Audit Engagement Renewal - Case Study Example

Audit engagement renewal Planning for the audit commenced with the intention of giving an opinion on the financial platform of Woolworth limited. Materiality was determined through the assessment of the company’s assets and income from the financial statements. Risk assessment was done by evaluating the various industries that Woolworth is involved in and looking at the management integrity of the company from past involvements. The policies of the company were additionally looked into which showed the company’s ability to minimize financial risk through a well executed internal control system. The following section relays the engagement letter to perform the audit. Assurance engagement letter To the Board of Directors, Woolworths Limited, In accordance to the request that we appraise the fiscal report of Woolworths Limited, which is inclusive of the balance sheet as of October 2015, income statement, statement of the cash flow for the previous financial year and the director’s declaration. We hereby confirm our acceptance for the engagement in this audit with the objective of the process being to give an opinion on the financial report. The audit that we will carry out will be specifically based on the standards set by the Australian Auditing Standards. With regards to this, we are required to apply the ethical requirements as needed in the auditing engagement. We will further execute the audit to ensure whether the financial information is open from misstatement of material. In this audit we will evaluate the correctness of the framework of the financial reporting and the policies of accounting that have been used. Due to the limitation of an internal control system in Woolworths Limited, we find that there are some financial misstatements that may remain hidden. We will therefore provide a separate letter that concerns any weakness which may be found in the implementation of the internal control that we may come across in the audit process. We would like to take this chance to place the reminder that the accountability of preparing and presenting the financial statement in a fair manner falls on the managing director of Woolworths Limited. During the audit procedure we will appeal that the administration ascertains the presentations given to us with regards to the appraisal. Ensuing matters under the Corporations Act 2001 We would like to establish that as to the best of our knowledge our operations meet the required procedures of the Corporations Act 2001. The act includes limitations that are specific on the relationship of service between the entity being audited and the auditors. As such we would like to request that you offer a platform of discussion on the provision of services offered at Woolworths Limited and the opportunities for prospective employment in Woolworths Limited. Based on our understanding, Woolworths Limited would like to publish the audit information via electronic media and as such the responsibility for the presentation on the site will fall on Woolworths Limited. We look forward to working with you and expect full cooperation from your employees. We trust that all the records and information that we will request related to the audit will be provided. Kindly sign and return a copy of this letter to specify that it is in agreement with your perception of the preparations for our audit of the financial statement. Yours faithfully, (Signature) ............................... Name and Title Date Accredited on behalf of Woolworth limited By (signature) ............................... Name and Title Date Executive Summary of Woolworths Limited Organizational Structure Woolworths Limited is headed by a competent body of managers and directors who control the operations at the group company1. There is a board of directors that makes the major and involving decisions of the company. The management board is in charge of the various operations of Woolworth’s company. The activities principally carried out at Woolworths Limited include food service and liquor provision, supply of fuel, hotel services, general merchandise and home improvement services2. Woolworths limited is the largest retail company in Australia. The company furthermore, owns the largest capital market shares in New Zealand. Based on the review of operations, the consolidated profit net amount from the closed financial year amounted to $2146 Million3. Products and Services Woolworth provides Australian food, liquor and fuel. There are 961 Woolworth supermarkets in Australia, 1445 liquor stores and 516 petrol canopies. Woolworth’s food, liquor and fuel business provided the highest income in the previous financial year. In New Zealand there are 177 supermarkets and wholesale operations. Supermarkets in New Zealand had an increase of 2.5% in sales from the preceding year. Woolworth, in addition, has general merchandise operations and 330 hotels. From the general merchandise there was a decrease of 5.7% which was as a result of general deflating prices and the Big W project. Sales from hotels increased by 0.2% while home improvements showed the highest increase with 22.3% as compared to the previous year. The home improvement business has master stores, timber and hardware stores. In the financial year ended the company had total revenue of $61,149,400,000. Market Conditions and Competition Woolworth is facing increased competition from existing and new competitors in the market thus it has to review its strategy on the intense diversification of products4. One major competitor of Woolworths is Cole, a retail entity that also provides the market for food in Australia5. The chief income earner of Woolworths is its food chains and supermarkets, thus such a competition poses a threat to the dominance of Woolworths in the market. There has been a decline in economic activities all over the globe and New Zealand and Australia have not been left out6. The financial viability threatens the existence of food markets in Australia. Other contributing factors are such as bargain price marketing, marketing levies and standardization that has created an unstable environment for the steady cash flow of Woolworths. This economic disruption has hugely affected the operations of Woolworths Limited. The regulatory environment in Australia and New Zealand has increased company obligations and these have added vital costs to the company7. The regulations are more observant on the consumer welfare and employee welfare and inasmuch as the move is positive, the checks and balances are evidently very costly to conduct. The elevated concerns on environmental awareness have affected Woolworth, especially being a company that sells fuel. The risk of exposure on environmental liability is high and as such their cost on risk assessment has gone up8. Business Risk Analysis Business Risk Key Account Assertion Substantive Test The products that are sold by Woolworth’s expose it to product liability claims form the public and the adverse publicity of this directly affects company sales Liability account Completeness Review of production methods and focus on quality assurance to make sure that the products going to the public are of the best quality. Employment of skilled staff to deliver standard products and services Due to the closure of the company that manufactured infinity cables that were faulty, Woolworths has been exposed to the risk of counterparty defaulting and is thus liable for the compensation to consumers. Account payable Accuracy and Valuation Establish the real value of the damage caused by the sale of the faulty cables in terms of customer loyalty and effect on sales Discuss with management on the appropriate method of managing the occurrence and financing the compensation to the affected parties. Woolworths has lately been unable to attract and retain key management personnel and this risks the smooth operation of the business Provisions Accuracy and Valuation Establish the reasons for lack of attraction and retention of managers. Review the working conditions of manager and their remunerations in comparison with responsibility provided Media Publicity of Woolworth Limited Infinity Cables and its Effect on the Audit Plan Based on Voltimum News on January 22nd, 2015, Woolworths Limited faces a cleanup bill of about sixteen to thirty two million Euros for the sale of electrical cables that were faulty to over 40000 businesses and households9. Tests from the ACI showed that the cables became brittle prematurely and hence raised the risk of short circuiting and, electric shocks and fires. The Australian Competition and Consumer Commission estimated the cost of cleanup to be around 86 million Euros. Woolworths was involved in the sale of over 40 % of the infinity cables and thus will be forced to pay a larger share of the cleanup costs. The apparent effect to the audit plan would have the auditors ensure that the liability for the faulty cables was recognized. Since the estimate for the costs is not possible at the time for Woolworths, the group will have to include the amount to the end year payables to consumers affected. The auditors have the obligation to ensure that the cleanup costs are present in the end year accounts payable. The full estimate of the bill will further require to be recorded in completeness to the last amount owed to consumers. The auditors, in addition, have the responsibility to ensure that the amounts of the liabilities are accurately recorded. Basing on the primary framework of financial reporting, the presentation and disclosure of the statement will have to be looked through to ensure that it meets the target requirements. Masters, the home improvement section of Woolworth’s group agreed that it sold about one- third of the cable that had been affected during its home improvement project10. Masters further stated that they would continue on assisting the Australian Competition and Consumer Commission (ACCC) on alerting customers to the recall. The fact that the manufacturer and the importer of the cables was out business inadvertently means that the companies that wholly sold and distributed the cables are liable for the cleanup costs. Woolworth’s spokesperson however said that the costs reported were actually higher than the incurred costs. The auditor, in response to the statement from Woolworth that the actual costs were lower than the reported costs, has to investigate the figures for sales and ensure that they are free from error or any possible fraud. Tests of control would be plausible to confirm the party that approves documentation and establish that all statements have been accurately recorded. Checking of the trial balance as a substantive test would be recommendable to look out for errors present and as such the auditor will be in a position to accurately provide guarantee on the financial status of Woolworths. References Berk, Jonathon, Peter DeMarzo, Jarrod Harford, Guy Ford, Vito Mollica, and Nigel Finch. Fundamentals of corporate finance. Pearson Higher Education AU, 2013. Dafikpaku, Ezeosa. "The strategic implications of enterprise risk management: a framework." In 2011 Enterprise Risk Management Symposium, Chicago, Illinois, USA. 2011. Davies, Mr Adrian. Best practice in corporate governance: building reputation and sustainable success. Gower Publishing, Ltd., 2012. Hargroves, Karlson, Michael Harrison Smith, and Michael H. Smith. The natural advantage of nations: business opportunities, innovation and governance in the 21st century. Heffernan M, (2015),. Retrieved from http://www.smh.com.au/business/retail/infinity-cable-co- recall-tens-of-thousands-of-buildings-at-risk-from-faulty-cable-20150504-1mzbzy.html Earthscan, 2013. Murray, Peter A. "The nature and sources of competitive advantage." (2014): 187-221. O'brien, Larry, and Frank Harris. Retailing: shopping, society, space. Vol. 9. Routledge, 2012. Voltimum,(2015). Retrieved from http://www.voltimum.co.uk/articles/faulty-cable-leaves- woolworths-australia-big-financial-headache Woods, Margaret. Risk management in organizations: an integrated case study approach. Routledge, 2012. WOOLWORTHS LIMITED | ANNUAL REPORT 2015 Read More