HI6026: Analysis of Wesfarmers Annual Report and Auditor's Report

This report provides an analysis of the Wesfarmers annual report, focusing on the auditor's compliance with independence requirements and the non-audit services provided by Ernest & Young. It examines the auditor's remuneration and details key audit matters, including impairment of non-current assets, supplier rebates, and the acquisition accounting of Homebase. The report outlines the audit procedures performed for each key matter and assesses the formation of the audit committee. It also highlights the type of audit opinion issued, differences between directors', management's, and auditors' responsibilities, material subsequent events, and the assessment of material information. The analysis includes follow-up questions for the auditors and a conclusion summarizing the findings.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Student Name
University Name

2AUDITING THEORY AND PRACTICE
Executive Summary
The below report highlights the aspects of auditors given in the annual report of Wesfarmers.
The first part of the report highlights the independence of auditors and non-audit services
offered by the auditors. The next part covers the key audit matters identified and how the
auditors dealt with those matters. Lastly, the opinion of the auditors was established based
upon the auditors view point and few follow up questions were established which could be
asked

3AUDITING THEORY AND PRACTICE
Table of Contents
Introduction.....................................................................................................................................2
Has the auditor complied with Independence requirements?.......................................................2
Non-audit services...........................................................................................................................3
Auditor’s remuneration...................................................................................................................4
Key audit matters and audit procedures.........................................................................................5
Second Key Audit Matter: Different Supplier rebates.....................................................................6
Formation of audit committee........................................................................................................8
Type of Audit Opinion......................................................................................................................9
Difference between Directors’ and Management’s responsibilities and Auditors responsibilities 9
Outline of material subsequent events.........................................................................................10
Assessment of effectiveness of material information...................................................................10
Any form of missing material information....................................................................................11
Any form of follow-up questions for the auditors of Wesfarmers................................................11
Conclusion......................................................................................................................................12
References.....................................................................................................................................13

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Introduction
Knechel and Salterio (2016) opines that the auditors play a pivotal role in order to manage any
kind of miss statements in financial statements of modern business organizations. It can be
inferred that the primary responsibility of the auditor is to recognize errors in financial
statements and identify whether the organizations have followed the legal requirements while
preparing financial statements or not. One of the principle importance of auditing is to maintain
and regulate the internal organization as well as to establish a well-structured working and
financial structure. Internal auditing helps a company to know how the companies performing
in terms of financial and non-financial aspects will also help the company to regulate
transactions which it is undergoing. It also helps the company to know financial prospect in
future which can help them to establish the strategies which will give more profit (Louwers et al
2015).
It has also been observed that various organizations have taken several initiatives in order to
improve the process of auditing of the financial statements. This is done in order to avoid any
kind of misstatements in the financial statements. The given report will analyze the annual
report of the organization Wesfarmers on the basis of auditor’s compliance and key audit
matters as undertaken by the auditors of the firm.
Has the auditor complied with Independence requirements?

5AUDITING THEORY AND PRACTICE
It is the primary responsibility of an auditor in order to comply with the various rules and
regulations of auditor’s independence (Sirois Bédard and Bera 2018). If an auditor fails to do so,
there will be violation on the part of auditor’s part. In case of the organization Wesfarmers, it
has been seen that the auditors have complied with the requirements of Australian Accounting
Standards and the Corporations Act 2001. This has further enhanced the internal control of the
organization while preparing the financial statements. This kind of compliance has helped the
organization to provide a true and fair value of their financial statements and it is free from any
kind of misstatements. This has further avoided fraud or error in financial statements. Apart
from this, it has also been seen that the Remuneration Report of Wesfarmers Limited for the
year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. This
further implies that the organization is free from any kind of misstatements in their overall
financial statements.
Non-audit services
Cannon and Bedard (2016) opine that various auditors need to provide different kind of non-
audit services to their client organizations. From the annual report of the organization
Wesfarmers, it has been seen that Ernest & Young has provided non-audit services to the firm.
The total provisions of non-audit services received by the firm can be evaluated with the help of
the following table:-
In thousands
Tax compliance 1088
Others 1219

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Total 2307
Table 1: Services provided by Ernest & Young
(Source: Wesfarmers.com.au. 2018).
It can also be inferred that Ernest & Young has successfully complied with all the rules and
regulations of Corporations Act 2001 which can be considered as a positive sign for the
organization Wesfarmers.
Auditor’s remuneration
It is of utmost importance for any business organization to disclose the total amount of
auditor’s remuneration in their financial statements (Knechel and Salterio 2016). The auditor’s
remuneration of the firm can be evaluated with the help of the following figure:-
Figure 1: Auditor’s remuneration of Wesfarmers 2017

7AUDITING THEORY AND PRACTICE
(Source: Wesfarmers.com.au. 2018).
From the above figure, it can be inferred that total amount paid to auditors in the 2017 is
10,222 (in 000’s), while it was 10662 (in 000’s) in the previous year. It has also been seen that
Ernest & Young has received and amount of 5723 (in 000’s) and 5780 (in 000’s) in the years
2017 and 2016 for providing audit services to Wesfarmers.
The above table also indicates that Ernest & Young has also received payment for providing
non-audit services to Wesfarmers. The firm has received 1272 (in 000’s) and 2215 (in 000’s) in
last two financial years for providing non-audit services (Wesfarmers.com.au. 2018).
Apart from this, Ernest & Young has also received payment for providing assurance related
services to the firm Wesfarmers. They have received 1272 (in 000’s) in the year 2017 and 2215
(in 000’s) in the financial year 2016 for providing assurance related services to the firm
(Wesfarmers.com.au. 2018).
Key audit matters and audit procedures
It can be inferred that the auditors need to disclose Key audit matters and their subsequent
audit procedures in the respective financial statements of the firm (Kachelmeie Schmidt and
Valentine 2017). In case of Wesfarmers, the key audit matters can be segmented in various
types.
First key audit matter
Impairment of non-current assets including intangible assets

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From the financial statements, it can be seen that the organization Wesfarmers has not
recognized any material impairments during the financial year of 2017. Moreover, it is
mandatory to assess Goodwill on annual basis (Wesfarmers.com.au. 2018). This is considered to
be a key audit matter for the auditor.
Audit procedures performed for these key audit matter
In case of determination of CGU’s (Cash generating units), the auditors have evaluated growth
rates, forecast cash flows, different discount rates and other form of comparative industry
valuation multiples. The auditors have also considered the various disclosures made in the
financial report regarding impairment testing and different forms of key assumptions.
Second Key Audit Matter: Different Supplier rebates
Supplier rebates is the second key audit matter that can be evaluated from the annual report of
the Wesfarmers. This can be considered as significant due to various reasons. Supplier rebates
can be also terms as commercial inform where different form of rebates are received from
various group of suppliers in the operational process of the firm. Commercial income can be
recognized due to various factors. These factors are as follows:-
 Commercial terms
 The given time of recognition
 The given consideration
 Accurate recognition based on Australian Accounting Standards (Wesfarmers.com.au.
2018).
Audit procedures performed for this matter

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The auditors have understood the nature of each material related to commercial income while
treating them. They have also compared various rebate assessments with reference to previous
financial years and variances were identified from the above process. The given variance
analysis were taken as a supporting evidence for the auditors. Proper inspection of supplier
material contracts were done which further added to supporting documentation of the
auditors. A proper enquiry was done for the supply chain managers, merchandisers and
procurement staffs related to any kind of non-standard agreements. This test of controls
implemented by the auditor has helped the organization Wesfarmers to display a true and fair
view of the financial statements.
Third key audit matter: Finalization of the acquisition accounting of Home base
In 2016, Wesfarmers has acquired Hampden Group Limited (Homebase) as a business
combination as per section AASB 3B of Australian Accounting Standard. As per the accounting
standard of AASB 3, a provision period of 12 month during which the initial acquisition
accounting can be revised (Wesfarmers.com.au. 2018). This is considered to be a key audit
matter due to nature and size of the given acquisition and different judgments while
determining fair value of assets and liabilities of the organization in its financial statements
(Wesfarmers.com.au. 2018).
Audit procedures performed for this matter
The auditor has successfully assessed the given acquisition strategy and methodology. Apart
from this, all the changes and key judgments were assessed properly. This further supports the

10AUDITING THEORY AND PRACTICE
true and fair value assessment of the assets and liabilities of the firm. The auditor has also
assessed whether there is any variances in provisional fair values of assets and liabilities since
the acquisition have taken place. In addition to this, the auditors have involved their specialists
in the valuation and recognition process which is also disclosed in the given financial report.
Formation of audit committee
The organization Wesfarmers have an audit and risk management committee which is evident
from their financial statements. The major aim and objectives of audit and risk committee is to
protect the organization in case of any discrepancies of financial reporting. The non-executive
directors A J Howrath and Smith-Gander were the members of the audit committee. However,
it can also be inferred that there is no proper audit committee present within the organization.
The remuneration of the audit committee can be explained with the help of the following
figure:-
Figure 2: Remuneration of Audit and Risk Committee
(Source: Wesfarmers.com.au. 2018).
However, it has also been seen that there is no audit committee charter within the organization
Wesfarmers. Apart from this, functions and responsibilities of Audit committee is not clearly
described in the annual report.

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Type of Audit Opinion
The financial statement of Wesfarmers for the year ended 2017 reports about the audit opinion
regarding the remuneration report. The auditors of Wesfarmers have expressed that
Remuneration Report of Wesfarmers Limited is accordance with section 300A of the
Corporations Act 2001 for the year ended 30 June 2017. This opinion and report of the auditors
indicate that financial statements of the firm reflects a true picture of their business operational
activities. This can be considered as a positive sign for the organization Wesfarmers.
Difference between Directors’ and Management’s responsibilities and Auditors
responsibilities
Peecher Solomon and Trotman (2013) opines that there are differences between a
responsibility of an auditor and responsibility of the director and management of any business
organization like Wesfarmers. The basic objectives of the director and management is to
prepare the financial statements of the firm in accordance to the Corporations Act, 2001. The
primary aim of the auditor is to express their opinion of the financial report while conducting
audit in accordance to the Australian Auditing Standards (Brasel et al 2016). Similarly, the
directors and managers ensures the preparation of remuneration report as per Section 300A of
the Corporations Act 2001 and auditors conduct audit as per the given standards. In addition to
this, there are several other roles and responsibilities of an auditor. One of the primary
responsibilities of an auditor is to identify and assess the risks of misstatement that are present
in the financial report of the firm. Another responsibility of the auditor is to evaluate the
appropriateness and effectiveness of accounting policies used by the firm. The auditor needs to
evaluate the overall structure and presentation of financial report prepared by the

12AUDITING THEORY AND PRACTICE
management of the organization. The auditor also needs to evaluate and obtain certain audit
evidence of financial information of the firm. These are the major differences of responsibilities
between auditors and management of the firm.
Outline of material subsequent events
There were various material subsequent events which was reported after the reporting period.
The first material subsequent event was related to fully-franked final ordinary dividend. A total
of $1,361 million of fully-franked final ordinary dividend was declared during September, 2017.
However, the dividend was not provided till June, 2017. The second material subsequent event
is related to Kmart brand name acquisition. During August 2017, the brand name of Kmart was
acquired with an agreement of $100 million (Wesfarmers.com.au. 2018). However, this
transaction is not expected to have any materialistic impact of the earnings of the firm.
Assessment of effectiveness of material information
Ernst & Young have audited the financial statements of the organization Wesfarmers in an
effective manner. There are no form of material information missing in the financial statements
of the firm. In addition to this, it can be also highlighted that all the key audit matters have been
assessed and analyzed effectively by Ernst & Young. Apart from this, remuneration report, non-
audit services have been highlighted effectively in the financial statements. Proper and effective
audit opinion was also expressed through the presentation of the financial statements. The
audit committee have also performed their role in an effective manner (De Paula 2016)
From this, it can be also inferred that all the stakeholders of the firm Wesfarmers will be
satisfied with the presentation of findings of the financial statements.