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Overview of Dick Smith Holdings Limited

Dick Smith is an Australian company engaged in the business of retail stores and till 2016 was known as Dick Smith Holdings Limited. However, in the year 2016 the brand name of Dick and Smith in Australia and New Zealand was acquired by online retailer giant Kogan. This document will shed lights on various areas of audit which have lacked the standard of professional ethics and code of conduct that a professionally qualified accountant must adhere to while conducting such audit. In addition to that the document will also try to shed some lights on various standards of auditing and the different provisions of the Corporations Act associated with different areas of audit to be discussed in this document.

On June 21, 2017 news.com.au published an article named Dick Smith Shareholders launch class action. The article talks about how 1000 former shareholders of Dick Smith Holdings Limited have signed up to launch a class action against the company for their losses which ranges between $500 to $2 Million per shareholder. The discussion in this document is not only limited to the class action and the reasons for the same but also discusses the various auditing standards and sections of the Corporations Act, 2001 which are relevant to conduct an audit in accordance with the international standards of auditing to express valid opinion on the financial reports of an organization. The article link is provide her for the benefit of the readers (https://www.news.com.au/finance/business/retail/dick-smith-shareholders-launch-class-action/news-story/2e5df4b5d580e9d205c5cad77e3b04ec).        

“Dick Smith Collapse puts directors and auditor under the gun” published in Financial Review on February 25, 2016 discusses the huge implications of the sudden collapse of Dick Smith Holdings Limited on the auditor and directors of the company. However, the discussion in this document shall only be limited to the various areas of auditing which were not in accordance with the international standards and thus, unable to forecast the crash down of the company. The financial statement of the company in the year 2014 showed a profit before interest, depreciation and amortization of $72.00 Million however, in reality excluding the discounts and endowments the company should have posted a loss of $119.00 Million. The auditor of the company failed to point out the same it its audit report which led to huge losses to more than 1000 former shareholders of the company. The article can be found in https://www.afr.com/brand/chanticleer/dick-smith-collapse-puts-directors-and-auditor-under-the-gun-20160225-gn3phf        

In the following paragraphs a detailed discussion shall be made on different auditing standards to provide the readers with a basic knowledge as to various accounting and auditing standards which must be followed for different areas of auditing.  

The Class Action Against Dick Smith

As many as 1000 former shareholders of Dick Smith Holdings Limited have alleged that the financial statements of the company in no time shown any indication of crash down and since there was no negative incident to suddenly crash the company down the way it in-fact did. The losses of the shareholders’ ranges from $500.00 to $2.00 Million due to the inability of the financial statements to show the true and fair picture of the financial position and operating results of the company. This amount to improper disclosure as well as non-disclosure of financial information, a violation of Section 320 of APES 110.

According to section 320.1 of APES 110 the financial statements of an organization shall include Forecasting statement as well as normal financial statement. These should be prepared for the needs of the insiders as well as to inform the outsiders of the company, who may or may not be stakeholders of the company. Those who will prepare these statements should honestly prepare these statements to ensure that the statements reflects the true and fair picture of the organization without any sheds of grey. In order adhere to this requirements the financial statements should be prepared in accordance with the relevant standards and guidelines issued by the highest accounting board in this country. In addition to the above Section 320.2 of APES 110 makes it amply clear that the financial statements shall be prepared keeping in mid the International Financial Reporting Standards to ensure that these statements are of international reporting standard. If the relevant accounting standards as are applicable for preparation of financial statements of a particular company then the financial statements will not show the true and fair position and operating results of the company. This is a contravention of section 320.1 and section 320.2 of APES 110 (Malsch and Gendron 2013).

The auditors have the most important duty in this regard as they are responsible to express an unbiased opinion on the financial statements as to whether these statements are reflecting true and correct picture of a particular entity. An auditor will be guilty of professional misconduct if he fails to follow the standard procedure while auditing the financial statements of an organization. The financial statements of an entity will have to be prepared following the relevant accounting standards applicable for such class of companies (Agrawal and Chadha 2005).Auditing standards applicable in different areas of Auditing:

Auditing Standards and the Corporations Act

The gravity of the collapse of Dick and Smith and its subsequent impact can be assessed from the fact that the heads and beneficiaries of Securities and Investment Commission of Australia are investigating the matter and according to their report it has been made clear that the profession of accounting should be enquired thoroughly to re-impose the trust of the people on the profession as it has taken huge blow after the massive crash down of Dick and Smith. The head of the Commission in his report talked about the effort of supposition which was made to suppress the failure of the business (NewsComAu 2017). According to the financials Dick Smith reported a profit of $72.00 Million before deducting expenditure of interest, depreciation and amortization however, if the discounts and endowments are taken into consideration this profit would have turned into a loss of $119.00 Million clearly shows the dishonest effort on the part of the management to suppress the actual result to show the operating performance better than the performance actually was. This is certainly in contradiction of true and fair reporting of financial statements as it defeats the very basic characteristic of financial statements (Malley 2017).                    

In order to provide the auditors and other professionals to deal with issues involving frauds in an audit of financial statements ASA 240 has been framed. Thus, the auditors in Australia while dealing with frauds in an audit of financial statements shall follow the relevant guidelines provided in ASA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report. An auditor will have to corroborate all possible evidence to show the clients that all necessary procedures and processes have been carried out to unearth any possible fraud that can be committed. The auditor should check whether the management can override the controls to commit fraud and document their findings to show the same to the client (Arens et al. 2010).

In Australia, the relevant auditing standard that deals with the above subject is ASA 200, Overall objectives of the independent auditor and the conduct of an audit in accordance with Australian Auditing Standards. The standard has mentioned that how important it is for the auditor to be independent of the organization as the lack of independence of an auditor would negatively influence the quality control and assurance level in audit procedures and processes. It would only be possible for an auditor to express an unbiased opinion on the financial report of an entity if the auditor has no interests attached with the entity and is completely independent of the entity Coram et al. 2008).

Fraud in Auditing and ASA 240

ASA 315, identifying and assessing the risks of material misstatement through understanding the entity and its environment, provides a complete guideline that an auditor shall follow to understand an entity and its environment to conduct an audit with utmost efficiency and effectiveness. It is important for an auditor to know an entity properly as well as its environment to plan an audit accordingly (Cheevakasemsook et al. 2006). Only if an auditor is aware of an organization and its environment that it would be possible for him to properly plan an audit hence, this auditing standard is of particular importance to conduct an audit properly. An auditor before starting an audit of the financial statements should thoroughly understand, entity, and its environment to have proper understanding of the various transactions that he should expect in the financial statements (Ivers et al. 2012).

ASA 300 talks about the importance of planning an audit of financial statements. Only if an audit is properly planned that it will be possible for the auditor to corroborate audit evidence and express a valid opinion on the financial statements of an entity (De Martinis et al. 2011).

ASA 320, Materiality in Planning and Performing an Audit, discusses and establishes the standards that an auditor shall follow while planning and performing an audit of financial report in the country. Materiality is a matter that is to be judged based on the circumstances of a particular case thus, the auditor will have to be very cautious and careful while planning and performing an audit (Salehi and Azary 2009).

ASA 330, The Auditor’s Responses to Assessed Risks, provides necessary guidelines which an auditor must follow to response to assessed risks to ensure that the risk is neutralized and no damaged is done to the overall audit effectiveness. Evidence should be collected to show the client that the auditor has responded to the assessed risks on time and appropriately. An auditor will be guilty of professional misconduct if he fails to design an effective procedure to deal with assessed risks (De Martinis et al. 2011).

The auditor should maintain all working papers associated with and every single stage of an audit to show the client that proper documentation has been maintained during the course of audit. Evidence should be documented and sufficient evidence should be collected from which the auditor shall be able to express a clear opinion on the financial statements of an entity. In case an auditor fails to maintain proper documentation during the course of audit then the auditor will not be able to justify the hard work that he and his team has put in during the course of audit. Apart from that audit documentation is an evidence in itself to show the client that the auditor has conducted all the necessary procedures and processes to complete the audit assignment effectively and efficiently (Simnett 2007).

ASA 200: Overall Objectives of the Independent Auditor and Conduct of Audit

An auditor apart from the routine audit provide other consultancy services if approached by the client as long as the consultancy services is not in conflict with the audit engagement. In order to guide the professionals of CPA ASAE 3100, Compliance Engagements, has been issued by the Institute. The qualified auditors will have to follow the laid down guidelines in this standard while providing compliance services for an audit client (Meyer et al. 2006). An auditor shall consider all aspects of independence before accepting a compliance engagement and only if the compliance engagement is not in conflict with the audit then the auditor should accept such engagement. Written representation shall be obtained from the relevant authority that the auditor is only providing compliance services and is not responsible in any capacity for such work (Flood 2015).

In relation to related party transactions auditors will have to be very careful, should thoroughly analyze and assess procedure, and established system within an organization to identify the related party transactions and accordingly use necessary auditing techniques to verify such transactions to express his opinion on the overall financial statements. ASA 550 deals with the related party transactions and provides necessary guidelines for the auditors to be followed while conducting an audit (Elder et al. 2011).

ASA 210, agreeing the Terms of Audit Engagements, explains the standard procedure to be followed by the professionals before accepting an audit engagement. The auditor should ask for an engagement letter from the appointing authority clearly explaining the terms of audit engagement. In case the auditor is reappointed for the audit even then also the auditor shall ask for fresh engagement letter (Jamtvedt et al. 2006).

The auditor will have to assess whether the financial statements of an entity has been prepared in accordance to the relevant accounting standards or not. Based on the findings the auditor will have to report the finding on his report addressed to the relevant authority. Apart from accounting standards an auditor will have to follow the guidelines provided in different auditing standards. Auditing standards are the guidelines for the auditors to conduct the audits of different entities (Louwers et al. 2015).

The corporations Act should be along with auditing and accounting standards should be the guiding light to the auditors to discharge their duties properly. Divisions 3 and 5 of Part 2M.4 of the Act, i.e. the Corporations Act shall be strictly followed by the auditors to ensure that the auditor is adhering to the requirement of independence while conducting an audit. The above mentioned auditing and accounting standards are in addition to the provisions of the Corporations Act thus, an auditor will be guilty in case he is unable to adhere to any of the provisions of the Corporations Act along with relevant standards of auditing and accounting while discharging his responsibilities in an audit of financial reports (Arens et al 2012).

ASA 315: Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

Conclusion

Professionally qualified accountants have the responsibility to protect the reputation and enhance the reputation of the profession of accounting and auditing by adhering to the professional ethics and other standard guidelines. In case of auditing apart from auditing standards different provisions of Corporations Act, 2001 should also be followed to ensure that the auditing is conducted in accordance necessary guidelines and standards to discharge their duties properly. Had the auditors of Dick Smith followed the relevant standards of auditing while conducting the audit of Dick Smith then it could have been pointed out that the income as shown in the financial was not reflecting the actual performance of the company rather the company has incurred a huge loss. The sudden crash down of the company which resulted in such huge losses to the shareholders could have been avoided as the shareholders would have been aware of the actual financial and operating performance of the company. The financial statements must be prepared following the IFRS and Accounting standards applicable in the country to ensure that the financial statements reflect the true and fair picture of an organization to help the users of the financial statements to take proper decisions affecting their interests in an organization.

Reference

Agrawal, A. and Chadha, S., 2005. Corporate governance and accounting scandals. The Journal of Law and Economics, 48(2), pp.371-406.

Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.

Arens, A., Best, P., Shailer, G., Fiedler, B., Elder, R. and Beasley, M., 2010. Auditing, assurance services and ethics in Australia: an integrated approach. Pearson Education Australia.

Ball, R., 2009. Market and political/regulatory perspectives on the recent accounting scandals. Journal of Accounting Research, 47(2), pp.277-323.

Cheevakasemsook, A., Chapman, Y., Francis, K. and Davies, C., 2006. The study of nursing documentation complexities. International journal of nursing practice, 12(6), pp.366-374.

Coram, P., Ferguson, C. and Moroney, R., 2008. Internal audit, alternative internal audit structures and the level of misappropriation of assets fraud. Accounting & Finance, 48(4), pp.543-559.

De Martinis, M., Fukukawa, H. and Mock, T.J., 2011. Exploring the role of country and client type on the auditor's client risk assessments and audit planning decisions. Managerial Auditing Journal, 26(7), pp.543-565.

Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson Higher Ed.

Flood, J.M., 2015. Wiley Practitioner's Guide to GAAS 2015: Covering All SASs, SSAEs, SSARSs, PCAOB Auditing Standards, and Interpretations. John Wiley & Sons.

Ivers, N., Jamtvedt, G., Flottorp, S., Young, J.M., Odgaard?Jensen, J., French, S.D., O'Brien, M.A., Johansen, M., Grimshaw, J. and Oxman, A.D., 2012. Audit and feedback: effects on professional practice and healthcare outcomes. The Cochrane Library.

Jamtvedt, G., Young, J.M., Kristoffersen, D.T., O’Brien, M.A. and Oxman, A.D., 2006. Audit and feedback: effects on professional practice and health care outcomes. Cochrane Database Syst Rev, 2(2).

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Malley, A. (2017). Dick Smith collapse raises more questions for accounting profession. [online] The Sydney Morning Herald.

Malsch, B. and Gendron, Y., 2013. Re?theorizing change: Institutional experimentation and the struggle for domination in the field of public accounting. Journal of Management Studies, 50(5), pp.870-899.

Meyer, M.J., Rigsby, J.T. and Boone, J., 2006. The impact of auditor-client relationships on the reversal of first-time audit qualifications. Managerial Auditing Journal, 22(1), pp.53-79.

Munro, L. and Stewart, J., 2011. External auditors' reliance on internal auditing: Further evidence. Managerial Auditing Journal, 26(6), pp.464-481.

NewsComAu. (2017). ‘I wanted to support an Australian company’. [online]

Salehi, M. and Azary, Z., 2009. Fraud detection and audit expectation gap: Empirical evidence from Iranian bankers. International Journal of Business and Management, 3(10), p.65.

Simnett, R., 2007. A critique of the international auditing and assurance standards board. Australian Accounting Review, 17(42), pp.28-36.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.

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