pension worth $ 193.9 million
comprises of significant amount in terms of financial position of the company. It is
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consider a key audit matter because of involvement of size of financial balances and high
judgment involvement in the calculation of these balances.
Audit procedures
Following are the audit procedures taken auditor for above mentioned Key Audit Matters:-
a) Examination of location of physical customer and volume of customer’s ownership
which has been used in provision calculation as major. Also, by doing physical stock
counts to justify the basis for calculating provision and checked all the documents
including estimated transportation costs.
b) The main audit procedures done by auditor were comparison of the expected cash flows
with per approved management budgets so that intention of the manipulation can be
checked. Evaluation of discount rate models with helps of external experts from PWC.
c) Assessed the balances of the plans with the help of actuarial experts and obtained third
part confirmations for pension plan assets (Grain Corp limited, 2017).
RECOMMENDATION AND CONCLUSION
Auditor’s report as a part of annual report of any entity will provide the judgment and thinking
which the auditor has framed after auditing the financial statements. Auditor’s Report is
considered as base by different internal and external stakeholders of an entity for making
effective and meaningful decisions or opinion about the company and the auditor’s report is
always considered to be issued after fulfilling all the requirements of auditing standards as laid
by Australian Auditing Standard Committee governing the actions of the auditor. For providing
transparent and important information, Australian Auditing Standard- 701 is formed after Global
Crisis. In this study, Retail Industry containing Consumer Staple sector and companies operated
in this industry listed in ASX Top 100 list has been analyzed to assess the requirements of New
Auditing standard has been fulfilled by the auditor along with reason for inclusion of particular
matter as Key Audit Matter. It can be concluded from the study that after introduction of
Australian Auditing Standard – ASA 701, the disclosures in audit report of the companies
include Key Audit Matters which in turn helps the stakeholders in getting full and correct
information.
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Major recommendation from study is that every auditor should performs audit procedures which
are necessary for inclusion of all relevant Key Audit Matters in their independent auditor’s report
so that government and those charged with governance will able to identify future risks and take
preventive actions to safeguard the entity or industry from crisis.
REFERENCES
AASB, (2015), “ASA 701, Communicating Key Audit Matters in the Independents Auditors
report”, available on http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
accessed at 08/05/2018.
ASX Website, 2017, List of Top 100 ASX listed Companies online available at
https://www.asx100list.com/ accessed on 19-05-2018.
Bajada, C. and Trayler, R., 2010. How Australia Survived the Global Financial Crisis. The
Financial and Economic Crises: An International Perspective, Edward Elgar: Cheltenham, UK
and Northampton, USA, pp.139-154.
Cordos, G.S. and Fülöpa, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128
Grain Corp Limited official website, 2017, “Annual Report 2017” available on
http://www.graincorp.com.au accessed on 08/05/2018
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.
Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of
Modern Accounting and Auditing, Vol 6(4), pp 27-36
McKee, D., (2015). New external audit report standards are game changing. Governance
Directions, 67(4), p.222
Thomson, J., (2008), “Five lessons from the Spectacular fall of Eddy Grooves”, available at
http://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-
grroves.html accessed on 08/05/2018
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Woolworths Limited official website, 2017, “Annual Report 2017” available on
http://www.woolworthslimited.com.au accessed on 08/05/2018.
Wesfarmers Limited official website, 2017, “Annual Report 2017” available on
http://www.wesfarmerslimited.com.au accessed on 08/05/2018.
Xu, Y., 2011. Audit reports in Australia during the global financial crisis. Australian Accounting
Review, 21(1), pp.22-31
Xu, Y., 2013. Responses by Australian auditors to the global financial crisis, Accounting &
Finance, 53(1), pp.301-338
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