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Based on your analysis of the auditors’ sections and other areas pertaining to the auditor, as included within the Annual Report, submit a report which summarises and evaluates the auditor’s assurance services performed for the client company.

As part of your review of the assurance services provided, consider the following:

1. Has the auditor complied with Independence requirements?
2. If there were non-audit services provided, what was the nature of such services?
3. Provide an analysis of the Auditor’s remuneration in a table with prior year comparisons. Include percentage changes and explanations of the remuneration.
4. In relation to the key audit matters, which audit procedures were performed to provide assurance over each matter? Summarise and paraphrase each key audit matter. Correctly classify each audit procedure listed as: tests of controls, substantive tests of detail, substantive test of balances or analytical procedures.
5. Is there an Audit committee? Are there any non-executive directors on the audit committee? Is there an Audit Committee Charter? If so, summarise the main points of the charter including: the structure, function and responsibilities
of the Audit Committee.

6. What type of Audit Opinion was expressed? 

Auditor Independence and Non-Audit Services

Enhanced Audit reporting refers to increasing the overall transparency of the audited financial statements through better reporting by the auditors in their audit report. It is important that companies should see that all the key matters that affects the company in any way are properly stated and taken care of. Other important matters like auditor’s independence and his state in the company should also be taken care of by the management of the company (Mock, et al., 2018).

The fundamental for “independence” underscore the fact that the audit work should not be clouded with any influence on the auditor from anyone including the entity whose financial statements are being audited. To form a conclusion the auditor the auditor needs to exercise his own set of professional judgements and skill-set (Andiola, et al., 2018).  This conclusion would determine the audit opinion and it must remain unbiased. Upon a reading of the Annual report, we come across the declaration of independence as per Sec 307C of the Act. It states that that there have been no contraventions of the provisions relating to independence requirements neither there has been any violation of the code of professional ethics (Mubako & O'Donnell, 2018).

In addition to the non-audit services, certain non-audit services have also been provided by the auditors. The nature of these services is varied such as matters related to accounting, due diligence, review of compliance related and regulatory affairs. In the details provided for auditor remuneration, a breakup of the total fees paid about these services has been provided (Antle & Smith, 1985). The international associates of the auditor Deloitte have provided both audit and non-audit services to the other entities of the group.

Particulars

2017

2016

Difference

Percentage Change

Remarks

Audit of Financial Statements

3254

2748

506

18.41

Increase

Services related to regulatory affairs and compliances

129

239

-110

46.03

Decrease

Other related services (Non-Audit)

421

173

248

143.35

Increase

Services related to tax compliance

108

113

-5

4.42

Decrease

Total

3912

3273

639

19.52

Increase

 This table goes to show that there has been an overall increase in the audit remuneration to the tune of 19.52 percent. There is mixed trend in the other constituents. There has been a decline in the fees paid for tax compliance services which is pegged at 4.42 percent. The figures suggest that a lot of work related to non-audit matters has been given to the auditors (Appelbaum, et al., 2018). This argument buys its weightage from the fact that there has been a 143.35 percent increase in the fee paid to non-audit matters.

Performed matters of audit and the Key matters of Audit:

The matters which attain a high degree of significance in the financial statements according to the auditor’s opinion are covered under this paragraph. They are as follows:

Audit Remuneration and Non-Audit Matters

Carrying value of Plant, Property and Equipment of Big W:

The value of Plant, Property and Equipment on the Balance Sheet is a whopping amount of $ 514.3 million. Since the determination of this value involves substantial amount of Estimation, judgement and forecasting by the management the chances of valuing it more than the realizable value exists. To address this risk certain procedures are required to be performed by the auditor (Bumgarner & Vasarhelyi, 2018). Firstly, the auditor needs to understand the methods involved and this could be done by test of details. For the evaluations of the assumptions and estimates, analytical procedures are required to be undertaken. The auditors need to assess the carrying amount of the assets and for that to happen, test of controls is necessary.

The accounting policy followed by the company states that the inventory of the company would be valued at the cost price or net recoverable value, whichever is lower. The total inventories of the group amounted to $ 4,080.4 million. For dealing with different factors like obsolescence, trends, it was important to evaluate the process adopted for this and hence test of controls was required. For value testing, certain items were selected on a sample basis as well

The suppliers of the group offer certain discounts and rebates often as the group has a big size and thus procures in large quantities. The company has a practice which involves lowering he costs of the products with amount of rebate or discount received. However, the timing of recognizing these incentives is a tricky. Since this area is a key matter for the auditor, hence the requirement of control testing and performing analytical procedures are very much required, as test of controls is the best tool for determining the robustness of the controls (Kim, et al., 2017).

The IT systems in place are critical to the business operations. The systems are integrated to one another. Assessing the degree of effectiveness and the efficiency of the IT systems are of paramount importance. Collecting required information for the audit of the same was done using enquiry as a tool. This enabled the auditor to obtain an understanding of the entity’s degree of reliance on its IT systems about day to day activities. The IT tools testing involves two forms of testing one being substantive tests of details and the other being controls testing (Kim, et al., 2017).

The group complies with the statutory guidelines regarding audit committee. The committee has five members and is headed by its Chairman Michael Elmer. Hundred percent of the members on the committee are non-executive directors.

Key Matters of Audit

The major issues covered in the charter are as under:

  • Objectives of the committee: One primary objective of the board is to provide advice and guidance on working within the governance frame work of the entity. The audit committee also has a role to play in managing the risks and providing recommendations for an effective and efficient system of internal control. Various other areas are also covered under the ambit of the committee such as recommendation related to the compliance framework, oversight of the audit functions of the entity (Both internal and external), adherence to the accounting policies and monitoring of the financial reporting framework.
  • Authoritative powers of the committee: The audit committee can act within the purview of the charter. The committee has the power to discuss organization specific to the internal as well as external auditors. There is no requirement of a presence of any other member of the management when the discussions happen. No restrictions can be imposed on the committee relating to access over records of the company the and senior management. When the need arises, the committee is entitled to take technical help from an external agency or person who has some level of expertise in concern(Kangarluie & Aalizadeh, 2017).
  • Composition of the committee: The formation of the committee takes place by a minimum of three directors. There are restrictions on the quantum of non-independent directors in this regard. The charter requires that most of the members on the committee must be independent directors. All the members should some possess some level of financial literacy meaning that the must understand how to read and analyze a set of financial statements. The members should have some idea about business processes and dynamics of competitive corporate environment. Chairman of the committee should be an independent director who will be appointed by the board of directors from amongst the members of the audit committee. A member can be appointed or re-appointed as per the discretion of the board. A person who is an executive director cannot be made a member of the board. The secretary to the committee will be the company secretary. For ensuring the right balance of experience and skill-set, the composition of the committee will be subjected to process of annual review.
  • Responsibilities of the committee:
  1. Providing recommendations to the board on the appointment and selection of statutory auditors.
  2. Evaluations of the policies of the company and recommendations on enhancing and strengthening of the governance framework and providing an oversight mechanism for it.
  3. Review the work of the internal audit function and discuss the issues to resolve and plug the loopholes. They also need to assess the performance of the statutory auditors, deal with the observations made in the audit report and re-negotiate their re-appointment based on the assessment(Garon, 2018).

The audit opinion states that the preparation of the financial statements have been made as per the financial reporting framework and it complies to the Australian accounting standards as well as the Corporation regulation 2001. The statements present a true and fair view of the of the group.

Directors and management are responsible for preparation of the financial statements in compliance with statutes prevalent such as the accounting standards and the Corporations Act 2001 such that the report gives a true and fair picture of the. In doing this it is their duty to ensure that any material misstatement does not exist in the financials and that necessary and appropriate internal controls are in place and are operating effectively and efficiently for the preparations of the statements. They must keep in consideration the corporation’s ability to continue to exist as a going concern while preparing the financial statements (Lessambo, 2018).

It is the responsibility of the auditor to provide an opinion on the financial statements. He must provide a reasonable assurance that the financial statements do not contain any material miss-statement whether because an error or fraud and that the assurance is based on the sufficient appropriate audit evidence obtained during the year (Fukukawa & Mock, 2011). The report is addressed to the equity shareholders of the company. The thing to be kept in mind in here is that reasonable assurance can never be construed as a guarantee, it is simply an opinion that has come out from professional judgement.

The company made an exit from one of its business verticals namely Home Improvement and thus the following events related to it have taken place:

  • A share sale agreement was entered into by the company with Home consortium in which an agreement was made for sale of 66.7% shares of Hydrox. The agreement included acquisition of 20 of the master’s leasehold sites, 40 trading sites and 21 freehold development sites. There was an obligation for Woolworth for taking responsibilities of liabilities of 11 master leases and acquisition of 3 master freehold sites.
  • In a trust where Home consortium was a beneficiary, shares of Hydrox pertaining to Lowe were sold to that trust.

The mammoth capital losses which occurred after the date of balance sheet were the outcome of sale decision of Hydrox. Upon completion of transaction with Home consortium, the capital losses are estimated to be pegged at $1.8 billion. Deferred tax asset has not been recognized because the group estimates sufficient future capital gains against which such losses could be utilized.

Assessment of material information reporting by auditor from the perspective of a third-party stakeholder who has interests:

As third party I believe the information is effective particularly on key matters. The segment wise information gives a good picture on the performance of each of the segments. It is easier to understand and analyze as to which is the best performing segment on various fronts of profitability and sales. The segregation of financial risk management into various categories also helped in making decisions (Bailey, et al., 2017).

Assessment of Material Information Reporting

Potential misreported or under-reported information which has not been communicated in an effective manner:

The carrying value of plant, property and equipment involved estimates and forecast to be made. Those required some more detailed explanation. Disclosure relating to inventory provision would also have been beneficial.

Follow-up questions for the auditor at the AGM:

  • Did any whistleblowing matters took place? If yes, how did the investigation take place and was the results that came out of it?
  • Was any deficiency noticed in internal control and whether they were discussed with the appropriate people? Reasons for not considering deficiencies, if any, material/ 

Conclusion:

The enhanced requirements related to reporting have been taken care of by the auditors and they have acted within the framework and discharged their duties and responsibilities in accordance with the act and standards in place. The users of the financial statements are better informed through the report.

References

Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation, and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp. 43-55.

Antle, R. & Smith, A., 1985. Measuring Executive Compensation: Methods and an Application. Journal of Accounting Research , 23(1), pp. 296-325.

Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics.. Journal of Accounting Literature, 40(1), pp. 83-101.

Bailey, C., Collins, D. & Abbott, L., 2017. The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), pp. 25-46.

Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.

Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A Journal of Practice & Theory, 30(1), pp. 75-99.

Garon, J., 2018. Ownership of University Intellectual Property. Cardozo Arts & Ent. LJ, 36(1), p. 635.

Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.

Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.

Lessambo, F., 2018. Audit Risks: Identification and Procedures. Auditing, Assurance Services, and Forensics, 3(1), pp. 183-202.

Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning Technology to Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in Accounting, 15(1), pp. 29-43.

Mubako, G. & O'Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended consequences on evidence evaluation. International Journal of Auditing, 22(1), pp. 55-64.

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