ASA 701 was introduced with the aim of informing about the important matters of audit, by the auditors, to the management of the organizations. It was instituted for the purpose of providing considerable clarity about the audit which was executed, in the context of the organization. It transacts with the matters related to the accountability of the auditors to report the important audit content in the assessor’s record (Auditing and Assurance Principle’s Board, 2015). It is consistent with the International Principle on Auditing ISA 701- ‘Reporting Important Audit Matters in the Independent Auditor’s Report’ issued by the International Auditing and Assurance Standards Board (IAASB), a self- regulatory board of the International Federation of Accountants (IFAC). The other important Auditing Principles in this reference are ASA 570 and ASA 315. ASA 570 refers to the accountability of the auditors in the audit of the fiscal reports of the organizations, in the context of going concern and its effect in their report (Auditing and Assurance Standards Board, 2015). ASA 315 is applicable on the fiscal reports for the period starting on or after 1 January, 2010. It is concerned with the accountability of the auditor to recognize and evaluate the risk of substantial misappropriation in the fiscal report, by comprehending the business and its aspects, comprising of its interior regulations (Auditing and Assurance Standards Board, 2015). In this report , Wesfarmers which is among the top 100 listed companies in ASX ,is selected for analyzing ,whether all the provisions of the mentioned Auditing Standards are followed in the said organization or not.
Originated in 1914, the Western Australian farmer’s collaborative; Wesfarmers has developed into one of the Australia’s biggest listed companies. Its headquarters are situated in Perth, Western Australia. Its areas of processes include liquor, hotels, supermarkets and departmental stores with its diversified business in chemicals, power and manures .Its turnover was around AU$68.44 billion and profit was around AU$ 2.87 Billion in the fiscal year 2017. It has employed around 2, 23,000 employees and its shareholders are numbered approximately 5,15,000. In 1984, it was listed on the Australian Securities Exchange and has grown into a major industrial conglomerate. Its primary objectives are to create value for shareholders, to promote its development through initializing new business schemes and sustaining the business through attaining excellence and satisfying consumer’s needs. It attempts to revive its portfolio by putting more value added transactions in it. Its audit was done by EY (earlier known as Ernst & Young), a professional services firm and amongst the Big Four accounting firms.
It is one of the biggest professional service firms of the world. The services of financial audit and tax consulting services are provided by this firm. It has 2, 31,000 personnel working in around 700 offices in 150 countries in the world. The key audit findings were that the organization has earned the highest level of retributions and monetary flows along with an increment in the return on equity and there is an increase in the profits paired with capital effectiveness. The Auditors evaluated the efficiency of the audit procedures used along with the revelations made by the directors in the report and the processes were selected for the assessor’s evaluation to analyze the risk of substantial deception in the fiscal record, whether due to mistake or fraudulence practices. In judging those risk evaluations, they determine the entity’s internal control mechanisms, so that they can prepare the audit mechanism which fit into the situation, not for the purpose of just articulating their advice on the efficiency of the organization’s interior regulation. The Auditors also evaluate the legal and regulatory compliance to make sure that the company is following all the regulations as per the laws of the country. They also review the company’s Whistleblower policy and assess the procedure of receiving, retaining and dealing with the information received under the said policy and the mechanism relating to the grievance redressal of the information regarding to the fiscal reports, internal control and audit etc. which is against the company’s Code of Conduct.
Significant Perils of Substantial Misstatements
There are some matters with regards to the evaluation of the value of the estates, plant and resources approximately amounting to AS $ 23,941 million, goodwill and other intangible assets by Wesfarmers. According to the Auditing Standard ASA 315 ‘Recognizing and Evaluating the Threats of Substantial Deceptions through Comprehending the Organization and Its Surroundings’, it must evaluate at the end of every interval, if there are any causes which denote that the assets may be damaged. The deterioration of goodwill was approximately AS$1,266 million and tangible assets amounting to AS$58 million. Intangible assets such as Goodwill are evaluated yearly. These evaluations are typically complicated, comprising a variety of estimations which will be effected by the future performance and market situations (AICPA, 2017). The FVLCOD valuation methodology was adopted for the recovery of the amount.
Another matter of concern is the Supplier Rebates. It is also explained as commercial income. It is the discount received by Wesfarmers from the suppliers which are related with its retail transactions. This is the important audit matter due to the quantity of the discount availed by the suppliers during the year. The vital judgment to be executed in this context comprise of the commercial terms of the discount received with reference to each transaction, its accurate time of recognition, the nature of the discount received, if it should be adjusted against the cost of owing the stock or should it be mentioned in the fiscal records. It implies the appropriate evaluation and the computation of discount received in the company’s mechanisms and procedures and in accordance with the ASA 315.
It acquired Hampden Group Limited (Homebase) as an amalgamation under the Australian Accounting Standard – AASB 3 Commercial Arrangements (AASB 3) and 29 February, 2016 was the acquisition date for accounting purpose. It authorizes a 12 month interim book keeping interval, during which the preliminary accession bookkeeping can be reviewed and altered to consider the data that was recorded in the books of accounts at the acquisition date. It ended on 28 February, 2017, by the time it concluded the acquisition accounting values. The investment in associates and subsidiaries amounted to AS $703million. It is the matter of utmost importance due to its dimension of the acquisition and the calculation of the reasonable worth of the acquired properties and the financial obligations of the business.
Last but not the least, the matter is relating to the related party transactions amounting to AS $ 23.57 Lakhs. The majority stake is owned by JP Graham, the director of Wesfarmers, in a company which is equally owned by Gresham Partners Group Limited with an exclusively possessed subsidiary of Wesfarmers. The partly possessed subsidiaries of Gresham Partners Group Limited have rendered amenities to Wesfarmers for a value amounting to AS$23.56 Lakhs in 2017. It is required to be recognized and evaluated on the parameters of risk identification as per the ASA315.
Important auditor’s decisions concerning the areas in the Fiscal Report that require key managerial decisions
One of the key matters that require the attention of the auditors is ’Deterioration of long term properties including imperceptible properties.’ It identifies the methods and mode of analyzing the Cash Generating Units, estimation of growth rates, cash flows, different aspects of industry valuation and other market related factors (KPMG, 2016). Different types of impairment tests comprising of discount rates, growth rates, estimation of exchange rates, commodity price estimations, long term inflation and growth rate predictions. The auditors also evaluated the accuracy of the fiscal records, revelations comprising of the Deterioration Testing Approach. They also considered the important assumptions while conducting the test (Deloitte, 2017).
Another matter of concern was the supplier rebates or discount received by the suppliers concerned with the retail transactions. A comprehension of the essence of every substantial business cash inflow comprising of the evaluation of the important agreements was executed by them. The analysis of the efficiency of the appropriate controls concerned with the valuation of the rebate amounts was carried by the auditors. The documents related to the supplier rebates and evaluations of the creditors with substantial credits, other types of discounts were also verified. The legal department of the company was also questioned about the contracts regarding the availing of the discounts with infrequent terms and conditions. The supply chain managers and the procurement personnel were also inquired about the unusual agreements which existed among them and the company.
The matter related to settlement of the acquisition accounting was also illustrated in the assessor’s record. The auditors evaluated the methods adopted for the acquisition accounting which comprised of the assessments of the change in the important decisions and the assumptions underlying the computation of the reasonable worth of properties and the financial obligations. An assessment of the changes in the reasonable worth of the properties and the financial obligations as on the date of acquiring which was derived from the fiscal report of 30 June 2016 was evaluated by the auditors. For these calculations, various tax and real estate consultants were appointed to evaluate the calculation of the resultant assets and liabilities.
With regards to the Related Party Transactions, all the transactions were carried on the arm’s length price and standard commercial terms basis.
The impact of the audit of key proceedings or dealings which happened through the period
According to the ASA 701 (Para 9), the auditor shall consider those matters which attract their specific attentiveness with regards to the matters concerned with governance. In this process, the areas of the intense risk of substantial deception should be determined in accordance with ASA 315. The major judgment of the auditors with regards to the sections of the fiscal report concerned with important judgment of the management, relating to the accounting calculations as having high calculating errors (KPMG, 2017). The influence on the audit of the important activities of the business, which occurred during that particular time span. So, the key occurrences during the period of audit are those in which the auditor finds difficulty in acquiring the accurate and satisfactory information for the purpose of auditing and it challenges the auditor in judging the evidence. It is concerned with complicated judgment in relation with the audit procedures and the allotment of resources having an impact on the audit (EY, 2016).
In the context of Wesfarmers, for determining the significant events, the realization and the ranking of the event are necessary. The next step is collecting the data related to the event .For more complicated occurrences; detailed evaluation is required to comprehend their nature. The next step would be to appoint a team who will design the appropriate procedures for auditing and execute them with the help of evaluation of each event. It must meet regularly to examine the events so that the significant event audit is conducted properly. Minutes of the meeting should be sent to each member of the team, so that its message is properly conveyed. Afterwards, the event is evaluated on the basis of answering four questions. What, Why, the lessons learned and the procedure altered or executed on the basis of above mentioned questions.
The next activity comprises of the consenting, applying and assessing the change. All the above mentioned activities should be recorded and reviewed in order to rectify the errors made in any of the processes and for further reference purposes.
The matters relating to the Impairment of the long term and the intangible assets, discount received by Wesfarmers from its suppliers, the Acquisition of the Hampden Group Limited (Home base) and the related party transactions of the directors of the company illustrate the examples of events which require significant event audit.
Occurrences having an impact on the organization’s capability to remain as a successful firm
As per Auditing Standard ASA 570, the fiscal reports are prepared according to the supposition that the business is an everlasting successful entity and will continue to transact its business in the future. The fiscal records are formulated with the idea of an everlasting successful entity basis of book keeping, until the administration decides to settle the business or ceases its transactions. In the normal circumstances, it is assumed that the value of the assets is realized and the liabilities would be paid (FASB, 2014).
The decision of the management whether the entity would last as a successful entity, depends upon the analysis of the undefined future results of a certain event. This depends on the number of factors such as improbability of the result of a particular occurrence or situation. So, the fiscal reporting agendas which demand the clear evaluation of the outcomes explain the timespan for which the management should consider the specified information. Another factor is the magnitude and the complexity of the organization, its characteristics, type and the nature of industry in which it operates. These aspects have an impact on the decisions relating to the result of a particular event. It also depends upon the information available at the point of decision making. There are possibilities of its variation afterwards, which can have an effect on the audit processes and its consequences. So, if there is lack of substantial consistency in its transactions, it can’t be observed as a going concern.
Hence ,in the context of Wesfarmers, the impairment of the long term assets including the intangible assets will not affect the organization’s ability as a going concern as per Auditing Standard ASA570.The valuation of goodwill is done on yearly basis which would not have an influence on its consistency of transactions without any requirement to wind up its transactions.
In the case of Supply rebate, where the company is availing the discount from its suppliers, concerned with the retail transactions. The management will calculate the purchases of the particular product and its sales and the closing stock as on the reporting date ,on the assumption of the current and the future stock turnover and sales. The evaluation of its agreements with its creditors shows that it doesn’t affect its ability as a going concern.
The acquisition the Hampden Group Limited (Homebase) is another aspect for examining the organization’s capability as an everlasting successful entity. The auditors analyzed this by evaluating the balance sheet and the cash flows of Wesfarmers. They assessed various factors such as importance of the marginal groups, partnerships and full dominance and contrasted the investment to the capital management options and concluded that it doesn’t affect its ability as a going concern.
The related party transactions which amounted to AS $ 23.57 Lakhs were at arm’s length price and were conducted at genuine commercial terms and conditions. So, they don’t affect the company’s ability as a going concern. Hence, neither of the above mentioned transactions affects the entity’s capability as a going concern.
To conclude, it can be said that the objective of the audit is to form and exhibit an opinion regarding the fiscal reports and other relevant documents of the company. It should be executed to ensure that the fiscal reports do not indicate substantial deception or fraud. The purpose of the audit is to evaluate the accounting doctrines used in the organization and the assumptions made by the managerial personnel in this regard. The stages applicable in this regard are collection of the audit evidence and its analysis regarding its authenticity and acceptability. It should comprise of the suitable evidences, at its operation level and in its books of accounts. The analysis should derive at an appropriate conclusion (CPA Australia, 2014). This results in the expressing of the opinion regarding the compliance with the code of conduct by the auditors. Wesfarmers, which is one of the biggest listed companies of Australia, has complied with the relevant Australian Auditing Standards.
AICPA (2017).Understanding the Entity and Its Environment: Risk Assessment and Response to Assessed Risks. [ONLINE] Available at https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00315.pdf. [Accessed on: 27 December, 2017].
Auditing and Assurance Standards Board (2015). Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report. [ONLINE] Available at https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf. [Accessed on: 26 December, 2017].
Auditing and Assurance Standards Board (2015). Auditing Standard ASA 570 Going Concern .ONLINE] Available at https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf .[Accessed on: 26 December, 2017].
Auditing and Assurance Standards Board (2015). Auditing Standard ASA Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. [ONLINE] Available at https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf. [Accessed on: 26 December, 2017].
CPA Australia (2014). A Guide to Understanding Auditing and Assurance: Listed Companies. [ONLINE] Available at https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/auditing-assurance/guide-understanding-audit-assurance.pdf. [Accessed on: 26 December, 2017].
Deloitte(2017). Spotlight on key judgements and estimates. Available at https://www2.deloitte.com/content/dam/Deloitte/ru/Documents/audit/IFRS_news/23-05-2017.pdf. [Accessed on: 28 December, 2017].
EY(2016) .Enhanced auditor’s reporting. Available at https://www.ey.com/Publication/vwLUAssets/EY-enhanced-auditors-reporting/$FILE/EY-enhanced-auditors-reporting.pdf.[Accessed on: 28 December, 2017].
FASB(2014). Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. [ONLINE] Available at https://www.fasb.org/resources/ccurl/599/128/ASU%202014-15.pdf. [Accessed on: 27 December, 2017].
KPMG(2016). Accounting policies, judgements and estimates. Available at https://home.kpmg.com/content/dam/kpmg/au/pdf/2016/aci-au-accounting-policies-judgement-estimates.pdf. [Accessed on: 28 December, 2017].
KPMG(2017). Key Audit Matters Auditor’s Highlight Memorandum snapshot.[ONLINE] Available at https://home.kpmg.com/content/dam/kpmg/im/pdf/key-audit-matters-auditor-report-18-May-2017.pdf. [Accessed on: 27 December, 2017].