Woolworth Australian Auditing - Assignment Example

Woolworth Australian Auditing Name Institution Date Question One Woolworth’s income sources and areas of operations Woolworths Ltd, being a public limited company in Australia, is currently ranked at position number two (2) out of the overall close to 2000 number of public limited companies in Australia. (Clout and Willett, 2015). Being a renowned company, the company majorly generates it income from the grocery stores as well as from supermarkets in Australia industry. The Woolworths group, in the year 2014 made whooping $2.45 billion net profit. Similarly, in the year 2015, the company generated a total income of $61.2. Additionally, including the total number of employees from the subsidiaries, in the financial year 2015, the company had close to 190,000 employees (Woolworths Holdings Limited 2015 Annual Financial Statements, 2015). The company generates income from a number of industries including the beverage industry, the food industry, the petroleum industry, and the hospitality industry as well as the gaming industry (Keith, 2012). However, the majority part of its income is generated from grocery stores and supermarkets. Woolworths limited conducts its operations in a number of stores nationally. The company has, on the lower side, a store in every region in Australia. To be close to precision, the total number of stores in Australia is close to 780 stores. Regulations and laws affecting Woolworth Apart from the financial reporting laws in Australia, Woolworth is affected by other laws including the sourcing policy, compliance with labor standards and environmental compliance policies. The Woolworth Company is bound to operate by the standards set regarding sourcing of materials from the suppliers. The company should ensure that the sourcing behaviour and tendency of suppliers is not only ethical but encompasses activities that are environmentally friendly. The company is also bound by the labor laws which require the company to treat its employees well in terms of proper remuneration and establishment of conducive working environments. Additionally, the labor laws stipulate that working hours of employees be stipulated. Woolworth is also bound to work as per the environmental laws which stipulate that the organizational activities should be environmental friendly and that the organization should find a proper way of disposing its waste material. The company’s competitors Woolworths limited is facing severe competition from worldwide discounters Aldi, Lidl, Costco, and Wal-Mart each offering customers altogether lower costs for regular items (Keith, 2012). However, the major competitors are Aldi; Lidl and Costco. New rivalry is driving critical change inside the Australian general store segment. However, Woolworths together with Coles are ready for assault given their reality driving overall revenues and overwhelming shares in the market. Over the previous decade, the two major competitors have profited from an absence of rivalry in the rebate end of some foodstuffs market. However, despite the enormous competition from the rival companies, Woolworth has broken odds to be the most profitable player in the industry. Woolworths market share The Supermarket industry and Grocery Stores industry is a standout amongst the most savagely aggressive in Australia. The quick development of German-claimed ALDI in the course of recent years has fundamentally modified business activities in the very competitive industry. ALDI has developed in notoriety in the course of recent years, somewhat because of its markdown private-name items. This has constrained the two set up industry giants, Woolworths and Coles, to cut costs and grow their own scope of private-name items. Changing shopper assessment and shopping inclinations have additionally impacted the business' exchanging conditions. Woolworth’s market share is therefore slowly dropping due to increased competition in the industry. Question Two Identify and explain SIX significant business risk factors that the auditor needs to consider for the Woolworth group engagement Fraud risk Fraud refers to intentional misstatements of financial statements with an intention of gaining. Woolworths limited is faced with fraud risk which can either be asset misappropriation fraud or financial statements fraud. The greatest form of fraud facing the company is the possibility to overstate expenses and inappropriate application of accounting principles and concepts Corporate governance risk For efficient control, an organization should develop an efficient Internal Control System (ICS).Corporate governance refers to the capability of the business entity to follow instructions. It is useful, especially in monitoring the actions of organizations employees and particularly in assessing the level of potential risk likely to be faced by the auditor. For Woolworth, there is a possibility of the auditor facing the corporate governance risk Risk posed by the Information Technology (IT) Environment With the current shift into computerized form of accounting and organizational management, there has been equally increased exposure to risk of misstatements. The auditor therefore needs to assess the level of risk faced by the client arising from the use of IT. Some of the causes could be failure of a system to pick up, especially when an organization changes from one system to another. Therefore, the auditor of Woolworth need to consider the risk that arises as a result of use of Information technology, like for example, the possibility of unauthorized access into the financial statements due to leaked passwords. Account and closing procedures The auditor should ensure that the matching principle is followed in the preparation of books of accounts, or the financial statements. The concept ensures that expenses in a given financial period are written off using the incomes in the same period. The auditors should also ensure that accrued assets and liabilities are properly recorded. The auditor therefore, faces the risk that the client’s closing procedures are not adequate, or are not a true reflection of the affairs of the company. The auditor of Woolworth Company therefore needs to consider the possibility that the closing procedures are not accurate. Going Concern Risk Any other entity or business is established on the going concern assumption, which is the assumption that the company is to exist into the unforeseeable future. However, in as much as the entity is established on this assumption, the auditor needs to ascertain whether the assumption is questionable. The auditor should check for indicators of questionable going concern assumption which include the inability of a company to pay its creditors on time, increased gearing ratio, increased staff turnover and loss of major suppliers, among other indicators. The auditor therefore must ascertain the going concern assumption of Woolworths. Question Three Formula Results 2015 Results 2014 Liquidity Gearing ratio Total Liability/total equity 27,158/14,297 =1.90 15,317/6952 =2.20 Debt ratio Total liabilities/total assets 27158/41455 =0.66 6952/22269 =0.31 Current ratio Current assets/current liabilities 8251/9086 =0.91 14077/13399 =1.05 Quick ratio Cash and trade and other receivables/current liabilities 8251-5881/9086 =0.26 14,077-3436/13,399 =0.79 Profitability EBIT to sales (%) Per annual report (%) 5587/58069*100 =9.6% 3943/39944*100 =9.8% Ordinary earnings per share Per annual report(cents) 5.7% 5.8% Managerial efficiency Day’s sales of inventory. {Inventory/cost of sales}x365 5881/33356*100 =64 times 3436/24209*100 =52 times Return on equity Per annual report (%) Net income/shareholders’ equity 23,150/14,297 =1.62 15498/6692 =2.32 Cost of doing business Per annual report (%) 12.5% 10% Source: (Woolworths Holdings Limited 2015 Annual Financial Statements, 2015). Short term solvency The analysis of short-term solvency requires that a company or organization maintains adequate and sufficient assets to enable the company meet its short term obligations as and when they fall due (Delen, Kuzey, and Uyar, 2013). Inorder to analyze liquidity, the use of current ratio, quick ratio, debt ratio and gearing ratio will be used. The current ratio indicates the capability of an enterprise to pay its short-term obligations. Woolworths registered 0.91 times of excess assets over liabilities in the year 2015, compared to 1.05 in the year 2014. The acid test ratio or the quick ratio, on the other hand highlights on the capability of highly liquid assets to meet and offset short-term obligations. Woolworths quick ratio was 0.23 in the year 2015 compared to a figure of 0.21 in the year 2014. Long term solvency The long term solvency analysis is undertaken to establish the company’s capability to remain liquid and solvent and its capability to meet its obligations (Delen, Kuzey, and Uyar, 2013). To assess this, the gearing ratio is employed. The gearing ratio also referred to as the Debt to Equity ratio, measures the company’s capital structure by establishing the ratio of debt to equity. The higher the ratio, the better the company’s financial leverage .Woolworths gearing level reduced from 2.20 in the year 2014 to 1.90 in the year 2015. However, the change is attributable to an increase in liabilities by 1.43% and a further increase in debt by 2.8% Profitability analysis The computation of profitability ratios enables an organization to establish its capability of make profits, relative to revenue and resources dedicated to the organization (Delen, Kuzey, and Uyar, 2013). To analyze this, the EBIT to sales ratio and ordinary earning per ratios used. Woolworths EBIT to sales ratio indicates that there has been a decrease of 2.04 % from the 2014 figure of 9.8% as compared to 2015 figure of 9.6%.This has probably been attributable to an increase in debt by 2.8%.Similarly, earnings per share ratio has decreased from 5.8% in the year 2014 to 5.7% in the year 2015 Managerial efficiency ratios This has been analyzed by the use of Debtors ratio, return on equity and cost of doing business ratio. The debtor’s ratio improved from 52 times in the year 2014 to 64 times in the year 2015. Additionally, the return on equity ratio reduced from 2.32 in the year 2014 to 1.62 in the year 2015. Finally, the cost of doing business ranks businesses environments according to their ease of doing business. In the year 2015, the business environment was conducive for doing business in Australia with an index of 12.5% as compared to an index of 10% in the year 2014. Question Four Based on your business risk analysis (Q. 2), analytical procedures (Q3) and your understanding of Woolworths Group and its environment, list and explain at least Three accounts to be at risk of material misstatement (key audit risk areas). You also need to identify the assertion most affected by the risks identified. For proper identification of material misstatement, the auditor needs to analyze the possibility of relevant management assertion being ignored. From the analysis of Woolworth’s financial statement of accounts, a number of financial statements are subjected to risk of misstatement, which could be material. Debtors system `Debtors is classified as a current asset in the financial statements and is always prone to a lot of misstatements in the financial statements. The form of fraud involved in debtors systems involves the use of team lading which is an aspect of carry forward fraud. The Woolworths debtors system, which arises out of credit sales, is susceptible to fraud due to the nature of transactions involved by the company. The assertions mostly affected by the risk are the Description and Existence assertions where there could be failure to record debtors properly in the financial statements and the possibility of indicating g fictitious debtors which do not exist The risk of omitted or in-accurate disclosures Financial statements should be disclosed fairly for any misstatement to be avoided. The auditor should therefore analyze the financial statements to ensure that no form of omission has been exercised. Further, the auditor should undertake analytical review and substantive procedures to ensure that enough evidence is gathered regarding omissions and to establish whether the omissions were intentional or not intentional. Additionally, all forms of disclosures should be done according to the required standards. Therefore, the auditors of Woolworth should closely check the books of accounts and ensure that all items have been disclosed as per the requirements. Risk involving improper revenue recognition This arises as a result of failure of the organization to properly declare and disclose its income. The organization could overstate its expenditure inorder to underestimate its profits, hence affecting how much tax it is supposed to pay. The auditors of Woolworth should therefore ascertain whether income has been correctly stated, by undertaking a computation. The risk of Information Technology Whenever a computerized system is used in an organization, the organization should ensure that adequate controls have been put in place to ensure that fraud is prevented. There is a possibility that fraud will be exercised whenever controls are not strong .For instance, when an organization moves from one accounting system to another, it is important that the phasing out process of the old system is done professionally to avoid loss of critical information. Current and future financing requirements risk Out of the current and future or prospective financial requirements, there could arise a risk that the Company is not in a position to properly meet its obligations. Additionally, an organization could face a risk of not being in a position to meet its financial requirements because its profitability or liquidity ratios might be in question. Question Five Recently Woolworths Group Limited announced that it will be either selling or shutting down its Master’s chain (a joint venture between Woolworths and US partner Lowe’s). You need to identify why it ended up as a bad investment decision for Woolworths Group Limited? Woolworth has finally decided to shut down its master’s chain since the joint ventures has been making a lot of losses, therefore dragging down the overall profitability of the group company which has a 33% stake. The master’s chain has been, in the recent past, making huge losses to the tune of $700 million. Analysts finally arrived at the decision to close the master’s plan after considering the detrimental effects the continuation of operations will have to the group company at last. The final decision of the group company to exit from the joint venture is termed as an appropriate move in reducing the exposure of the company to further risks and to avoid future or prospective commitments to capital requirements. Additionally, the exit from its master chain, a home improvement venture, will enable Woolworth to eliminate a number of operational challenges facing the company and allow the groups management to channel resources into the company’s food and liquor sectors. Further, the decision will also enable the company to gain millions in terms of tax deductions. The investment was a wrong move for Woolworth because it was a far much different investment for the company. The main source of the group’s income is through grocery and supermarkets industry and therefore a move to venture into home improvement business proved suicidal for the company as a result of its continued losses. Bibliography Clout, V.J. and Willett, R. (2015) ‘Analyzing the market-book value relation in large Australian and US firms: Implications for fundamental analysis and the market-book ratio’, Accounting & Finance, Delen, D., Kuzey, C. and Uyar, A. (2013) ‘Measuring firm performance using financial ratios: A decision tree approach’, Expert Systems with Applications, 40, pp. 3970–3983. Keith, S. (2012) KEITH—COLES, WOOLWORTHS, AND THE LOCAL COLES, WOOLWORTHS, AND THE LOCAL. Available at: http://localejournal.org/issues/n2/Locale%20n2%20-%2007%20-%20Keith.pdf Woolworths Holdings Limited 2015 Annual Financial Statements (2015) Read More