Hi6026 The Responsibility To Disclose Assessment Answers

Answer:

At the time to prepare the audit reports, auditors have the responsibility to disclose information about all the key audit matters related to the material misstatements of the financial reports in order to enhance the quality of the audit reports (Murphy and Yetma 2015). After the detection of these key audit matters, the responsibility is on the auditors to disclose them to the major stakeholders of the company so that they can know about them at the time to make the investment decisions (Sharma and Panigrahi 2013). For this reason, one can observe that different kinds of initiatives have been undertaken for enhancing the quality of the audit reports. All these initiatives play a crucial role in enhancing the quality of the audit reports. The main aim of this report is to conduct the analysis and evaluation of the recent annual report of Wesfarmers Limited in order to consider different aspects of the audit process sin the company.   

Compliance with Auditors’ Independence Requirement

The success of the audit operations of the companies largely depend on the requirement of the auditor’s independence. It is necessary for the auditors to stay independent in mind and appearance from the audit client; and needs to be honest and straightforward to maintain the professional integrity (Guénin-Paracini, Malsch and Tremblay 2014). This puts the obligation on the auditors to be mentally independent from the audit client while providing the audit services (wesfarmers.com.au 2018).

The analysis of the annual report for the year 2017 indicates towards the fact that Ernst & Young, the audit partner of Wesfarmers for the year 2017, has complied with all the requirements of auditor’s independence as per the Corporations Act 2001 (wesfarmers.com.au 2018). The directors of the company has confirmed the same stating the fact that the audit associates of Ernst & Young has followed all the professional principles as well as standards while providing the professional services (wesfarmers.com.au 2018). ‘Corporations Act 2001’, ‘Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants’ are the main standards and guiding standards that the auditors have adhered to and they have mentioned this in the annual report (Gul, Wu and Yang 2013). All these aspects help the auditors in conducting the audit procedures in the most perfect manner.

Non-Audit Services

            There is mention about two specific types of non-audit services; they are compliance of tax related service and other non-audit services. For non-audit services, the company increased the payment to the auditors in 2017 due to the increase in non-audit services from them (wesfarmers.com.au 2018).  The management of Wesfarmers put the obligation on the audit associates of Ernst & Young to comply with the rules and regulations of providing non-audit services; and full compliance from Ernst & Young can be seen with the standards of Corporations Act 2001 for providing non-audit services (wesfarmers.com.au 2018).

Moreover, the management of Wesfarmers put emphasis on the fact that the received non-audit services from Ernst & Young do not include audit and review of the auditor’s own work in the decision-making process of the company. The corporate governance committee of Wesfarmers closely reviewed the non-audit services provided by Ernst & Young so that it does not lead to the violation of the principles related to auditor’s independence (Walker and Hay 2013).  These aspects can be considered as the major pillars for the success of the audit operations.

Auditor’s Remuneration

The above table indicates towards the fact that there are two segments for the payment of auditors that is Australian business and businesses of overseas; and the non-audit services are tax compliance and other services from Ernst & Young. The above table shows that Wesfarmers had less expenditure related to audit fee payment in 2017 from 2016; and it has decreased by 8.86 percent (wesfarmers.com.au 2018). However, in the year 2017, Wesfarmers has increased the payment for the fees to the auditors for providing non-audit services as compared to 2016; and it was increased by 16.63 percent. According to the above table, in the year 2017, Wesfarmers has decreased the payment for the auditors as compared to 2016; and it is reduced by 4.13 percent (wesfarmers.com.au 2018).

Key Audit Matters

            It is the duty of the auditor to report about the material misstatements in the financial reports as the key audit matters. In the year 2017, the audit associates of Ernst & Young have reported about three key audit matters in the annual report of the year and they have also mentioned about the undertaken procedures for dealing with these risks. They are discussed below:

Problem 1: According to the auditors, one major material issue has relation with the process to determine the recoverable value of certain assets of the company; and these assets include fixed assets like equipment, plant and others along with intangible assets in the form of goodwill (wesfarmers.com.au 2018). They have also reported that Target’s recoverable value is more than the carrying value. Due to this aspect, development of impairment of the cash generating unit of Target can be seen (wesfarmers.com.au 2018).

            As auditing treatment, Ernst & Young has done the evaluation the associated assumptions along with methodologies for the determination of the cash generating unit, furcated cash flow, rate of discount, growth rate, comparative valuation and others (wesfarmers.com.au 2018). In addition, Ernst & Young has also reviewed the aspects like test of impairment and assumptions. These are the major analytical procedures (Eshleman and Guo 2014).      

Problem 2: The next key audit matter is related to the suppliers’ rebates. Ernst & Young has indicated that Wesfarmers has done the reporting of suppliers rebate under rebate received from the suppliers of the retail business operation. The commercial income recognition can be considered as a major reason for ascertaining this as a key audit matter. These aspects have major impact on the financial reports of the business entities (wesfarmers.com.au 2018).  

In order to deal with the issue, the associates of Ernst & Young have obtained understanding about the each of the commercial incomes, design assessment and operation effectiveness of related controls, compare different arrangements of rebate, testing of the supplier’s rebate, analysis of the suppliers in the presence of promotional credit, inspection of the material sample for the new contracts, inquiring the legal counsel and others (wesfarmers.com.au 2018). These audit procedures can be considered as tests of control, tests of details, test of balance and analytical procedures (Legoria Melendrez and Reynolds 2013).

Problem 3: According to the auditors, there is the presence of material issue in the process to deal with the acquisition of Homebase as the company has used certain accounting process in this. This is considered as a key audit matter by the auditor due to the fact that Wesfarmers has crossed the conditional accounting stage of twelve months according to the AASB 3 Business Combination. Apart from this, the auditors have assessed the presence of specific other factors that make this situation material for financial reporting; such as use of accounting judgment for fair value determination, the whole size of the acquisition and many others. Consideration of all these aspects is required for addressing these key audit matter in the financial statement of the company.

            In order to deal with this matter, the audit associates of Ernst & Young has done the assessment of acquisition accounting of the company in order to ensure that whether Wesfarmers has done the assessment or there is any change in the fair value of the assets and liabilities. After that, Ernst & Young also reviewed the processes for recognizing and valuing the assets and liabilities. This process can be considered as test of details and analytical processes (Cao, Chychyla and Stewart 2015).

Audit Committee

            According to the annual report of Wesfarmers for the year 2017, the board members of the company has established an Audit and Risk Committee with the primary objective of monitoring the policies related to internal control as well as procedures for protecting the assets of the company so that integrity of financial control can be maintained (Khalil and Ozkan 2016). The presence of two non-executive board members can be seen in this committee; and their names are J A Westacott and D L Smith Gander (wesfarmers.com.au 2018). This committee has been developed with the focus on ensuring the integrity of financial reporting, reviewing as well as assessing the factors to recognize the commercial incomes, reviewing the framework for audit risk management and others (wesfarmers.com.au 2018).

Audit Opinion

The auditors of Wesfarmers have disclosed certain aspects in their audit opinjon about the assessment of the financial report of the business entity. Some part of the audit opinion states that the directors of the business entity have adhered to the Corporations Act 2001 under Section 300A in order to prepare and present the remuneration report for the executive and non-executive directors (Czerney, Schmidt and Thompson 2014). In addition, the associates of Ernst & Young have also mentioned that the managemnment of Wesfarmers developed and presented the financial reports of 2017 with accordance to the regulations of Australian Accounting Standard (wesfarmers.com.au 2018).

Difference between Responsibilities

The directors of Wesfarmers have the major obligation for following and taking into consideration the guiding principles of Australian Accounting Standard and the Corporations Act 2001 so that the investors can get the true and fair view of the financial position and financial performance of the business entity. While preparing the financial statements of Wesfarmers, the obligation is on the directors to assess the company’s ability to continue as a going concern with the help of the assumption of going concern (West and Bhattacharya 2016).  However, one can differentiate the responsibilities of the directors with the auditors.

            However, it needs to be mentioned that there is difference between the responsibilities of the auditors with the responsibilities of the directors. The obligation is on the auditors to gain sufficient information about the financial statements of the business entity so that it can assist them in detecting the material misstatements in the financial statements of the company (wesfarmers.com.au 2018). Apart from this, the other responsibilities of the auditors for financial reporting are to identify as well as assess the risks of material missstements, to acquire understanding about the internal control of the company, to evaluate the correctness of the accounting policies, to conclude the suitability of the going concern assumption, to evaluate the overall development and presentation of the financial statements and to obtain enough audit evidence (wesfarmers.com.au 2018).

Material Subsequent Events

            There are two events that took place in the process of financial reporting of the company after the date of financial reporting. The company has done the acquirement of the brand name of Kmart for $100 million; and this incident happened after the date of financial reporting that in the month of August, 2017.

            As per the annual report, the second event is the dividend declaration by Wesfarmers that is a fully franked ordinary dividend of $1.20 per share and the total amount of dividend was $1361 million that was due payment on 28^th September 2017. These are two subsequent events that took place after the financial reporting period of the company. These events do not have any material effects on the financial statements of Wesfarm     ers and thus, the auditors have not treated them as material events (wesfarmers.com.au 2018).   

Material Information Assessment

            Any third party stakeholder can understand the reported information about the material issues of the company from the report of the auditors as the auditors have explained them in simple language. For this reason, Ernst & Young has made compliance with the standers of Corporations Act 2001, APES 110 and Australian Auditing Standard. As the part of their major job responsibilities, the auditors of Ernst & Young have reported about the necessary key audit matters that have material effects on the financial statements. These aspects prove the effectiveness of Ernst & Young for dealing with material information (wesfarmers.com.au 2018).   

Material Information Missing

One aspect is clear from the above discussion that the auditors of Wesfarmers have correctly assessed all the material information of the financial reporting of the company and thus, they have been able in the identification of the major key audit matters of the company (Mir, Fan and Maclean 2017); and they have ensured the communication of these key audit matters in simple language in order to make it easily understandable for the stakeholders and others users of the financial reports. In addition, Ernst & Young has given the required disclosure along with the explanation and information of the material issues. It indicates that the auditors have not missed any material information.

Follow-up Questions

            At the time of the annual general meeting, one can raise the question for the auditor that how Ernst & Young has initiated the audit processes. After that, one question can be asked related to the ascertainment of the materiality level for the identified key audit matters in the company (Legoria, Melendrez and Reynolds 2013).

Conclusion

            The above analysis of Wesfarmers for 2017 indicates towards the full compliance of the audit associates of Ernst & Young with Corporations Act 2001, APES 110 and Australian Auditing Standards in order to avoid any violation of auditor’s independence. The auditors have provided the company with some additional advises in some specific areas like taxation and other aspects; and Wesfarners had to pay less to Ernst & Young in 2017.

The above discussion shows that the auditors have considered some major issue as the key audit matters after the assessment of the financial statement of Wesfarmers; and the company has spotted and applied some of the major substantive audit procedures in order to resolve these key audit issues. Apart from this, there are differences in the job responsibilities of the auditors and the managements in the areas of financial reporting. It can also be seen that the audit associates of Ernst & Young has provided full attention to the material issues of financial reporting with the help of required standard and principles.

References

Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons, 29(2), pp.423-429.

Czerney, K., Schmidt, J.J. and Thompson, A.M., 2014. Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?. The Accounting Review, 89(6), pp.2115-2149.

David S Murphy and Scott Yetmar, 2015. Student Perceptions of Auditor Responses to Evidence of Suspicious Activities: An Experimental Assessment. International Journal of Business and Social Research, 5(11), pp.48–59.

Edgley, C., 2014. A genealogy of accounting materiality. Critical Perspectives on Accounting, 25(3), pp.255-271.

Eshleman, J.D. and Guo, P., 2014. Do Big 4 auditors provide higher audit quality after controlling for the endogenous choice of auditor?. Auditing: A Journal of Practice & Theory, 33(4), pp.197-219.

Guénin-Paracini, H., Malsch, B. and Tremblay, M.S., 2014. On the operational reality of auditors' independence: Lessons from the field. Auditing: A Journal of Practice & Theory, 34(2), pp.201-236.

Gul, F.A., Wu, D. and Yang, Z., 2013. Do individual auditors affect audit quality? Evidence from archival data. The Accounting Review, 88(6), pp.1993-2023.

Khalil, M. and Ozkan, A., 2016. Board Independence, Audit Quality and Earnings Management: Evidence from Egypt. Journal of Emerging Market Finance, 15(1), pp.84–118.

Legoria, J., Melendrez, K. and Reynolds, D., 2013. Qualitative audit materiality and earnings management. Review of Accounting Studies, 18(2), pp.414–442.

Mir, M., Fan, H. and Maclean, I., 2017. Public sector audit in the absence of political competition. Managerial Auditing Journal, 32(9), pp.899–923.

Sharma, A. and Panigrahi, P.K., 2013. A review of financial accounting fraud detection based on data mining techniques. arXiv preprint arXiv:1309.3944.

Wesfarmers. (2018). 2017 Annual Report.

West, J. and Bhattacharya, M., 2016. Intelligent financial fraud detection: a comprehensive review. Computers & security, 57, pp.47-66.