Woolworths Holdings Limited Audit - Case Study Example

Name Professor Course Date Woolworths Holdings Limited Audit 1. Company Summary Major Sources of Revenue The main source of revenue for Woolworths is from sales. The company is made up of several business divisions from food, liquor to petrol and hardware stores. The food and liquor division are the best performing and contributes to the bulk of the company’s profits. The 2015 records show the sales of food and liquor grew up by 4.7%. The sales include both the indoor and online customers. The other major revenue source is the petrol division, which registered 6% growth in 2015. The sum of revenue from the major contributors including food and liquor and petrol divisions grew by 7.2% that was $169 million. The other sources of revenue for the company include clothing and general merchandise and home improvement solutions. Operation Areas Woolworths chain operates its supermarkets majorly in Australia and New Zealand. The headquarters is in Bellas Vista, New South Wales Australia. The company operates 961 stores across Australia that makes is one of the top-two chains in Australia together with Cole. In New Zealand, the chain operates about 156 supermarkets. Currently, Woolworths has its presence in South Africa, India, and UAE. Woolworths operations consist of three major divisions, Woolworths South Africa that operates across 11 countries in sub-Saharan Africa, David Jones that trades in Australia and The Country Roads Group that trades in Australia, New Zealand, and South Africa. Laws and Regulations Affecting Operation Commonwealth, States, and Territories of Australia regulation like product safety regulations, chemical, goods transportation and load limit regulations, worker compensation regulations, container deposit regulations, corporate registration regulation and the liquor licensing and staff training regulations often have many irregularities between jurisdictions that pose challenges to grocery chains like Woolworths. The challenges are mainly on the companies having additional compliance burdens in terms of cost for national operators like Woolworths. The irregularities pose a burden to Woolworths in having to pay multiple licensing fees for the same product, the transportation permits, and other regulatory fees are levied at every stop. Non-tariff trade barriers and quarantine regulation pose a burden to Woolworths Grocery regarding the importation of certain materials. Compliance with national and international standards poses an extra burden to Woolworth because it operates both locally and internationally, therefore, the company must incur double charges for both compliances. The labor market regulation defines the time limits for working, the amount one is to be paid for works during the day and at night. The labor regulations have posed myriad challenges not only to Woolworths but also to other companies because the company may not be in a position to support the said packages in a time for low performance. The regulations make the labor be one of the most expensive resources to the company. Primary Competitors The major competitor of Woolworths in the Australian market is Coles. Cole deals in the very products like those of Woolworths having its branches spread all over Australia. Currently, Coles operates 2417 retail outlets nationally. Minor competitions are currently from the German multinational store Aldi, US-based store Costco and Metcash IGA, which are slowly penetrating into the Australian Market. Local players like the SPAR Australia limited and the Independent Foodworks also join the list of the minor competitors. Market Share Woolworths Limited is still the top player in the Australian market with a market share of 37.3%. The market share has dropped substantially since the entry of the German multinational store Aldi. 2. Business Risk Factors The Economy in which Woolworth operates It is important to understand the economic trend in the Australian market and the international markets in which the Woolworth covers like the South African market. It is important to understand the economic status if it is a healthy economy or the current trend is depressed or stagnant to help advise the client accordingly. The industry in which Woolworth Company operates The trends in the industry are important in guiding the audit team on the likely or predictable future trends in company performance. It is important to understand the Australian, New Zealand and South African grocery industry and make projections on the future trends. Understanding the industry includes knowledge on the existing competitors and their effect, the new entries like the German-Aldi and the likely effect. It is important to learn if the industry is established, stable and is relatively not influenced by the external conditions or the industry is unstable, and greatly impacted by external conditions. The Company Management Philosophy in terms of Operations and Audit Matters Before getting to the real audit business, it is important to understand the company management team the auditor is going to work with. Understanding the philosophy, the Woolworths management has in regard to accounting whether they are conservatives or aggressive is instrumental before the auditing work commence. Woolworths Control environment and the possibility of management override. It is important to understand the extent of management override and the administrative system of the company. This factor is important in understanding if Woolworth has strong administrative controls or the management employs control-conscious management mechanism with a low probability of management overriding the process. The Woolworths’ previous audit history This factor is important in evaluating if there are unqualified opinions for previous audits or if there are no prior history. Besides, it is important to determine if there are any prior disagreements with the auditors before or not. In addition, previous audit history is to help determine if there are few adjustments to be made or numerous adjustments. Woolworths’ owners or the company management understanding of the auditor's responsibilities This factor is to help determine if the people at the company really understand the duties the auditor is coming to do. It is important to understand if their knowledge of the various roles of the auditor is clear or unclear. 3. Financial Performance Formula Results 2015 Results 2014 Liquidity Gearing ratio Total equity/ total liabilities 0.85 0.83 Debt ratio Total liabilities/ total assets 0.54 0.55 Current ratio Current assets/ current liabilities 0.79 0.97 Quick ratio Cash and trade and other receivables/ current liabilities 0.59 0.69 Profitability EBIT to sales (%) Per annual report (%) 6.18% 6.21% Ordinary earnings per share Per annual reports (cents) 195.2 196.5 Managerial efficiency Days sales of inventory (This is used as a liquidity ratio as well as an indicator of managerial efficiency) (Inventory/ cost of sales)x365 81.75 69.32 Return on equity Per annual report (%) 23.27% 25.43% Cost of doing business Per annual report 21.32% 20.90% 3.1 Short-time Liquidity The ability to sort or pay the company loans, which are short-term, is measured by current ratio. The current ratio in 2015 is 0.79, which is a drop from the 2014 ratio of 0.97. The ratios are below 1; giving an indication that Woolworth Company is leveraged and so cannot easily pay short-term debts. The ratio needs to be 1 or above 1 so that it gives a suggestion that the current assets are more than the current liabilities that allows the company to settle its loans fully using the current assets. Besides, the short-term liability can be determined by the quick ratio that is determined by the quick assets that can be turned into quick cash. The quick ratios of 0.59 and 0.69 are indications that the company is leveraged and so cannot pay its short-term debts. 3.2 Long-term Liquidity The ability of Woolworths to pay its long-term debts can be determined from the debt ratio and the gearing ratios. The company’s debt ratio for the last two financial years of 2015 and 2014 shows values of 0.54 and 0.55 for 2015 and 2014 respectively. A debt ratio of 0.55 indicates that the company has debts that are more than 50% of its assets. However, because the value is below 1, it indicates that the company can settle its loans with the company assets. The gearing ratio measures the contribution of the owners to the total assets of the company. In 2015 and 2014, the company registers values of 0.85 and 0.83 respectively that means that much of the assets are pumped into the company from owner’s pockets that put the company in a better position to pay its long-term loans. 3.3 Profitability EBIT to sales is important in measuring the Woolworths profitability in the last two financial years. The values give the comparison of the revenue figures and the earnings per company. In 2015 and 2014 the EBIT to sales are 6.18% and 6.21% that indicates that Woolworths retained or had revenue left over after settling the operating expenses. Positive EBIT to sales is an indication of profitability. The statistics show a decline in the EBIT to sale value in 2015 comparing with the value in 2014 that indicates a fall in profits. Earnings per share are also valuable indicators of profitability. The decline in earnings per share shows that the profits have dropped in 2015. 3.4 Efficiency Woolworths’ management has led the company efficiently in the last two years. However, the management needs to do more to raise the score to larger percentages. The management efficiency is indicated by the high scores in Days sales of inventory having a value 81.75 in 2015 and 69.32 in 2014. A number of returns the owners get, the 2015 and 2014 records show better scores further indicates the efficiency in Return on equity with values 23.27% 25.43% for 2015 and 2014 respectively. In addition, the Cost of doing business in each year is low (below 25%) that indicate much is retained as profit. 3.5 Overall Conclusion and Financial Position The company has performed well in the last two years; the only worrying aspect is that the positive trends have declined in 2015 comparing by 2014. Downward trends are an indication that the company needs to improve on its strategies to maintain good performance in terms of profitability and in regards to liquidity. The company must restructure its operation to compete well with the existing competitor (Cole) and the new multinational stores that are joining the market. Another better explanation for the failure has flawed workplace culture where the workers feel empowered because of the set strong organizational culture. 4. Risk or Material Misstatement Declining Conditions Affecting the Company's Industry The company summary shows that Woolworths is facing increasing pressures from the market and is increasingly losing the market control. The current market share is 37.3% having dropped from the previous value above 40%. The competition in the Australian market, which is one of its major operational areas, is increasing pressure on the management. The financial ratios of 2014 and 2015 show decline in performance with lower profitability in 2015 compared to 2014. The aforementioned pressures from the market might create pressure or opportunity for the chain managers to manipulate the financial statements causing higher risks of misstatement. Inherent Risk and Control Risk This risk will relate to Woolworth chains, the environment it operates and the internal control. It will be important to assess the risk based on evidence that is available. The inherent risk refers to the susceptibility of an allegation ton a misstatement because of error or with an intention of fraud. Woolworth operates several chains, and the market pressures are increasingly piling because of the new entries that the misstatement can be material or just by one of the chain managers. The inherent risk will be assessed using the information from risk assessment procedure and consideration of characteristics of accounts. Control risk is a misstatement because of error or fraud that occurs in an assertion but it takes the time to detect by the companies internal control. This risk will be assessed by using the evidence from tests and controls Ineffective Control Environment The control environment for Woolworth may not sufficiently promote effective internal control over the financial statements reporting in the whole management structure. The lack of control may cause material weakness that is contributing factor to the development of further material misstatement. Some of the principal contributing factors include lack of personnel at the Woolworth chains with enough competence to perform accounting principles necessary. Besides, at the various Woolworths stores, there may miss adequate policies and procedures to enable timely preparation of reliable financial records. 5. Selling or Shutting up Master’s Chain The Woolworth management made the decision to sell or shut down the Masters’ Chain because the division had been running on massive losses recently. The losses the company registered are mainly because of poorly thought out strategies before venturing into the big-box hardware; the chain was not strategically located, and the products sold were wrong and at the wrong time of the year. The decision to shut down the Master’s chain is wrong owing the fact the chain is a joint venture with the US firm Lowes, and the decision to shut down the chain is likely to unravel the Lowes relationship. The two companies entered a deal in opening up the chain and any decision to shut it down with a mutual wish for the shutdown is likely to ignite mixed reactions that can affect the reliability of venture with the company and can end up affecting the global image of the company. Besides, the move is wrong as it opens the ground for the Woolworths main rival the Wesfarmers to take over and gets full control of the hardware business. Work Cited Woolworths Holding Limited. Financial Report 2015. Woolworths Holding limited 2016. Print Retrieved from http://www.woolworthsholdings.co.za/investor/annual_reports/ar2015/whl_2015_afs1.pdf Read More