Describe about the Auditing Theory and Practice for Business Engagement.
An audit planning is defined as the particular guideline that is followed during the conduction of an audit. This helps the company’s auditor to attain sufficient accurate evidence for the situation (Messier Jr 2016). It also assists to keep the expenses of audit at a rational level. Moreover, this helps to avoid any kind of misunderstandings among the clients. It has been found that the planning of audit is addressed by the “ISA 300 Planning an Audit of Financial Statement” (Kogan et al. 2014). As per this standard, the adequate planning of audit provides benefits to the system of auditing the financial statements of a particular company in various ways. From the detailed study, it can be said that the audit planning helps an auditor of an organization to devote an accurate attention to the significant regions of the audit. In addition to this, the planning of audit assists the auditor of an organization to determine and also to pledge the possible issues on the basis of constant time. Moreover, the planning of auditing also assists the company’s auditors to organize properly and also to manage the engagement of auditing in order to make the performance of the company effective and efficient. Additionally, the audit planning helps in selecting the engagement members of team with proper levels of competence and capabilities in order to react for the expected risks and the accurate assignment for working (Stewart and Shamdasani 2014). This also facilitates the supervision and direction of the engagement of the members of the team and to review their work. In this report, inherent risks of the company named Woolworths Limited have been identified in order to analyze the reasons for considering the particular four risks of the company as inherent risks. Lastly, the identified four inherent risks have been analyzed through the audit risk model and its impact on the evidence mix for planning the audit of the organization Woolworths Limited in the relevant segment of audit have also been studied in detail.
Woolworths Limited is a public company that is enlisted in the Australian Stock Exchange (ASX) and is traded as “WOW”. The particular company belongs to the retail sector and is headquartered in Bella Vista that is situated in New South Wales of Australia. The specified organization Woolworths Limited was established on 22nd September in the year 1924 that is around 92 years ago (Woolworthslimited.com.au 2016). The founders of the specified organization are Percy Christmas, Ernest Williams, Stanley Chatterton, George Creed and Cecil Scott Waine. Woolworths Limited mainly serves its products and services across the world that is in India, New Zealand and across its home country Australia. It has been found that Gordon Cairns is the chairman and Brad Banducci is the CEO of the firm. As per the financial report of the year 2016, total revenue of the firm has been decreased to A $ 59 billion and operating income decreased to A $ 1.6 billion (Woolworthslimited.com.au 2016). Additionally, the profit amount of the firm decreased to A $ (1.2 billion) that is a huge loss of an amount of A $ 1.2 billion took place (Woolworthslimited.com.au 2016). As per the annual report of the company for the year 2011, the particular firm employed around 202000 employees (Woolworthslimited.com.au 2016).
The particular company Woolworths Limited has various divisions, these include – supermarkets, Thomas Dux, Food for Less, Petrol, General Merchandise, Liquor, Hotels and Gambling and Home Improvement (Woolworthslimited.com.au 2016). It has been noted that the specified firm is considered as the second largest organization across the nation Australia in terms of revenue. Moreover, Woolworths Limited is also regarded as the largest retailer of liquor in Australia
The Key Inherent Risk Factors
Inherent Risk – Nature of the Industry
It has been found that the retail industry of the country Australia is under considerable pressure from the forces of consumer base like – increase in the diverse consumer segments, the development of the non-stop consumer journey and the digital generation (Birolini 2012). Thus, the nature of the particular retailing industry of Australia mainly depends on the needs and tastes of the customers. Therefore, it can be said that Woolworths Limited operates in an industry that is susceptible to volatility and market circumstances due to the result of changing tastes and needs of the consumers.
Reasons for considering it as risk
Nature of the particular industry is ever changing and volatile, thus this acts as an inherent risk factor for the firm Woolworths Limited. It has been noted that if the tastes and needs of the customers of changes, then the consumers will visit the stores relatively less numbers of times and the total revenue of the company will also decrease (Baldwin, Cave and Lodge 2012). On the other hand, with the decrease in the sales revenue, profitability of the firm will also decrease. However, the management of the company is unable to control this risk of changing taste and need of customers; thus, it is considered as inherent risk.
Inherent Risk – Susceptibility of Inventory to Theft
As per the annual report of the company Woolworths Limited, the closing inventory of the company raised by 3.8% due to opening of new stores (Woolworthslimited.com.au 2016). It can also be said that the average inventory rose from 1.6 days to 40.2 days (Woolworthslimited.com.au 2016). This implies a risk for the company as the duration of converting the products (inventories) into liquid assets increased. On the other hand, from the summary of five year of the company, it can be said that the inventory amount increased constantly since from the year 2011 to 2015 (Woolworthslimited.com.au 2016). It increased from $ 3736.5 million in 2011 to $ 4872.2 million in the year 2015 (Woolworthslimited.com.au 2016). Therefore, it can be said that 43.76 % of the total net assets of the company is composed of inventories; thus, there remains a high susceptibility of theft of the inventory (Woolworthslimited.com.au 2016).
Reasons for considering it as risk
The inventory percentage of the total net assets of the organization Woolworths Limited increased constantly since the year 2011 to 2015 (Woolworthslimited.com.au 2016). Thus, the probability of theft of the inventories also increases and this will result into a huge loss for the firm. The duration of converting the inventories into cash has also increased; thus, it assists to theft the various products of the firm, like – products of supermarket, petrol, liquor and many more (Zadek, Evans and Pruzan 2013). All these products are expensive and stealing of these would result into a huge loss for the company. Thus, the particular risk is considered as the inherent risk.
Inherent Risk – Risk of occurring Natural Calamities
It has been found that some of the operations of Woolworths like meat processing plants, petrol, and winemaking business are mostly exposed to potential environmental liability with the aim to contaminate (Woolworthslimited.com.au 2016). This might have a negative effect on results of operations of the firm. In other words, it can also be said that the firm is subjected to risks from adverse conditions of the weather and natural disasters (Watts and Zuo 2016).
Reasons for considering it as risk
As the natural calamities are unpredictable, the management of the firm is also unable to ensure about proper operation of the business. Moreover, provision amount for damages that might occur due to natural calamities would also become impossible for the firm to calculate for future. Thus, this might cause trouble during the process of auditing, as if any natural calamities does not take place, then the auditors have to carry forward the provision amount to next year (Bebbington, Unerman and O'Dwyer 2014). Therefore, this risk is also considered as the inherent risk.
Inherent Risk – Technical Advancement
Technology advancement brings a super fast change within the operation and regulation of a business. It has been noted that with passage of time, technology gets advanced and this creates barrier for the present employees of the organization as they also have to learn the new one. Moreover, this learning process is a time consuming factor and thus it might cause delay in the operation of business (Power and Gendron 2015).
Reasons for considering it as risk
Technical advancement implies advancement in the machineries, thus, the work force of the firm Woolworths might also get affected. It might result into high rate of turnover of employees and for any business; man power is the most important factor for running the business successfully (Birolini 2012). However, with the appearance and implementation of advanced technologies within the firm, both the workforce and the operations can be affected. Thus, this particular risk is considered as the inherent risk.
2. Audit Risk Model and Evidence Mix for planning of audit for Woolworths Limited
Audit Risk Model is the combination of audit risk, inherent risk, control risk as well as detection risk. Audit risk is the risk that is faced by an auditor in rendering their opinion with an unqualified opinion (Simnett, Zhou and Hoang 2016). This is regarding any misstatement financial statements of business organization. Inherent risk considers as the risk considering errors or deviations occurring due to client control. On the contrary, Control risk is the risk whereby client internal control system fails or prevents for future analysis purpose. At the end, Detection risk considers as the risk in the auditor procedures failing for detecting errors in the near future (Ge, Simnett, and Zhou 2016).
The above question explains regarding the inherent risk factors faced by Woolworths Limited. It discusses regarding the nature of industry a Woolworths Limited relies upon retail industry (Heenetigala, De Silva Lokuwaduge and Armstrong 2015). This particular business organization occupies the topmost position in the retail sector and renders stiff competition with Wesfarmers Limited. Addition to that, it takes into consideration risks regarding susceptibility of inventory or any kind of theft at Woolworths Limited. Evidence Mix Planning considers as the mixture of audit plan activities that need to be considered by the auditors of an audit firm. Risk-based audit is one of the approaches that relates directly with the concepts regarding audit risks as well as materiality aspects of Woolworths Limited. Audit risk is considered as the likelihood whereby financial statements are mostly materially misstated after determination by auditors (Carson, Fargher and Zhang 2016). This is because of the auditors who view at the financial statement that are free from material misstatements gathering facts on the retail giants named as Woolworths Limited. In other words, materiality is a concept in relation with understanding the importance of transactions or any form of discrepancy. On the contrary, auditors majorly analyzes audit risks as well as sets materiality on given audit risks as well as develop audit procedures (Hay, Stewart and Botica Redmayne 2016). Therefore, these audit procedures mainly into areas possessing greatest risks. This means audit resources allocates from the areas of financial statements containing given material misstatements for concentration of audit efforts.
The other inherent risk factor mentioned above is the risk of occurring natural calamities. This means Woolworths Limited faces various natural calamities issues that lad to loss to the company in its operational activities (Simnett, Carson and Vanstraelen 2016). At the last, inherent risk faced will be the technical advancement in and around business organization in carrying out operational activities in desired way. Auditors should consider the aspects that need to be addressed for the potential clients. In other words, Risk-based audit approach is mostly efficient as well as time-cost saving for future analysis purpose. These particular approaches aim at enhancing the audit quality as well as adding value to potential client. Therefore, Risk based audit approach designs ways for understanding the organizational nature in its own business sectors.
At the end of the study, it is concluded that Woolworths Limited faces some of the audit risks in terms of inherent risks in their operational activities. In this particular assignment, inherent risks have been identified and their reason for selecting for the same as in case of material misstatements in financial statement. This means that risk base approaches are majorly adopted by its compliance as well as regulations. Auditors may not always perform detailed audit procedures on given areas of audit activities. The plan as well as performance was regarding audit areas considering time-consuming as well as costly at the same time. In this particular risk-based approach, programs are designed regarding the audit resources for allocating in the high-risk areas. In this particular attempt, it reveals the efficiency as well as time saving activities in the normal audit approach. Auditors should plan for identifying the key risk areas for testing low risk activities in the most appropriate way.
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