Analysis Of Financial Reporting And Auditing Process Of JB Hi-Fi

You are a part of the team responsible for planning the JB Hi-Fi (JBH) audit engagement for 2018. You are required to gather relevant background information and prepare a report for a meeting with your senior managers and audit partner. Your report must address the following issues:

1. What are the areas in which JBH conducts itsoperations?   
2. Who are theFOUR primary competitors of JBH in Australia?    
3. Which particular laws/regulations (other than financial related categorieswhich include legislation such as: Corporations Act 2001, Australian taxation laws, etc.) affect JBH’s operations? You need tolist and briefly describe FOUR laws/regulations.  
4. Identify and explain FOUR key inherent risk factors that could have impact on the audit of JBH. You also need to describe how these risks may lead to potential material misstatements in the financial report.
5. Using the JBH 2017 annual report, identify and discuss FIVEaccounts to be at significant risk. You also need to identify the key assertionat risk for each account. Do not use the same accounts identified in question 4 as answer.   
6. With specific reference to JBH’s corporate governance arrangements, you need to assess the likelihood of potential reliance that could be placed on the overall control environment. Your conclusion should be supported by at least THREEfactors 

Business Aspects of JB Hi-Fi

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.

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

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).

Consumer Laws (ACL)

Equal Opportunity Laws and Human Rights Acts

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).

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 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.

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.

Consumer Protection Laws

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.  

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 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.  

Competition Laws

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 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.

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.

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 noted that the complex assertions need to be cross-checked by the auditor as part of their professional duties and responsibilities (Porter, 2015).

Environmental Protection Laws

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 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.

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.

Inherent Audit Risks

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).  

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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