The Inherent Risks in the Company - Term Paper Example

UDITING (WООLWОRTHS LIMITЕD) By: Name: Tutor: Subject: City: Date: АUDITING (WООLWОRTHS LIMITЕD) Background of Woolworths Limited Woolworths has been operating in Australia since the year 1924 where it opened the first store in Sydney. The company is committed to being honest, open, transparent and fair in its operations where it has partnered with manufacturers, farmers, and producers to ensure efficiency and effectiveness in its operations experiencing growth in sales of sales of around 3.1%5 (Winograd, et al. 2000). However, the earnings per share of the company has been declining where the EPS for the financial year ending 30th September 2016 decreased from by 39.5% to around 123.3 cents (Arli, et al. 2013). This can be attributed to some inherent risks facing the company. Besides, the Food sales for the year financial year were $34.8 billion recording a decrease of around 0.2% for the previous financial year (Keating and Coltman, 2009). Inherent risk factors Inherent risks can be defined as the omissions or errors that are posed to financial statements because of other factors than control failure. In the course of the company financial audit, inherent risks are likely to occur in the situations when the transactions involved is complex, or the situation surrounding the auditing process do require high judgment degree concerning financial estimates (Winograd, et al. 2000). The inherent risks do entail the material misstatement in the company financial statements that are attributed to the omission or errors in the lapse of control on the part of the management in the process of assessing the possible risks. The inherent risks in the company can be suggested by the decline in investing activities by $67.2 million (Luiz, et al. 2011). Woolworths Limited has been working toward ensuring that the interests of its stakeholders are properly met. For instance, the company has gross proceeds of round $1.5 billion with Hydrox Holdings which one of its stakeholders (Winograd, et al. 2000). The company has been ensuring that it offers high-quality product at affordable prices with the aiming meeting customer expectations in the best way possible where it has reduced the prices by average prices by 2.3% (Knechel, 2007). Besides, the company has shown the commitment to ensuring that the interests of the shareholders of maximizing their wealth are met. As a result, it has been managing its stakeholders in the management of the company to ensure proper managing of the company. For example, in the process of making risk investment and financial decisions the company has been engaging the shareholders. Auditors need to ensure that they determine the level of risks the moment they are dealing with organization client. Inherent risks are among the important risks that auditors need to be much aware of when handling the financial statement of the client organization. In the process of assessing the level of inherent risks, the auditor can fail to realize that the client organization has some internal audit controls that are geared towards mitigating the inherent risks. The auditor has some inherent risk factors that need to be considered in the process of auditing the financial statements of the company (Bell, et al. 2002). Despite the fact that the auditor has the duty to assess the strength associated with the company internal controls, it is necessary to ensure that some issues that are related to omission and errors of the financial management and reporting of Woolworths Limited need to be considered. For instance, it is essential for the auditor to ensure that there is a proper evaluation of the susceptibility of the financial statements assertions of Woolworths Limited. This can involve assessing the material misstatement while considering the nature of the business conducted by Woolworths Limited. Shareholder equity has declined to 8,470.6 million from 10,834.2 million in the previous financial year an indication that there was possible mismanagement of the company funds (Keith, 2012). Woolworths Limited has experienced significant growth in the market where it has managed to expand its operations where currently it has established around 3,000 stores that trade in liquor, food, general merchandise, hotels, and home improvements. There a various inherent risks factors that can have some significant impacts in the process of conducting auditing of Woolworths Limited for the ending 30th September 2016 and any other future audit in the organization. The key inherent risks factors affecting auditing of the Woolworths Limited financial statements can include the following: External and environmental factors There are various external and environmental factors that are likely to result in increased inherent risks in Woolworths Limited. Some of the external factors can include rapid change in business where the whole inventory can easily become absolute quickly leading to high inherent risks. For instance, changes in tax have affected the company performance leading to decrease in EBIT by approximately 3.7% (Fels, 2009). The other external factor is expiring patents in the operations of the Woolworths Limited where the expiry of the patents of the company can affect its operations negatively leading to increase in the inherent risks. Woolworths Limited operates in an inherently risky business environment where it is exposed to many changes that can then affect the entire performance. Business patents do expire leading to increase in the level of competition coming from other businesses leading to decrease in the market share of the company in the market (Knechel, 2007). The economic state is also another external factor that can affect the level of inherent risks in the Woolworths Limited through affecting the general performance of the company. The Economic state has great influence on the factors of product that are essential for the overall operations of any business. For instance, the economy changes can result in increased costs of operating leading to decrease in the profits realized (Eilifsen, Knechel and Wallage, 2001). Considering the level of competition that Woolworths Limited operates, changes in the economic state can greatly affect the performance of the company, as efficacy is all what has been determining competitiveness of the companies in the industry. Rapid technological changes are also part of the external factor that is likely to affect Woolworths Limited inherent risks. Therefore, it is crucial for the auditor to ensure that there is proper assessment of the technological changes that has some inherent risks facing the company. The changes in technology are likely to cause some inherent risks to the Woolworths Limited as the inventory of the company can easily become absolute faster than that of the competitors. For instance, company has experienced inventories impairment of around $189.7 million in the financial year (Sarens and De, 2006). Prior period misstatement Woolworths Limited can experience an increase in inherent risks due to prior period misstatements where the company financial statements can easily repeat the same financial misstatements in the following financial years. In case the financial management of Woolworths Limited has made some financial mistakes that were not significant enough to affect the financial report of the company in the previous year, the same mistakes are likely to exist in the following year. These prior period misstatements are likely to affect the financial reporting process of the following year if they accumulate to levels that are not significant. Considering the decline in the gross profit of the company to 26.92 million from 27.57 million in the previous financial year, there are possibilities that there were some misstatements that were accumulating (Sarens and De, 2006). The mistakes cannot be significant in the current year but with time the mistakes keep accumulating to level that they can be significant hence affecting the financial reporting of Woolworths Limited. Therefore, it is the duty of the auditor to ensure that the misstatements in the prior financial statements are aggregated to assess whether they have significant effects on the current financial performance of the company. This can involve asking the organization management to adjust the accounts comprising of the total misstatements of the organization. Accumulating the omissions or errors that have been considered as insignificant can make them significant as they can accumulate to high levels. Susceptibility to fraud or theft The level of vulnerability to fraud and theft in the management of Woolworths Limited can affect the level of inherent risks facing the organization. For instance, the petrol sales for the financial year were $4.6 billion recording a decrease by around 18.1% an indication of possible fraud (Luiz, et al. 2011). Therefore, the assets of the company are susceptible to fraud and theft, the balance or account level of these assist are highly exposed to inherent risks that can affect performance of Woolworths Limited. For instance, if Woolworths Limited has many customer who pay in cash, the company is exposed to high inherent risks due to the possibility of fraud and theft. Therefore, the auditor can ensure that the cash account on the balance sheet is properly audited while assessing the inherent risks level. This factor can expose the financial management practices of high inherent risks than the companies using credit cards or checks in the process of making payments (Knechel, 2007). Besides, considering the industry that Woolworths Limited has been operating inventory theft is very high hence it can be wise to consider inventory account to face high inherent risks. Some other inventory items that are small can lead to increased inherent risks as they are easier to still making the auditor make valuation of the account incorrectly as the items involved can be concealed easily. Complex financial transactions Complex financial calculations are likely to pose some inherent risks as they can easily be misstated as compared with the simple calculations. The complexity of the financial calculation does pose some inherent risks to the company performance as profits for the financial year declined yet sales increased. The sales for the company in the financial year increased by 6.4% meaning the costs of operating increased that can be attributed to the susceptibility of the inventory (Wardle and Baranovic, 2009). The complex financial transactions are likely to result in high chances of hiding some other transactions with the aim of frauding the company. This can be possible as the auditors can face challenges in the process of establishing the financial transactions taking place in the company (Sarens and De, 2006). Many accounts are now using the complex financial transactions in the process of frauding the companies they work, as there are high chances that the auditors can realize the fraud. For instance, in Woolworths Limited financial management there are various accounts that are complex to account for especially the cash accounts where the auditors can hardly detect theft (Richardson, 2012). Audit risk model application The above inherent risks in the Woolworths Limited are likely to affect the evidence mix in the process of planning for the auditing of the company. Following are the ways that the identified inherent risks can affect the evidence mix in the planning of the audit. Poor presentation of the financial statements Considering the fact that Woolworths Limited has been recording some complex transactions, chances of misinterpreting the financial statements are high. This is because the external auditor can fail to be in a position detect some of the misappropriation of funds in the company due to the complexity of the transactions (Rosemann and Zur, 2005). As a result, the company accountant of the many can easily fraud the company as they are aware that the auditors can fail to detect hence increasing the chances of misrepresenting the financial statements. Increase in fraud The nature of the operations in Woolworths Limited exposed the company to high chances of fraud where the employees can easily steal from the company. The fraud in the company can be related to the decline in the cash that was used in the investing activities that was around $1,266.7 million recording a decrease of approximately $67.2 million (Verghese, Horne and Carre, 2010). This is because most of the company transactions are in cash making it easy for the employees to fraud the company. Besides, considering the inventories in most of the stores, the rate of theft in the stores can be high due to the size of most of the inventory. This can affect the inventory control systems where the recording of the inventory can be prone to fraud. Misstating financial information Woolworths Limited has been experiencing prior period misstatement where some mistakes in accounting that are considered insignificant are not accounted creating high chances of misstating the company financial information. The company experienced decline of inventories to $4,558.5 million from $4,872.2 million creating some possibilities that there were misstating of the financial information (Lin and Yang, 2003). This is because the accumulation of the mistakes can pose a challenge to the company financial management making it have the inherently greater incentive of misstating financial information in the process of meeting some agreements (Spira and Page, 2003). In case, Woolworths Limited made some improper report of particular balance in the past; it is likely to misstate the report again inherently. Increase in costs of capital The economic state of the industry that Woolworths Limited has been operating is dynamic where there have been changes in the interest rates. For instance, the interest of the company is 289.3 million which is very high (Sah, et al. 2016). The current changes in the interest rates are turning to be high making the costs of capital high affecting the liquidity of the company and its ability to meet short-term liabilities n its operations. The change in the economic state as one of the external factors can influence the financial availability and costs cost of capital of Woolworths Limited. The financial availability can be affected by the rate of interests, as an increase in interest rates is likely to affect the capability of the company to access the necessary capital for its operations. The high-interest rates can include the costs of capital hence resulting in increased costs that can affect the profitability of the company (Power, 2004). The auditor needs to consider the ability of the company of meeting the short-term problems that can be determined by the level of capital that is available in the company. References Arli, V., Dylke, S., Burgess, R., Campus, R. and Soldo, E., 2013. Woolworths Australia: Best practices in supply chain collaboration. Journal of Economics, Business, and Accountancy| Ventura,16(1), pp.27-46. Bell, T.B., Bedard, J.C., Johnstone, K.M. and Smith, E.F., 2002. 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