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David Jones Corporation- The Client

Discuss about the Auditing & Assurance Risk Assessment.

This report will emphasize on the issues of speculation of inherent risk for the upcoming audit assignment of audit firm EA Partners. It is the basic homework for the audit firm to assess the risk factors related to new audit assignment to safeguard the same while executing audit operation. There are three different types of probable risks normally found in the audit practice- inherent risk, control risk and detection risk (Nguyen, 2009). These are all different in nature but mainly focused with the material misstatement of financial information and its subsequent impact on the financial report of the identity. In this present report we will focus on inherent risk of a company of Australian base named David Jones Corporation who is engaged in the business of retailing of garments and other products.

Being a senior partner of the audit firm, EA Partners, I was assigned to detect inherent risk related to the upcoming assignment of David Jones Corporation. For this purpose I will utilize my experience of working in the retail chain outlet as accountant to find the inherent risks normally relevant to this type of business as per guideline fixed by Australian Audit Standards governed by Auditing and Assurance Standard Board of Australia. 

The company, David Jones Corporation popularly known as DJs, was established in 1838 by David Jones. The main business of this brand is to spread the departmental stores in Australia and abroad. The company has its nearby competitor in the name of Myer. The company is recently acquired by the world famed Woolworths Ltd, a South African Retail group under the umbrella of Woolworths Holdings Limited since midway of 2014. The acquisition process had been endorsed by the DJs management with the effective capitalization of $ 2.15 billion. The acquisition had been approved by the Federal Court of Australia in July 2014. The company has human resource strength of 4956 in 2016 in comparison to 4175 in 2015 as per data retrieved from the financial report of Woolworths Holdings Limited for the year 2016.

The above Auditing Standard is meant for detection of risk of audit assignment for material misstatement in the financial report of any company. ASA 315 is complying with the International Auditing Standards IAS 315 to ensure the global acclaimed policy related to the subject. This standard is enforced with the objective of identifying and assessing respective risks of material misstatement in the financial reports due to reasons of frauds or mistakes, whether intentional or unintentional (Auasb, 2006). This objective is endorsed with the conception of the establishment in respect of environment with the internal control which can provide the basis of implementation and design of responses related to the risks assessed occurred due to material misstatement. To ensure this activity, proper analytical verification of financial statement of the entity is to be done in respect of different financial information provided upon which the foundation of the financial report is being made (Auasb, 2013).

Auditing Standard ASA 315

Being a senior audit partner, it is my duty to find different areas of financial operation which can generate inherent risks related to financial operation of the company. Through the annual financial report of Woolworths Holdings Limited, it is observed that the group is performing with systematic way of handling its financial activities and the same is being scanned through the effective Audit Committee which is already fixed its basic compliance criteria with the execution of the financial operations of the companies under the group. It had been observed from the report of the Audit Committee that David Jones had executed compliance level to ensure the mandate of compliance set by the Audit Committee of the Group (Investopedia, 2016).

Even after the certification by the Audit Committee, it is my professional obligation to find inherent risk in different areas in which there may be occurrence of such risks during the concluded financial report. In this aspect I have highlighted certain specific areas which are given below with my observations:-

As David Jones had been taken over by Woolworths Holding Limited, evaluation of goodwill is significant in the acquisition process. As goodwill is falling under the category of long term assets under the subhead of intangible assets, evaluation process is specified for the group so far goodwill is concerned of the acquisitioned entity.  The excerpts of the annual financial report of Woolworth Holding Limited is featured below for understanding the same;-

The basis of goodwill evaluation with impairment is depending upon the factor of evaluation of Cash Generating Unit or CGU or the units to which allocation of goodwill is done.

Inventories are contributing to the current asset which is a basic component of deriving working capital. As David Jones is being taken over by Woolworths Holding Limited in midway of 2014, the inventories of the departmental stores under the possession of the company is also being taken over by the Group. The consolidated financial position of the group had been furnished with segmented portion of different companies running under the group. David Jones had shown the inventories with valuation of 2345 RM in 2016 in comparison to 1864 RM of 2015 with the variance effect of (+) 25%. The steady growth of DJs is being observed with the inventories’ value increasing, but inherent risk is there to segregate current saleable stock from obsolete stock (Woolworthsholdings, 2016).

Receivable is also considered as the basic component of current asset which is also contributing to the determination of working capital. From the annual financial report of 2016 of the Group it is observed that receivable of DJs is declined from 396 RM of 2015 to 380 RM of 2016 with the negative variance of 4%. Inherent risk is there to segregate good and bad/doubtful debts (Whl, 2016).   

Inherent Risks – David Jones Corporation

As the business of DJs is mainly depending upon the counter sale from departmental stores, cash handling plays a vital role in the area of inherent risk detection. Proper internal control is to be practiced to ensure zero level material misstatement in the area of cash handling. ERP implementation with proper software full proof software with control implemented at different layer right from sales to delivery is to be ensured to make the cash handling system perfect.  After the acquisition of DJs by the Group, cash and cash equivalent are being observed as increasing with significant growth from 186 RM of 2015 to 324 RM of 2016 with the resultant positive variance of growth by 74% (Woolworthsholdings, 2016).

DJs had shown significant increase in their revenue in 2016 with 27% positive growth variance. Revenue of 2016 had shown in the annual financial report of the Group featuring the contribution of DJs as 17297 RM in comparison to 13242 RM of 2015. This growth shows that in spite of stiff competition of the retail chain marketing in Australia, DJs is keeping its growth in satisfactory standard to ensure overcoming the competition. Mainly the competition is confined between DJs and Myer, but DJs, with the backing of its holding company, Woolworths, is sweeping the market with clear growth of 7%   and net retail space by 3.5% with value sale increase in AUD terms by 8.4% (Pash, 2016).

Payables, provisions and other non current liabilities are basic component of liabilities along with borrowings. As per the group financial reports of 2016, trade payables, provisions and other non-current liabilities of DJs are 5967 RM with comparison to 4977 RM of 2015 which is with 20% growth variance in 2016 over 2015. Borrowings are 215 RM in 2016 as per Group financial report pertaining to DJs which was new introduction as nothing had been featured under this head in 2015 (Whl, 2016).

As DJs is one component of the group of Woolworths Holding Ltd, the control environment of the company is dictated by the standing procedure of the group which is being fixed by the Audit Committee of the Group consisting of six independent directors. The annual financial report of the Group is also certified by the auditors, Ernst and Young with the declaration of the directors’ responsibility so far making of financial report as per the fair and true representation of the financial information and the auditor’s responsibility to opine about the true and fairness presentation of the financial statements of the company (Woolworthsholdings, 2016).

Goodwill

It is also conferred in the annual financial report by the auditor that the compliance of effective internal control is to be ensured by the directors of the Group.  

The Audit Committee is driven by the key result areas in different financial operations out of which assurance of internal control is one of the prime features. This committee is there to ensure the independence of the external auditors, fixation of the charter of internal audit along with planning to confirm the integrated mode of financial reporting as per the objective of assurance model , appointment of the auditors and suggest necessary changes in the financial policies of the group company along   with its subsidiaries. All these efforts are to ensure the issues in macro level, while in micro level critical analysis and evaluation is required to make the accounting system of the company full proof.  With all these efforts from the Audit Committee, the assurance related to audit with respective financial decisions are enforced to enhance the level of performance of the company so far its operation is concerned. The main objective of control practice is to make it mandatory that inherent risks are to be detected with the respective steps to mitigate them through proper process manage3ment induced in the company system (Whl, 2016).

Conclusion and Recommendations

To ensure the detection of inherent risks, I have to be proactive with my knowledge, experience and respective fields of application in David Jones Corporation. As the company is being taken over by world renowned Woolworths Holding Limited, this company is a part of the professionally managed Group which has good infrastructure of financial reporting with the back-up of Audit Committee which can ensure the effective models to be implemented through the system. As the company is engaged in retailing, inherent risk is always there in certain areas like cash handling, and inventory control. As the company is growing after the acquisition, more emphasis is to be given on the areas of control for the components which are directly contributing to the effective working capital practice to make the liquidity ratio of the company in such a position that the company can grow more facing the competition and overcoming it. It is mandatory to go into the deep of the system of the company to find out the inherent risk of the respective organization in respect of auditing.  To make it possible I have to understand the system management of the company so far different steps of operation of the company is concerned. The system starts from the level of procurement, supply chain management, sales and marketing and logistics management. In each part of this business, I have to understand the concept of operation and thus it can be ensured that effective detection of inherent risk is possible in different level of activities of the company. Self involvement is necessary to understand the process management and thus the assurance of detecting inherent risk is possible.

Although different industries have typical process management which can give birth to inherent audit risks, the probability of material misstatement can be there with intentional or unintentional approaches. It is often observed material misstatement followed by subsequent errors occur due to the nature of the business and the application of the system related to it. The more complicated the system, the bigger the chance of inherent risk is there. Hence to identify and mitigate the respective inherent risk related to any business depends upon the clarity of understanding of operation with clear objectives and respective appropriate strategies implemented in the business. It is the duty of the auditors to find the gaps of the operation system and suggest respective remedies to fulfill them. 

References:

Auasb. (2013, November 11). Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. Retrieved January 07, 2017, from Auasb: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_315.pdf

Auasb. (2006, April 28). Auditing Standard ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. Retrieved January 07, 2017, from Auasb: https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_28-04-06.pdf

Investopedia. (2016, March 06). Inherent Risk. Retrieved January 07, 2017, from Investopedia: https://www.investopedia.com/video/play/inherent-risk/

Nguyen, J. (2009, June). What is the difference between investing and speculating? Retrieved December 07, 2017, from Investopedia: https://www.investopedia.com/ask/answers/09/difference-between-investing-speculating.asp

Pash, C. (2016, July 15). David Jones sales growth is crushing the competition. Retrieved January 07, 2017, from Businessinsider: https://www.businessinsider.com.au/david-jones-sales-revenue-smashes-the-competition-2016-7

Whl. (2016). Woolworths Holdings Limited. Retrieved January 07, 2017, from Whl: https://www.woolworthsholdings.co.za/downloads/2016/WHL-Audited-Annual-Financial-Statements-2016.pdf

Whl. (2016). Woolworths Holdings Limited.

Woolworthsholdings. (2016). Woolworths holdings Limited. Retrieved January 07, 2017, from Woolworthsholdings: https://www.woolworthsholdings.co.za/downloads/2016/WHL-Audited-Annual-Financial-Statements-2016.pdf

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