Woolworths Group Limited Audit Plan - Case Study Example

The following is a template to use in risk assessment of your client for the 2010 year. The text in italics has already been completed by your audit assistant. Several key sections of the planning work papers remain outstanding (still to do). PLEASE NOTE: Instructions are given in blue. Complete the template as appropriate in the spaces provided. The number of lines in each section is only a guide.You may add additional points, but you may not delete any sections. The total number of pages cannot exceed 10. Submit your AUDIT PLAN electronically through FLO. Audit Planning Memorandum Date: Client name: Woolworths Group Prepared by: __________ Year end: 30 June 2010 Reviewed by: __________ 1.0 Terms of engagement A full statutory audit of the parent entity (Woolworths Limited) and the consolidated economic entity (Woolworths Limited and controlled entities) will be carried out under the Corporations Act 2001. This audit plan focuses on the economic entity (Woolworths Group) overall. 2.0 Brief summary of significant background information Woolwoths Limited is a company listed in Britain and has large retail chain business established all over the country and worldwide. Woolworths Limited has a lot of brand under their umbrella which has helped them to grow their business and ensure a presence evrywhere. The growth in the business can be seen from the fact that the company has around 3199 stores all across Australia & NewZealand which has enabled the business to grow. The company has developed their business model where they look towards selling quality products to their customers’ at the most competitive rates. To ensure it Woolworths Limited has relied on purchasing in bulk so that the products can be provided at the best price. Having tie up with different brands which exclusively supply there products to Woolworth has developed a customer base for the company which has developed their business and enabled them to grow. The company based on the model has been able to increase the retailer size to 188,000 people across the country. This has also provided employment too many people either directly or indirectly which has enabled the business to grow and ensure proper returns both to the economy and the stakeholders. 2.1 Business Risk Woolworth Limited has to deal with the risk related to techology which has improved the supply chain and also enabled the business to ensure that the products are available and properly ordered Woolworth Limited has to deal with the risk related to currency fluctuations. This is primarily due to the fact that the business has to look towards purchasing product from overseas which increases the risk of currency fluctuations Woolworth Limited has to deal with the risk related to new initiatives which the company has entered into as it will require special focus and considerations to be able to ensure successful business Woolworth Limited has to deal with the risk related to the supply of materials which will be sold to the customers. Since, Woolworth Limited looks towards purchasing the product from the suppliers which has increased their dependence on it will require that the risk in relation to the availability of materials is properly managed Woolworth Limited has to deal with the risk related to the fluctuations in the economy which has an effect on the demand of goods and services. If the economy is looking towards recession it makes it difficult for the business to be able to ensure that the same goods will be purchased in the predetermined quantity Woolworth Limited has to deal with the risk related to the policies of the governemnt with regard to the manner the retail sector will perform. This will have an effect on the prospects of the business as changes in the government policy will have an effect on the policies taken by Woolworth and will thereby have an effect on the overall performance of the business Woolworth Limited has to deal with the risk related to the availability of materials and manpower to carry out their function. This will have an effect on the overall performance of the Woolworth as being unable to get the required resources will make it difficult for the business to carry out the functions effectively Woolworth Limited has to deal with the risk related to governance as they have to ensure that the product sold by them doesn’t causes environmental harm. Woolworth has also looked towards ensuring that while purchasing products from different countries they look to ensure that the products supplied by them is not procured at the cost of the environment 2.2 Laws and Regulations Applicable to Woolworths Group The petroleum division of Woolworth is subjected to regulations & standard government setting which governs the contrsuction & operations relating to the storage of petroleum goods The business is subjected to the food licensing requirements as prescribed by the government and environment & town planning regulations which Woolworth has to ensure while developing their shopping centres Woolworth has to ensure that the financial report of the company is prepared according to the Corporation Act 2001, Accounting Standards & Interpretation and other laws which govern the preparation of financial statement Woolworth Limited has to ensure that they comply with the environmental regulation as stated in the Commonwealth of Australia or its States or Territories Woolworth Limited has to comply with the legal requirements of Australian Accounting Standards & Australian Accounting Interpretations 2.3 Risk of fraud Discuss whether you consider there to be any accounts to be susceptible to asset misappropriation or fraudulent financial reporting within the Woolworths Group and explain why. 2.3.1 Misappropriation Salary: There are chances that there is misappropriation of funds through salary by showing higher salary or remunerations to directors and people at high level within the organization and using the funds elsewhere Director Interest in share/options: There are chances that the funds shown are more than the actual interest so that the directors have better control and are able to exercise better control which will thereby result in the funds to be used in different directions 2.3.2 Fraudulent Financial Reporting Salary: The salary of the employees and directors is subjected to fraudlent financial reporting as the management might look towards concealing the actual expenses and instead look towards showing more salary so that the funds can be diverted in different directions Depreciation: The management can look towards making the depreciation amount to be higher than it is actually. This might result in fraudlent financial reporting as the business looks towards concealing the actual information and look towards increasing the depreciation expenses so that the business benefits from it and is able to use it in the direction desired by the business 3.0 Assessment of Control Environment Assess the likelihood of the potential reliance that could be placed on the overall control environment. Justify your decision with specific reference to Woolworths’ corporate governance arrangements. Woolworth’s Limited has ensured an environment norm which they look towards abiding and look towards contributing towards the environment by direction certain part of their income to develop the environmnt Woolworth’s Limited has ensured that the products procured from different outsourcing agency are not made at the cost of the environment. It has also been witnessed that Woolworth Limited has also cancelled some of its contracts with China as the agencies were looking towards using ways where they were destroying the environment and looking towards selling products at the cost of the environment Woolworth’s Limited has ensured that their business model is developed in such a manner that the constructio of their retail stores ensures maximum lights so that artificial light have to used for a limited time which has helped them to reduce carbon footprints and contribute towards the environment and society Woolworth’s Limited has also ensured that they preserve the environment by directing the people and others to look into ways through which the environment can be preserved 4.0 Planning materiality for consolidated economic entity Provide a brief justification of materiality base and % selected/applied: Woolworth’s Limited has looked towards ensuring that they develop a mechanism through which materiality concept is looked at so that proper development of the environmental policy can be developed 4.1 Base $ amount selected: Base chosen and why: 10% of the revenues as it will ensure that through which model the business will be able to reduce carbon emission and ensure an opportunity of growth for the business 4.2 Percentage (%) applied to the base above and why 10% of the revenues as it will ensure that through which model the business will be able to reduce carbon emission and ensure an opportunity of growth for the business 5.0 Preliminary analytical procedures 5.1 Ratio Analysis for Economic Entity Formula used (in words) Actual formula (in numbers) Results 2010 Results 2009 Liquidity Solvency Ratio Long Term Debt / Capital Employed 3516.2 / (3516.2 + 7817.7) 0.31 0.53 Debt ratio Total liabilities to total assets 10669.6 / 18487.3 0.58 0.59 Current ratio Current Assets less current liabilities 5199 / 7153.4 0.73 0.76 Quick ratio Cash and trade and other receivables to current liabilities 5199 – 916.8 – 3438.8 / 7153.4 0.12 0.14 Profitability EBIT to Sales (%) Earning before interest & taxes / Sales * 100 2870.6 / 51694.3 * 100 5.55% 5.30% Ordinary Earnings per share (cents) Net Income-dividend on preferred stoct / No of outstanding equity share Given 164.01 150.71 Efficiency and performance Cost of doing business Cost involved / Revenues * 100 38391.2 / 51784.8 * 100 74.14% 74.4% Return on equity Equity / Sales * 100 7817.7 / 51784.8 % 100 15.1% 14.2% Inventory turnover Inventories to cost of sales multiplied by the number of days in the period 3438.8 / 38391.2 * 360 32.25 days 32.06 days Commentary on financial performance (must apply to specific Woolworths factors) 5.1.1 Short-term liquidity Woolworth’s Limited have to look towards improving their liquidity position as the current liabilities are unsufficienct to pay for the short term liabilities Woolworth’s Limited also has to look towards developing a way through which they improve the quick ratio as the inventory holding is very high and requires special consideration to be able to deal with it Woolworth’s Limited has to look towards reducing its inventory holding as it is high. It increases the risk of the inventories becoming obsolete. This has also resulted in more funds to be parked in inventories but considering the nature of the business inventories are bound to be high 5.1.2 Long-term liquidity Woolworth’s Limited has been able to manage a proper balance between equity and debt. This will enable the business to finance for the required finance through both long term equity and debt which will thereby enable that the business is able to get the required finance Woolworth’s Limited has also ensured a strong solvency ratio which will ensure that the business is able to manage its debt in the most efficienct manner and based on it develop a mechanism through which the business will be able to gain better control 5.1.3 Profitability The profitability of Woolworth’s Limited ha improved which shows that the business is slowly improving and shows sign of better performance in the future The perecntage of profits for Woolworth’s Limited is low but considering the fact that the industry trend is similar and has lower profits will ensure that the business is able to ensur maximum profits Woolworth’s Limited needs to look towards reducing the indirect cost so that the business is able to gain maximum efficiency and will have to improve the efficiency and ensure that the cost reduces 5.1.4 Efficiency / performance The efficiency ratio for Woolworth’s Limited shows that th return on equity is very sound which has resulted in the business to ensure that the stakeholders gets appropriate return to the stakeholders Woolworth’s Limited has also ensured that the inventory holding is around one month which is high and needs to look towards reducing it so that better efficiency is achieved and goverance is better Woolworth’s Limited has also ensured that the business incurs major cost which is direct cost and is mainly due to the fact that the business purchases goods from secondary parties and sell those Woolworth’s Limited has shown overall efficiency and has thereby enabled the business to be able to garner developments 5.1.5 Overall conclusion on financial position Woolworth’s Limited shows a strong financial position where the profitability of the business has increased and has ensured better returns for the stakeholders Woolworth’s Limited needs to look towards improving the current ratio and inventory holding so that the overall efficiency of the business improves which will thereby ensure that the business gains maximum efficiency and is able to get the required return for the stakeholders 6.0 Key audit risk areas (response to significant risk at assertion level) 6.1 Liquor and gaming licences Outline why Liquor and gaming licences account is a significant risk. The business involves risk because Woolworth’s Limited has to ensure that the goods are produced and supplied to parties having the relevant license. This will require that proper inspection of all the areas is done which will thereby ensure that the business is able to deal efficienctly will all the matter. Identify Key Assertion (as per ASA 315.A111) at risk: Describe in detail relevant practical substantive audit procedures that will address the specific risk and assertion identified. Relevant substantive audit procedures The audit committee needs to ensure that all the information is audited so that the business is able to find out the companies which have the relevant licence The audit committee has to ensure that Woolworth’s Limited functions as per the details provided by the government and looks towards adhering to the rules provided by the government 6.2 Employee benefits expense Outline why this account is a significant risk. • The risk is that the business might looks towards making significant changes in the employee benefit risk Identify Key Assertion (as per ASA 315.A111) at risk: Describe in detail relevant practical substantive audit procedures that will address the specific risk and assertion identified. Relevant substantive audit procedures Look towards ensuring consistency in the audit procedure Check all the relevant documents so that the funds which has been allocated in this direction is used in the correct way 6.3 Goodwill Outline why this account is a significant risk. • The risk involved is that the business might have to ensure that the business brand image is not affected Identify Key Assertion (as per ASA 315.A111) at risk: Describe in detail relevant practical substantive audit procedures that will address the specific risk and assertion identified. Relevant substantive audit procedures Ensure a check to see that the materials and goods sold are subjected to environment conditions so that the risk reduces Look toward following the principle of corporate governance so that the business is able to gain maximum efficiency and looks towards having the required brand image for the business 6.4 Provisions – Self Insured Risks Outline why this account is a significant risk. • The risk here relates to the development of proper OHS facility so that injuries and accidents at the work place reduces Identify Key Assertion (as per ASA 315.A111) at risk: Describe in detail relevant practical substantive audit procedures that will address the specific risk and assertion identified. Relevant substantive audit procedures • Have proper first aid facility and ensure proper lightning and training so that the business is able to reduce the risk related to accidents • Have regular checks to ensure that the business doesn’t have to face accidents and injuries related to employees 7.0 Detailed Control Planning (Mitigating Controls) 7.1 Account at Risk: Trade Payables Key Assertion: Identify controls that would address the key assertion Ensure timely collection from the market so that the chances of bad debts in the market reduces which will provide an opportunity to manage the cash resources Have timely inspection to gauge the authenticity of the details and ensure a check so that every information provided is true and correct 7.2 Account at Risk: Wages (Casual employees) Key Assertion: Identify controls that would address the key assertion Have a proper method to record the details pertaining to the casual workers Have timely inspection to gauge the authenticity of the details and ensure a check so that every information provided is true and correct Conclusion Woolworth’s Limited performance has grown over a period of time as the business has been able to manage its resources effectively. Looking towards working on certain areas and controlling the risk for the business by developing ways will help to further improve productivity. In addition to it Woolworth’s limited has to look towards developing the audit plan through which the business is able to gain overall efficiency and the business demonstrates better performance in the future. Read More