Determining Audit Materiality In The Industry - Myassignmenthelp.Com

Question: Discuss about the Determining Audit Materiality In The Industry. Answer: Introduction The Australian Auditing Standards Board is a self-governing legislative board of the Australian Government which was formulated under section 227A of the Australian Securities and Investment Commission Act, 2001 .Section 336 of the Corporations Act, 2001 allows the AUASB to formulate the Auditing Standards with the aim of administering the Australian corporations. The Financial Reporting Council (FRC) directs the AUASB to evaluate the auditing guidelines which aim at serving the common public interest. These auditing standards are in confirmation with the International Standards on Auditing. There are new guidelines introduced by the Australian Auditing Standards Board with the aim to minimize the frauds and financial emergencies occurring worldwide. Some of them are ASA 315, ASA 570 and ASA 701.ASA 315 is related to the responsibility of the auditors to identify and assess the risk of quantifiable misuse in the financial report by following the business and its characteristics, conc erning its internal management .ASA 570 was formulated with the aim to conduct the audit of financial statements relating to an entity with the supposition that it is a going concern .It also involves the administrations evaluation of its capability to perpetuate as a going concern. ASA 701 is implemented with the aim of clarifying about the audit which was conducted with regards to the organization. It deals with the issues concerning the responsibility of the auditors to report the crucial information in the audit records. In this report, the conclusions drawn from the auditing of Woolworths Limited, by Deloitte Touche Tohmatsu, a professional consultancy services firm, shall be presented (Government of South Australia. Department of Planning, Transport and Infrastructure, 2014). Introduction of the Company Woolworths Limited, which is one of the Top 100 listed companies on ASX, was founded on 22 September, 1924. Its headquarters are situated at Bella Vista, New South Wales, Australia. It is one of the chief Australian companies in the retail business .It is the second biggest company in Australia in terms of revenue ,which was AS$ 59 Billion in 2016.It has employed around 2,05,000 employees who attend approximately 29 million consumers .It operates in a wide variety of conglomerate business such as Woolworths supermarkets ,Woolworths Rewards ,Countdown, Carltex ,Woolworths money, Big W and ALH Group (Woolworths Group Limited ,2018).It is the biggest pack and carry wine merchant and provider of hospitality services in the country. Its audit was conducted by Deloitte Touche Tohmatsu LLC, one of the members of the Deloitte Touche Tohmatsu Limited (DTTL), a UK based Private company, which is limited by guarantee. It is one of the foremost proficient consultancy services firms in the areas of auditing, consulting, IPO support services, risk management and monetary consultancy services (Deloitte, 2018). On June25, 2017, it conducted the audit of the business documents of Woolworths Limited (the Company) and its subsidiaries (the Group).It included the combined documents of its subsidiaries. The auditors were independent of the group according to the regulations of the Corporations Act, 2001 and the Accounting Professional and Ethical Standards Boards APES 110 Code of Ethics for Professional Accountants (the Code). The Auditors examined various key points such as Profit and Loss comparison for the year 2015-2016, evaluation of financial risks including market risk, liquidity risk and credit risk. Also, the sale of H ome improvement assets including Ezi Buy and the transformation of Big W were the important decisions made by the company. Evaluation of the risk associated with Substantial Mismanagement According to Auditing and Assurance Standards Board (2013), Auditing Standard ASA 315 is concerned with the auditors accountability to recognize and evaluate the risks of significant mismanagement in the financial reports of the organization, through analyzing its internal environment and control. The matters which attracted the attention of auditors during the last financial year were: Withdrawn operations: As the management has declared the exit from the Home Improvement Business and the sale of Ezi Buy, it has entered to exercise its call option of 33.30 % shares of Hydrox pursuant to the sale of Lowes shares. Also those resources which are at onerous lease and their expenses are estimated at the least unavoidable costs. It is prone to material mismanagement in the carrying cost of the left properties and financial obligations, held at the balance date. Market risks: As the company is operating in the foreign currency transactions, so the market risks may impact on its foreign currency dealings. The foreign currency exposures due to the translation of net investments in foreign subsidiaries are not hedged, so it may influence the data in the financial statements of the company. The firm is facing the risk of material misstatements as the management can manipulate the figures of the foreign currency transactions in the financial reports (Vls?noiua Buzenche (Matei), 2014). Liquidity risks: The possibility that the firm would not be able to repay its debts on time is termed as liquidity risk. It occurs due to reduction of sales and failure to liquidate the cash and its equivalents. So, there is a risk of material misstatements pertaining to managerial personnel manipulating the figures of maturing debts and reserves maintained for fulfilling the financial obligations in the balance sheet. Credit risk: The risk of the counterparty failure to fulfill its financial obligations is termed as credit risk. So, the short term funds or derivative financial instruments which are invested with approved banks and financial instruments can be manipulated in the financial statements (Kristensen, 2015). The profit for 2015 amounted to US$ 2137.4 Million while it incurred losses in 2016 amounting to US$2347.9 Million due to loss from discontinued business activities, resulting in the net loss of US$210.5 Million. The stock in the Financial Year 2015 was US$ 4872.2 Million while in 2016 it was US$ 4558.5 Million. So it decreased by US$313.7 Million during the year. The property, plant and machinery in the Financial Year 2015 was US$ 10,062.1 Million and in the Financial Year 2016 it was US$ 8,262.8 Million ,so it decreased to US$ 3 Million during the year. So, if this trend continues, there can be a huge loss to the company in future (Woolworths Limited, 2015). The equity in the Financial Year 2015 was US$ 11,132 Million while in the Financial Year 2016, it was US$ 8,781.9 Million. The decrease was US$ 2350.1 Million (Woolworths Group, 2016). As it is estimated that the current share price of Woolworths Group Ltd is 26.95 AU$ and it is expected to increase @ 10.91 % in one year, which is a positive sign for the Company (Financial Times, 2016). But with regards to its gross margin, it is only 7%, which shows its slow growth. As the margin is decreasing, the net earnings are predicted to be low. Also there is an expected loss of $1 Billion in sales because of the competition. So, these matters are required to be recognized and evaluated on the parameters of risk identification as per the ASA315. Auditors Evaluation regarding the areas associated with the risk of substantial mismanagement. One of the areas which require the auditors opinion is the withdrawn operations by the group and the sale of Ezi Buy. In relation to this, the auditors evaluated the accuracy of the deal of Home timber and Hardware and assessed the assumptions of the managerial evaluation of the resources and financial obligations and matters relating there to. They considered accounting for the Lowes put option and the calculations of the total carrying value of the properties reflected in the financial statements of the Share Contract. Also, the taxation inferences and the conclusions of the calculations relating to the exit contracts were evaluated by them. Carrying cost of land of BIG W and Ezi Buy, its plant and machinery: The evaluation was a blend of the outward market analysis and internal value in use (VIU) analysis. The outward market analysis is executed every three years. Also, the mathematical appropriateness of the cash flow models in accordance with permitted budget and predictions were also assessed. They performed sensitivity analysis with regards to the important estimates, keeping in mind the growth rates and the rebates used in the depreciation methods. In case of liquidity risks, the firm retains a reserve of the minimum of US$ 500 Million with tenure of 12 months. In order to lessen the refinance and re price risk, an amount is locked for the period of 12 months. (Khorwatt, 2015). In the case of credit risks, each creditor is assigned an exposure value, on the basis of their credit rating. The group can invest short term funds and derivative financial instruments with banks which are rated A or higher by Standards and Poors. The impact on the audit of important transactions which occurred during the period As per the ASA 701 (Para9), the auditors shall emphasis on the matters relating to governance and those which demand their attention specifically. They should evaluate the areas of higher risk of substantial mismanagement in accordance with ASA 315.The areas involving key managerial decisions including assumptions of accounting calculations recognized as having the probability of uncertainty and the impact on audit of key transactions which occurred during the time span are important aspects which should attract the attention of auditors (Auditing and Assurance Standards Board, 2015). . With reference to Woolworths Limited, the auditors analyzed the following facts: The company is planning to close 30 stores due to uncertainty surrounding lease renewals and 34 stores were closed due to the uncertainty in lease renewals. The sale of Ezi Buy and transformation of Big W: The sale from discontinued operations amounted to $1867Million which is around 3 % of the total group sales in 2015. While in 2016, it amounted to $2,100 Million, which is 3.5 % of the total group sales in 2016. The sale of the products of Big W amounted to $3929 Million, which is 6.48 % of the total sales in 2015 while in 2016 it amounted to $3,820 Million, which is 6.35 % of total group sales. The matters relating to the accounting of the withdrawn operations by the group due to the sale of Big W and the risk of Ezi Buy , carrying cost of land, plant and machinery, the impairment of machinery ,stock which consist of the writing down of the stock to the net realizable value. The provision of the onerous lease expenses and other exit costs based on the net realizable value and their income tax benefits arising as a result from all these transactions are some of the provisions which require auditor's attention. Events affecting the companys capability to remain as a successful entity and its impacts According to ASA 570, the financial reports are maintained assuming that the entity would continue to operate as a successful entity in the future, until the administration dissolves it or stops its operations, in case it is left with no other alternative (Auditing and Assurance Standards Board, 2015). The decision of the administration if the entity would continue its operations as a successful entity depends upon the analysis of a number of factors. These include occurrence of the contingent events whose outcome is indefinite. The extent and complexity of the organization its characteristics, type and the nature of industry in which it operates also affect its ability to continue as a going concern in future. These aspects also influence its decision making abilities. So, if there is absence of continuity in its transactions, it cant be observed as a going concern. In the context of Woolworths Limited, pursuant to the withdrawn operations of the Home improvement division, the sale of Ezi Buy amounted to a loss of US$ 2,347.9 Million in the FY 2016 whereas the profit in 2015 amounted to US $2,137.4 Million in the FY 2015. It requires specific attention of the auditors as the group has sold 66.7 % shares of Hydrox pursuant to the sale of Lowes shares. This involves intense observation of the auditors with regards to accounting of the sale of the Home timber and hardware group, the onerous leases and exit values to be adjusted by the group (Grant Thornton, 2017). As the Assets held for sale are US$1,100.5Million in the FY 2016 which is 4.68 % of the total assets amounting to 23,502.2, so it does not affect the firms ability as a going concern. While in FY 2015 it was US$381.6 Million which is 1.5 % of the total assets amounting to US$ 25,336.8 Million. So, it doesnt affect the firms ability as a going concern (Woolworths Group , 2016). Apart from this the events relating to the carrying cost of land of BIG W , its plant and machinery ,its market risks pertaining to the cross currency swaps amounted to an unrealized gain of US$147.7 Million in 2016 as compared to a gain of US$122.4 Million in 2015. Also, its liquidity and credit risks will not affect the organizations ability as a going concern as per Auditing Standard ASA570. Conclusion To conclude, it can be said that the aim of audit is to configure and reveal their opinion regarding the financial reports and other relevant documents of the company. It should be conducted to ensure that the financial reports does not reveal material frauds or errors which may affect its capability to continue its operations in the future (Hay, Stewart Redmayne, 2017). The focus of the auditors is to test the accounting principles and estimates made by the management with relevance to the transactions made by the company. The steps involved in this procedure are gathering of the information and testing its authenticity and reliability .It is determined by suitable proofs at the operational level and in its records. The evaluation should arrive at a relevant conclusion with respect to the accounting transactions conducted by the company. If there are frauds or errors, then the auditing team should suggest the methods for their rectification .Also strict measures should be implement ed by the management to minimize their repetitiveness in the future (The Institute of Chartered Accountants in England and Wales, 2013). Woolworths Limited, which is one of the biggest listed companies of Australia, has complied with the relevant Australian Auditing Standards. Also, the auditing team has evaluated the key transactions on the basis of the Australian Auditing Standards and suggested measures to improve the accounting procedures relating to its areas of operations. References Auditing and Assurance Standards Board (2013). Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment [ONLINE] Available from: : https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_315.pdf [Accessed 8th January, 2018]. Auditing and Assurance Standards Board (2015). Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditors Report [ONLINE] Available from https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 8th January, 2018]. 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