JB Hi-Fi Limited: Financial Performance Essay And Auditors Report.

Overview of JB Hi-Fi Limited

Company’s Name and Website

JB Hi-Fi Limited (Page 56, Independent Auditor’s Report)

(https://investors.jbhifi.com.au/annual-reports/)

30 June 2020 is the reporting date of JB Hi-Fi Limited (Page 56, Independent Auditor’s Report)

17 August 2020 is the date of the auditor’s report (Page 60, Independent Auditor’s Report)

Deloitte Touche Tohmatsu is the audit firm and Travis Simkin is the audit partner (Page 60, Independent Auditor’s Report)

The auditor’s report is addressed to the members of JB Hi-Fi Limited (Page 56, Independent Auditor’s Report)

As mentioned in the opinion paragraph in the independent auditor’s report, the audited financial statements of JB Hi-Fi Limited provides true and fair view of its financial performance and financial position, and they were prepared by complying with the Australian Accounting Standards and Corporations Regulations 2001. No emphasis of matter paragraph is there. Hence, an unmodified audit opinion is expressed with no emphasis of matter (Page 56, Independent Auditor’s Report).

ASA 315: Identifying and Assessing the Risks of Material Misstatement

ASA 540: Auditing Accounting Estimates and Related Disclosures

ASA 570: Going Concern

ASA 700: Communicating Key Audit Matters in the Independent Auditor’s Report

ASA 701: Communicating Key Audit Matters in the Independent Auditor’s Report

Corporations Act 2001

Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code)

(Page 99, Remuneration of Auditors)

JB Hi-Fi Limited received assistance from the auditors on certain pre-acquisition tax matters associated with The Good Guy. However, the group is not required to pay any fee for this service as the fee will be paid by the previous owner (Page 99, Remuneration of Auditors).

(Page 64, Balance Sheet)

It implies that JB Hi-Fi Limited has funded 64.92% of assets from liabilities which is loans and 35.08% by shareholders equity in 2020. It has increased from 59.33% in 2019. It is not a healthy debt to asset ratio due to large dependence on loans and it indicates potential solvency or going concern issues.

(Page 64, Statement of Profit or Loss)

Total operating revenue has increased in 2020 compared to the last year indicating strong revenue growth.

Number of shares at the yearend is 114,883,372 and the total value is $403.2 million (Page 87, Contributed Equity).

The above table shows that the auditors have expressed unmodified audit opinion with no emphasis of matter for the last four years to JB Hi-Fi Limited. It reduces the inherent risk of material misstatements because expressing unmodified audit opinions implies that JB Hi-Fi Limited has prepared the financial aspects as per the applicable financial reporting framework (ASA 700, 2022, Para 16). Deloitte Touch Tohmatsu has been auditing the company for the last four years which helps the audit firm in gaining adequate understanding on its industry, business environment and risks which makes it easier to detect the fraud risks due to rare transactions. It also make the inherent risk low. No familiarity or self-review threat has been created as Deloitte Touch Tohmatsu has not been JB Hi-Fi Limited’s audit partner for more than seven years (APES 110, 2022, Para R540.5). All these make the inherent risk low.

Independent Auditor's Report

The management of JB Hi-Fi Limited has used the accounting estimates and judgments in certain areas for preparing the financial statements, and these estimates and judgments are based on historical experience and other factors (ANNUAL REPORT 2020, 2022). The main three areas of judgments and estimates are inventory valuation where assumptions and judgments are used for determining the net realizable value, impairment of goodwill and other intangible assets where estimates and judgments are used for calculating value in use, and right-of-use assets and lease liabilities judgments and estimates are used for recognizing and measuring these assets and liabilities (ANNUAL REPORT 2020, 2022). The accounts in which these estimates and judgments have been used are material in nature, and these judgments and estimates are complex and subjective in nature (ASA 540, 2022, Appendix 1). Thus, it is needed to use specific expertise to assess them for assessing whether they can lead to material misstatements. As a result, the inherent risk is increased.

1. The COVID-19 pandemic and the subsequent government actions like lockdown and restrictions affected the operations of JB Hi-Fi Limited which will increase the financial pressure on the company in 2021. As a result, inherent risk is increased.
2. JB Hi-Fi Limited operates in a highly competitive market, and both the sale and profitability are decreased due to the increase in new and existing competitors. As such increased competition creates additional stress on the management to maintain the expected level of profit, inherent risk is increased (ASA 240, 2022, Appendix 1).
3. The adverse impact of COVID-19 pandemic on the overall economic has reduced the consumer discretionary spending, and created adverse impact on demand which will affect JB Hi-Fi Limited’s sales and profitability in 2021. As a result, inherent risk is increased.
4. JB Hi-Fi Limited has 17 subsidiaries in both Australia and New Zealand (Page 94, 2020 Annual Report) which makes its business structure complex and increases the complexity of financial transactions. It contributes to the increased risk of material misstatements which eventually increases the inherent risk (ASA 315, 2022, Para A56).
5. JB Hi-Fi Limited has established a robust Audit and Risk Management Committee which consists of all independent non-executive directors. It is an indicator of strong internal control over its business risks and financial reporting, and thus the control risk can be assessed as medium.
6. As a result of the adoption of the new lease accounting standard, AASB 16 Leasesin 2019, a lease liability of $164 million has been recognized in 2020 (Page 64, Balance Sheet). As a result, inherent risk of JB Hi-Fi Limited is increased.

In the last four years, unmodified audit opinions were expressed as there was no fraud. The identified key risks have been adequately addressed by the Audit and Risk Management Committee. As a result, the assessed inherent risk is medium since the risk is only high for unusual transaction and estimates and judgments. Therefore, the overall evaluated risk is high for JB Hi-Fi Limited. Therefore, the main components of the audit approach are as follows:

• Application of high level of professional scepticism (ASA 200, 2022, Para 15).
• Inclusion of adequately experienced and qualified members in the audit team.
• Ensuring adequate time for collecting adequate appropriate audit evidence.

As per the above discussion, the assessed inherent risk and control risk of JB Hi-Fi Limited are high and medium respectively. Therefore, the risk of material misstatement which includes both inherent risk and control risk is high for JB Hi-Fi Limited which make the overall audit risk also high (ASA 200, 2022, Para Aus 13.2 (n)). These make JB Hi-Fi Limited a company with high risk. The audit risk model is as below:

Audit Risk (High) = f {Inherent Risk (High), Control Risk (Medium), Direction Risk (Low)}

As per the audit risk model, detection risk of JB Hi-Fi Limited needs to be set at low level because of high inherent risk and medium control risk. Therefore, it is needed to set materiality at low level for attaining the low detection risk. Audit strategy mainly includes nature, timing and extent of audit test. Limited reliance needs to be put on JB Hi-Fi Limited’s existing internal control as a part of test of control since control risk is medium. Reliance on the substantive tests needs to be increased along with an increased emphasis on samples and level of testing through setting a low level of materiality. Hence, test of details at the yearend needs to be increased.

References

Apesb.org.au. 2022. APES 110. [online] Available at: <https://apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Code_Nov_2018.pdf> [Accessed 21 January 2022].

Auasb.gov.au. 2022. ASA 200. [online] Available at: <https://auasb.gov.au/media/zpcgnsmi/asa_200_12-21.pdf> [Accessed 21 January 2022].

Auasb.gov.au. 2022. ASA 240. [online] Available at: <https://auasb.gov.au/media/cyloqabg/asa_240_12_21.pdf> [Accessed 21 January 2022].

Auasb.gov.au. 2022. ASA 300. [online] Available at: <https://auasb.gov.au/media/gnkc2fzb/asa_300_12_21.pdf> [Accessed 21 January 2022].

Auasb.gov.au. 2022. ASA 315. [online] Available at: <https://www.auasb.gov.au/admin/file/content102/c3/ASA315_03-20.pdf> [Accessed 21 January 2022].

Auasb.gov.au. 2022. ASA 540. [online] Available at: <https://auasb.gov.au/media/ccvj4vf5/asa_540_12_21.pdf> [Accessed 21 January 2022].

Auasb.gov.au. 2022. ASA 700. [online] Available at: <https://auasb.gov.au/media/da0clvbr/asa_700_12_21.pdf> [Accessed 21 January 2022].

Investors.jbhifi.com.au. 2022. ANNUAL REPORT 2020. [online] Available at: <https://investors.jbhifi.com.au/wp-content/uploads/2020/09/FY20-Annual-Report_Printers-Version.pdf> [Accessed 21 January 2022].