Woolworths Auditing - Case Study Example

Woolworths Auditing (Name) (University) Introduction Every business conducts both internal and external audit for it to ensure that significant risks are being handled (Porter et al, 2014). This audit is an assurance that the objectives of the business are met, efficiency and effectiveness in operations, reliability in financial management, the safeguarding of the company’s assets and information is appropriate as well as ensuring that the applicable laws and regulations are complied with (AO Dos Santos et al, 2014). This retrospect paper seeks to avail the audit information for Woolworths group by providing the major sources of its revenue while at the same time assessing their main competitors. Lit Review Being one of the leading Australian companies that provides affordable things for the population, they focus on providing valuable and accessible services for the customers (Porter et al, 2014). In their 2014 annual report, it is indicated that every day, 144 people start a job with Woolworths. They also indicated that they have 426000 shareholders and still committed to forming partners with thousands of farmers, manufactures and producers (AO Dos Santos et al, 2014). The 3000 stores the company has within Australia and New Zealand deal in food, petrol, home improvement while providing general merchandise for hotels. The company generates it income via provision of the most trusted and recognized brands for the consumers across all platforms and stores. These include: i. supermarkets and petrol- the petrol sales conducted by Caltex network comprises of 663 sites which offers Woolworths discounts. ii. Endeavor drinks group which focusses on being the leading drinks retailer worldwide Big W iii. Masters Home Improvement which was launched in 2011 offering customers with the best service in home improvement iv. Hotels-the company operates 323 licensed venues while operating 537 liquor retail outlets within Australia. At the same time, they provide hospitality venues like restaurants, cafes, nightclubs and accommodation all of which earn a reasonable amount of revenue for the company v. EziBuy Limited (EziBuy) which is leading in apparel and homeware products within Australia by offering its services online and retail outlets vi. Woolworths rewards which I the leading Australian supermarket dealing in attractive loyalty program which operates on a principle of rewarding loyal customers who purchase more at Woolworths. Woolworths operates in supermarkets and franchise stores in Australia (Porter et al, 2014). From the 2015 annual report, it is indicated that the company starts between 20 and 30 supermarkets per annum and 3 to stores per annum. In addition, ALH Group is a branch of the company which deals in hotel and hospitality business (Ramsay et al, 2013). Home Timber and Hardware which is a retail wing of the company dealing with providing timber and furniture for its customers offers opportunities for the Home Improvement category of the group all of which provide home appliances and products for the consumers. Woolworths faces several regulatory laws regarding its operations in terms of production, retailing and distribution activities (Azizul Islam & Jain, 2013). These regulations are intended to ensure the consumers benefit most from the company while reducing other side effects of the activities. For instance, Commonwealth, State regulatory, Human Rights and UNEP have jurisdictions which restricts the group’s activities in the following sectors: i. Regulations on products Safety- this requires the company to ensure that the products sold to consumers are safe for consumption considering that they deal in hotel and food products. At the same time, the petrol has to be secured in that during storage and transportation does not pose a danger to the public. ii. Regulations regarding chemicals- this restriction comes in handy considering that the company deals in petrol which is among the chemicals that are considered to cause global warming. Due to this, the company is faced with tough rules which regulates the refining and distribution of the petrol across Australia. iii. Regulations concerning workers’ compensation- this regulation is put in place by both non-governmental organizations and Human Rights bodies which focus on ensuring fair treatment of the workers and safety of the workers in their workplace. By the company considering the safety of its workers at workplace, they reduce the chances of incurring compensation costs. Besides, if the workers were to get injured at the workplace or die, the company has the responsibility to compensate them appropriately. iv. Regulation in container deposit- this is put in place by UNEP in regard to environmental preservation. The company has to operate in an area that the residents do not get harmed from the hazards of waste deposition. Due to this, the company is supposed to comply with the regulation to ensure that the dumping is done at the right place. v. Regulation on liquor licensing and training of staff- this regulation comes in handy considering that many young people under the drinking age are allowed into nightclubs. Before the company is licensed to operate a liquor store, it has to accept the terms and conditions of not selling alcohol to underage people in the society. Woolworths faces stiff competition from ALDI, Metcash Limited, Wes farmers Limited and Coles. In the first quarter of 2016, Coles reduced its prices which has seen its sales increase by 4.7 percent. Owing to the price reduction, Coles has gained shoppers and sales which has come with more market share which is threatening the market share of Woolworths group. ALDI supermarkets is also presenting a very stiff competition to Woolworths. For the past eight years, ALDI supermarkets has gained more customers from blow one million to 4.2 million customers shopping per four-week period (Azizul Islam & Jain, 2013). Though this is below the 8.8 million shoppers at Coles and 9.5 million shoppers at Woolworths, its gaining speed is high in that it presents a threat to the two giants. By December 2013, ALDI was placed third by Roy Morgan’s Supermarkets currency report (Taylor, 2013). Wesfarmers Limited and Metcash Limited among the minor competitors to Woolworths. Basing on the research by ROY Morgan, Woolworths Group market share is unstable. Though they remain the dominant supermarket operators in $90 billion Australian market, they are losing market share to ALDI and Coles who are the main competitors (Taylor,.2013) As at the first quarter of 2016 financial year, Woolworths has 37.3% market share with 10.5 million shoppers at their stores per four-week period which is 0.5% higher than Coles’. Risk Assessment As discussed by McNeil et al, 2015, while conducting an audit at Woolworths, one has to consider the following business risk factors: i. The review of efficiency and effectiveness of the policies and initiatives put in place by Woolworths Group in order to identify the material risks the company faces. In this manner, the company will be able to design appropriate risk management strategies in order to address the risks that may arise. ii. The review of the annual report disclosures from the corporate governance statement. This is in the relation to the realization and management of the material business risks. These statements pose a risk to the company in that it paves way for fraud. iii. The review of risks associated with anticipated changes in economic and business environment. These includes considering emerging trends like online advertising, customer incentives, worker’s motivation among others which relate directly to the risk profile of Woolworths Group. This ensures that the company puts in place contingency plan to ensure stability in such times (Sadgrove,2015). iv. Review of the insurance scheme for the company and transfer arrangements. This is to be done in regard to considerations like adequacy in self-insurance, compensation of workers to the required jurisdictions, general insurance while at the same time considering public liability. v. The company’s administration and operations pose another business threat. The administration in the company has to ensure that all the units work in harmony and are all efficient and effective and if the administration lags behind, then the accounting controls will definitely be affected leading to operational failure. vi. The corporate and business risk management implementation has to be reviewed since the unpreparedness in the sector expose the company to the risk of corporate failure. Question 3 Source: Morning Star, 2015, Woolworths Annual Financial Statement 2014, Woolworths Annual Financial Statement 2014 Formula Results 2015 Results 2014 Liquidity Gearing ratio Total liabilities/total equity Debt ratio Total liabilities/total assets = 0.34 = 0.69 Current ratio Current assets/current liabilities =0.9081 = 1.0506 Quick ratio Cash and trade and other receivables/current liabilities 0.26 0.79 Profitability EBIT to sales (%) Per annual report (%) 5.04 5.77 Ordinary earnings per share Per annual report(cents) 195.2 196.5 Managerial efficiency Asset Turnover Fixed Asset Turnover Receivables turnover 2.46 9.27 101.39 2.62 10 92.69 Short term Liquidity In FNY2015 the company registered a ratio of 1.26, comparatively lower than an acceptable 1.0. This implied that the company may have difficulties in the meeting its immediate obligations, hence cannot take advantage of immediate opportunities that require fast cash. As such, Woolworth’s was incapable of undertaking any immediate opportunities that may arise in specific markets, contrariwise, in FNY2014 it had a current ratio of 0.79 implying that the company had a propensity of undertaking long term projects that appeared immediately. Long term Liquidity As evidenced from the current ratio of both financial years, it is evident that short term funds are used to fund long term assets. It is unlikely that the long term assets are converted to cash in the succeeding year, when the liability is matured. Profitability The Company has showcased reduced EBIT over the 2 years, nevertheless, it suggests that the company has showcased reduced profits, nevertheless, it is able to maintain the profits in each FNY. Efficiency The company showcases a reduced trend of asset turnover with a relatively low ratio of 2.46 in FNY 2015 and 2.62 in FNY 2014. Simply put for each dollar the company is the company is generating 2.46 and 2.76 worth of revenue (Morning Star 2015). Whereas it is generating revenue, it is relatively low. Overall Conclusion on the financial position Essentially, the company showcases a decreasing quick ration evidenced from FNY 2014 and FNY 2015. In this regard, a decreasing quick ration suggests that the company is over leveraged and that it is struggling to maintain profits or improve sales, quick bill payments and/or collection of the receivables is slow. Whereas in FNY 2014 the company showcased a quick ratio favoring 1:1, FNY 2015 showcased a reduced quick ration hence the company may be at risk since it does not have adequate current assets, that lacks inventory, to cover near term debt. This suggest that a significant amount of reduced sales will be realized hence leaving the company bound. Tentatively, a low ratio results to increased concerns on potential creditor and investors due to short term risks. As evidenced Woolworths operates under a fast moving consumer goods hence lower current ratio could be attributed to the company selling cash and buying credits. In the event that Woolworth’s production cycle is the shorter than the credit periods enjoyed from the suppliers, then its current assets are likely to be lower than operating current liabilities. Prima facie, such a result does not however cause divergent concern when analyzing Woolworths. Contrariwise, a debt ratio of 0.34 in FNY 2014 showcases that the company has a better debt ratio. Given that the interest on debts must be paid irrespective of the profits a high debt may negatively impact the entire operation in the event that the cash flow reduced. A higher debt of 0.67 in FNY2014 makes it difficult to borrow money and hence may not attract eligible investors. More often than not, lenders have limits on ratios and never wish to extend credits on firms that are over leveraged. Additionally, other factors influence the functionalities such as payment history, credit worthiness and professional relationship. Contrariwise, investors are rarely inclined to the purchase stocks of companies with relatively low debt ratios. Evidently if the comp any exhibits a zero debt ratio would showcase that the firm does not finance its functions through borrowing, hence reducing the total returns that can be realized and shifted to other shareholders. In both FNY 2014 and FNY2015 Woolworths showcased a high gearing ratio of 84 %, showcasing that the company has a great deal of the leverage; where Woolworth is using debts to pay for its continued operations. Nevertheless, in the event of a business downturn, Woolworth’s may have a problem meeting its debt repayment schedules m and could risk having high bankruptcy. This situation is notably dangerous when investing variables interest rates, where a sudden increase in rates could possibly cause an interest payment issue. Question 4 Insurance Scheme Its insurance scheme needs to be effectively analyzed against increased bonds. Whereas the bonds have increased it is notable that the company has maintained its insuring against debts that has increased from 110 basis points in comparison to 50 in FNY 2014. Company Administration It is imperative that the company addressed this risk given that it has witnessed reduced price share, where a high of $ 37.32 with latest sales of $ 26.99. Contrariwise, the company showcased an adjusted debt to EBITDA at 3.2, which is exceeding the 2.9 and 2.8 which exceed the minimum of BBB+ rating. Evidently, the company’s September 2020 bond has increased by 2.855 per cent to about 3.16 since the profit reduction, whereas the cost of insuring in Woolworth debts have increased immensely. Evidently, the looming risks associated with the declined costs needs to be addressed accordingly. Business Risk Management Failing business models have showcased reduced sales within the company as evidenced by the recent foreclosure of Masters. It is imperative that an effective business model is used in the entrants into new market so as to safeguard the company’s operation in divergent markets. Evidently, the company showcases a high debt ratio, which would raise an alarm for external or prospective investors. Question 5 High Barriers of Entry The barrier to entry of Masters were very high, given the dominance of the Bunnings that built its network quickly suggesting that a high labor cost typified by the high set up cost ran ahead of the revenues collected from the stores. In its early entrant stages, Bunning had been established in many years, where there were many established competitors such as the Mitre 10, situated in the country, locations. As such, it took a while to penetrate the US market. Evidently, the company admitted to high cost that kept on piling; where a high decline in Woolworths share price was witnessed and investors lost the confidence into Woolworths; that had lost its way against the Coles. Additionally, inadequate market research constituted to major failure where the Australian markets were different from the US markets where consumers did not want to purchase from hardware stores, including vacuum cleaners and washing machines (Ahmed and Foley, 2015). Its early marketing strategies were deliberately showcased as female friendly, hence alienating the bevy tradesmen who were loyal to out competitor. Sales Struggle Highlighting the sales figures from its stock, it was evident that its strategy “Cheap Cheap” was a huge failure, in its third quarter of its last financial year, Master’s increased the liquor and food sales by 0.2 per cent, whereas the fourth quarter showed a slow 0.7 per cent. Nevertheless, it lacked a visionary leader that was key to the business. Whereas “cheap cheap” gained momentum, it stalled partly due to the fact that it was not customer reality. If a customer spends $ 250 for example, and still has a receipt with a $ 250 price tag; then this was not cheap (Jones, 2015). References Ahmed, N and Foley, B (2015). Buyout Firms Said to Approach Woolworths on $1 Billion Big W. Bloomerg. Retrieved from: http://www.bloomberg.com/news/articles/2015-10-22/kkr-tpg-said-to-approach-woolworths-on-1-1-billion-big-w-chain AO Dos Santos, M., Svensson, G., & Padin, C. (2014). A fivefold bottom line” approach o implementing and reporting corporate efforts in sustainable business practices. Management of Environmental Quality: An International Journal, 25(4), 421-430. Azizul Islam, M., & Jain, A. (2013). Workplace human rights reporting: a study of Australian garment and retail companies. Australian accounting review, 23(2), 102-116. Jones, S. (2015). Woolworths: Where did it go wrong? Retrieved from https://mumbrella.com.au/woolworths-where-did-it-go-wrong-308694 McNeil, A. J., Frey, R., & Embrechts, P. (2015). Quantitative risk management: Concepts, techniques and tools. Princeton university press. Morning Star. (2015). Woolworth LTD. Retrieved from http://financials.morningstar.com/ratios/r.html?t=WOLWF Porter, B., Simon, J., & Hatherly, D. (2014). Principles of external auditing. John Wiley & Sons. Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2013). Auditing and assurance services. New York, NY: McGraw-Hill/Irwin. Sadgrove, M. K. (2015). The complete guide to business risk management. Ashgate Publishing, Ltd. Taylor, M. (2013). Wrestling with giants-a critical account of supermarket power and competition laws in Australia and United Kingdom. Australian Business Law Review. Read More