HI6026 Audit - Assurance and Compliance: Analysis of Wesfarmers

Introduction

In relation to an organization’s performance, there is a requirement that auditors must focus on internal control mechanisms so that risks of material misstatements can be identified. In relation to Wesfarmers, the company has been capable of reflecting a true and fair view of its financial performance. Audit functioning is the prime reason why this has been achieved. Moreover, since Wesfarmers has been able to comply with necessary statutory requirements like the Corporations Act 2001, the importance of auditors in verifying the same can also be observed through this research.

Adherence with independent requirements

Wesfarmers has been able to comply with various necessary guidelines that have allowed it to thrive in the market. The necessary accounting standards have been followed by the company that is a positive sign. Furthermore, all independent requirements have been complied by the company and the same has been reflected in the auditor’s report in the financial statements of the company. Besides, such independence requirement was based on the APES 110 code of ethics especially for the professional accountants and the Corporations Act 2001 that assures a true and fair view of the company’s performance (Wesfarmer, 2017). Nevertheless, all other matters significant to the compliance with independence requirements has also been fulfilled.

Non-audit services

The company’s audit committee has played a key role in offering legal and ethical suggestions for the provision of non-audit services. Furthermore, the same has been offered in a written manner to adhere to the resolution passed for the committee. In addition, the risk on the part of risk committee has also been accounted for by the board and they are effectively satisfied by the ideology that the decision of providing non-audit services are compatible on the auditors’ part (Geoffrey et. al, 2016). Hence, it can be seen that the offering of non-audit services in addition to the audit services have also been properly regarded by the auditors and the same has been disclosed properly in the annual report so that users can make effective decisions. Nevertheless, there are different kinds of standards required to be accepted to make decisions based under the Corporations Act 2001:

1. The audit committee of Wesfarmers have properly scrutinized the non-audit services for enhancing their objectivity and integrity towards the company. This is because they do not intend on affecting and policies of corporate governance that are implemented by the organization (Wesfarmer, 2017). Moreover, the decision to doubt the integrity of an auditor’s opinion is not a good part even after their independence declaration copy has also been offered.
2. The auditors will not be permitted to monitor any affair that they have undertaken and therefore, they are not going to offer any review on such provision of non-audit services

Evaluation of the remuneration of auditors

Audit Committee

Yes, Wesfarmers have it s own Audit committee that is structured to provide support in the functioning of the company and to look after the governance segment that contains internal and external audit, control mechanism, compliance  system and financial reporting of the company.

Further, the audit committee functions within the power entrusted so that it can aid the management in its work. The committee has the proper access to the records of the company and helps the management in carrying out the duties with ease and flexibility (Hoffelder, 2012).

Amount of non-audit services

Wesfarmers Ltd is liable to receive a certain amount for the provision of non-audit services provided to its consolidated company. The company has provided audit services for around $2307000 that is almost 23.1 % of the fees paid to the other corporate for the year ending June 2017 (Wesfarmer, 2017).

Key audit matters

Wesfarmers Ltd incorporated numerous procedures and processes so as to assess the audit plan to make assumptions so to evaluate and calculate growth rates, forecast cash flows, comparable industry valuation multiples, CG use, discount rates and such other factors that may allow the organisation to extend its business (Wesfarmer, 2017). Wesfarmers have assessed various elements with the help of an impairment test to find out their suitability and worthiness. These various factors are discussed below-

Wesfarmers had incorporated new material contracts not just before but also after the statements were balanced. It truly indicates that an evaluation is required in context of the treatment followed by the organisation and also helps in determining the worthiness of the procedure. The comparison of various discounted arrangements after learning from the last year’s budget. This helped Wesfarmers to consider aging profiles using analysing them (Kaplan, 2011).

Forecast exchange rate assumptions.

Impairment testing approach, key assumptions, and sensitivities are disclosed to analyse the efficiency of the financial report prepared by Wesfarmers. The commercial income earned by Wesfarmers was as a result of specific auditory tasks taken up by Wesfarmers. Such auditory responsibilities included valuation of all types of material that has in a way allowed the organisation to generate commercial income and regulation of corporate and designing of the relevant and efficient control system.

The discount provided to suppliers was supported by certain documents that were also analysed and examined to determine credits strategies. Various business facts that included products, merchandisers, supply chain manager and the staff in order were also assessed to determine the presence of any nonstandard agreement made in the name of the organisation outside the contract (Wesfarmer, 2017). The organisation needs to determine the matters discussed above to overcome future contingencies.

The contrast between the management’s and auditors responsibilities

The responsibility of an auditor is to give his opinion on the organisation’s financial report that is primarily managed by the directors of the organisation. The job of an auditor is to examine and assess the financial statements and perform audit process with an objective to achieve an accurate and fair view of the organisation’s financial statements. It is the responsibility of an auditor to assess the company’s financials in such a manner to eliminate corruption of data and confirm the authenticity of the same (Elder et. al, 2010). The management of the organisation mainly looks after adopting sound accounting policies that are beneficial for the organisation and implementing internal control functions that can be of great help in initiating, recording and processing transactions to record them in the financial statements. The management directly controls and regulates the organisation’s operations and the related assets, liabilities along with the equities (Wesfarmer, 2017). The auditor in the context of these transactions and internal control mechanisms most likely be aware of only those matters that are provided to him or that are obtained by him during the audit process.

Therefore, it is solely the responsibility of the directors and the management of the organisation to fairly represent the financial reports following the accounting principles. The duty of an auditor is limited to the representation of his opinions on the financial statements that are audited by him (Lapsley, 2012).

In Wesfarmers Limited, the auditors were seen as less responsible for performing audits efficiently. It is because of the auditor’s negligence to label the mishaps found in financial statements as frauds or errors (Wesfarmer, 2017). Thus, it is very much clear that the responsibilities of the directors and management from that of the auditors are poles apart.

Material subsequent events        

Material subsequent events are events that occur before the financials for the period is already issued or is going to be released but after the date of reporting. The annual report of the Wesfarmers limited depicts two subsequent significant events (Livne, 2015). These events were so following that could have allowed the financials of the company to get primarily affected. From the company’s annual report it can be seen that the Wesfarmers limited faced one of the subsequent significant events during the time it had a fully franked and final ordinary dividend after its reporting period. The company’s financial statements and overall performance is mostly affected by the payment of dividend. It is because payment of dividend depicts the company’s ability to make profits and achieve adequate earnings per share and return on investment that makes way for the company to declare a dividend to its shareholders. In 2017, Wesfarmers limited has paid a profit of 120 cents per share after its reporting period. Financial performance of the company could have been hugely impacted if the same had happened before the reporting period. Also, a dividend of $1361 million was announced to be paid in September 2017 by the company. Wesfarmers limited failed to pay a dividend for 2017 that might have negatively impacted its financials as well.

Another subsequent material event is when Kmart, a department store of Wesfarmers limited earned its brand name in Australia and New Zealand. It was considered following because of the license agreement that was long-term for the company to hold these departmental stores that amount them some $100 million (Wesfarmer, 2017). This event did not, however, affect the earnings of Kmart as reported in the company’s financial statements but it would have primarily impacted the share prices and earnings if it happened before the reporting date.

Efficacy of the auditor’s report

The effectiveness of the auditor’s report in Wesfarmers limited was barely seen. The auditors claimed to have audited the organisation’s financial statements adequately, and compliance with the Corporations Act 2001 and AAS was also taken due care of. One of the main reasons attributing to this ineffectiveness is the fact that the auditors have depicted crucial minimal audit matters in their audit report along with mentioning the audit process incorporated by them to account these essential audit matters. The auditors only highlighted why these essential matters have been addressed by them but have not substantially explained these matters (Wesfarmer, 2017). As these essential audit matters were not appropriately described, there is a probability for the complications that users might face in determining the nature of these matters and will impact their decision-making ability. The auditors have somehow managed to explain the process substantially regarding how crucial such audit matters has been considered which might be helpful for the users. The auditors however missed to highlight such materialistic issues in the reports that were required to be labelled as material information which affects the users in making decisions (Church, Davis & McCracken, 2008). The auditors failed to proper backup details of problems that were highlighted as material information. It must be understood that labelling an issue as material information calls for appropriate and legitimate information as well which was skipped by the auditors in the Wesfarmers audit report. This might hamper decision making on the users part. Footnotes and notes were provided by the auditors where one can quickly get the related information instead of providing adequate and complete in details in context with the key audit matters (Matthew, 2015). The efficacy of the auditor’s report can be labelled as unacceptable for it is difficult for the users to rely upon such details to make legal decisions (Gay & Simnet, 2015).

Under-reporting or missing material information? 

Wesfarmers failed to present certain vital aspects and critical matters in its reports that were substantial and required to be disclosed. This not only affects the users in making appropriate decisions but also impacts the goodwill of the company. The credibility and worthiness of the company are put into question. Failure to disclose essential aspects and information can be complicating on the users part to understand the performance of the company and thus makes it difficult for them to take appropriate decisions. The most prominent example of such discrepancy is the failure to provide footnotes and notes in the financial statements on the company’s part. This troubles the users from determining a transaction and its nature (Wesfarmer, 2017). The absence of required references in the financial statements creates an issue for the intended users in their decision making.

The company has however provided notes in its financial statements and has adequately detailed it which in itself is noteworthy. There are many other details under-reported by Wesfarmers Limited. The company has not sufficiently and correctly highlighted the crucial affairs of entities in the context of its consolidated group (Merchant, 2012). The company only disclosed little information and slightest of the activities that may not be useful or just incomplete for the users. To make decisions, users demand proper, substantial and complete disclosure. The company’s report also missed recording the actual details of the company’s diversity. But the website of the company provides the details of the company’s difference. This also calls for the absence of significant information. Also, the company has significantly mentioned such other material information such as risk factors, sustainability, corporate governance, etc. in its financial statements that might allow the intended users in making adequate and appropriate investment decisions (Cappelleto, 2010).

The auditors of the company have inappropriately disclosed the key audit matters of the company in the reports along with the issues stated above. All this combined might mostly affect the organisation’s financials and impact the users in investing in the company. It also changes the goodwill of the company. The auditors could have made way for further information related to crucial audit matters instead of the significance of all these information (Wesfarmer, 2017). It could have made the report more reliable and ease the users in understanding the performance of the company and in taking appropriate decisions.

Questions that can be asked to the auditor

1. Has the company reported the problem or issues noted  in the risk management?
2. Are the weaknesses in the management projected in a detailed fashion?

• How the complicated matters have been dealt by the committee?

Conclusion

Based on the previously mentioned analysis, it can be seen that the company has fulfilled its auditors’ requirements in a proper manner that is a positive indicator. Furthermore, the compliance with guidelines like Corporations Act 2001 and APES 110 Code also sheds light on the fact that the prevalence of auditors is necessary for the survival of a company because without a true and fair view of financial performance, sustenance in such competitive environment is not feasible. Nevertheless, the duties of the auditors has also been properly highlighted in the auditors’ report that plays a role in shedding light on the fact that all risks of material misstatement whether intentional or not, has been duly identified for facilitation of effective corporate governance practices.

References

Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne

Church, B., Davis, S & McCracken, S. (2008) The auditor’s reporting model: A literature overview and research synthesis.  Accounting Horizons. 22(1), 69-90. Doi: https://doi.org/10.2308/acch.2008.22.1.69

Elder, J. R, Beasley S. M. and Arens A. A. (2010) Auditing and Assurance Services. Person Education, New Jersey: USA

Gay, G. and Simnet, R. (2015)  Auditing and Assurance Services. McGraw Hill

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309  [Accessed 12 September 2018]

Hoffelder, K. (2012)  New Audit Standard Encourages More Talking. Harvard Press.

Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and practice. The Accounting Review [online]. 86(2), pp. 367–383. Available from https://doi.org/10.2308/accr.00000031

Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management. [online]. 9(3), pp. 291-292. Available from https://doi.org/10.1111/1468-0408.00081

Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online].  Available from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full [Accessed 12 September 2018]

Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from https://doi.org/10.2308/accr-50871 [Accessed 12 September 2018]

Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific Accounting  Review. [online]. 24(3), pp. 1-34. Available from https://doi.org/10.1108/01140581211283904 [Accessed 12 September 2018]

Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), pp. 767-796. Available from https://doi.org/10.1080/09638180.2012.671465 [Accessed 12 September 2018]

Wesfarmer. (2017) Wesfarmer annual report and accounts 2017 [online]. Available from: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 12 September 2018]