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ACC302 Auditing and Assurance Assignment - A Practical Audit Scenario, Kaplan Business School, Australia

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PART A - Review the audited annual reports including financial statements presented to the shareholders for your respective company and answer the questions:

1) Conduct an analytical review on the financial statements of your respective company in the planning phase and identify areas of concern and how relevant accounts and assertions are impacted.

2) You are now required to formulate the relevant audit procedures to respond to the areas of concern identified in Part (1).

Answer -

Analytical review procedures are a part and process of audit procedures. The analytical review is a substantive audit procedure. The analytical review procedures create a relationship with the financial data so that the auditor may check and review the financial statements for any material statement or misstatement (Allentuck & Marcia, 2014). Moreover the auditor can use analytical review to form a stable financial relationship between one period to another period.

Under analytical review the auditor generally performs the following for the company under their audit procedures -

1. The auditor compares current period's financial data with the previous year's financial data,

2. The auditors also compare current period financial data with the estimated financial data or future data.

3. Evaluation of relationship among financial information and the ratios via financial ratio analysis

4. The auditor also compares the current period financial information with the industry benchmarks and industry statistics.

5. In some cases the auditors may also analysis the financial data with the non - financial data for the current period.

Our selected company for the analytical review is J B HI - FI. The J B H I - F I is a big and famous home entertainment retailer in Australia. The company's retail sales is popular for the low prices, huge product range plus biggest brands for sale (Annual report, 2018 of J B H I - F I).

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The financial performance of J B H I - F I is showing a constant growth, since 2014 the growth in sales revenue of J B HI - FI has increased to 21.8 % (Annual report, 2018 of J B HI - FI). The company's E B I T has also increased to 14.5 % in the last 4 years. The N P A T of the company has also increased to 12.3 % (Annual report, 2018 of J B HI - FI). The earnings per share have grown up to 9.2 %. This is clear that the company is growing at a high rate in all areas. The revenue is increasing, the profits are increase. The company's E P S is also increasing.

The major year of boom for J B HI - FI was 2017, in 2017 the company's revenue increased from $ 3.95 billion to $ 5.63 billion, the profit in 2016 was $ 221 million and in 2017 the profit was $ 306 million (Annual report, 2018 of J B HI - FI). The overall increase in the profit in 2017 was $ 85 million or around 39 %. This sudden rise in the revenue and profits was majorly because of opening of new stores and increase in the no. of stores in 2017 was 110 new stores (Annual report, 2018 of J B H I - F I).

The auditors of J B H I - F I for the year 2018 was Deloitte, the declaration of independence as per section 307 C of the corporations act, 2001 is been provided to all directors in the annual report of the J B H I - F I (financial report, 2018 of J B H I - F I).

Up on going through the analytical review of the income statement of the J B HI - FI we analyised the profitability ratios, solvency ratios, liquidity ratios and so on. The profitability ratio of the J B HI - FI have been conducted and we found that gross profit ratio of the J B HI - FI for the year 2018 was 21.44 % whereas the gross profit ratio for the year 2017 was 21.85 % so there is a decline in the gross profit of the J B H I - F I (financial report, 2018 of J B H I - F I). Though the revenue has increased in 2018, it was $ 6854.3 million whereas the revenue in 2017 was $ 5628 million yet the gross profit declined, this is majorly because thought the revenue of the company increased, the cost of production of goods was also increased, the c o s in 2018 was $ 5384 million whereas the cost of sales in the year 2017 was $ 4397 million (Annual report, 2018 of J B HI - FI). So main reason for lower gross profit is the increase in the direct expenses related to C O S. The P B T ratio for the year 2018 was 4.88 % and in 2017 it was 4.6 % and the net profit ratio in 2018 was 3.40 % and in 2017 it was 3.06 % (Annual report, 2018 of J B H I - F I).

Current ratio of the J B H I - F I for the year 2018 was 1.32 times and in the year 2017 it was 1.32 times, the return on asset ratio for 2018 was 9.35 % for 2018 and it was 7 %. The return on equity ratio for 2018 was 39.29 % and in the year 2018 it was 52.88 % (Annual report, 2018 of J B HI - FI).

The debt to equity ratio for the year 2018 was 1.48 and in the year 2017 it was 1.65. So the overall areas of concern for the year 2018 are the net profit and gross profit. The J B H I - F I does not earning a much as it earned in 2017. The company is earning profit but at a decreasing rate and this is an issue which needs immediate attention (Audit Committee Effectiveness: 2009). The J B HI - FI is also unable to stabilize its return on equity which has declined and this is also in context with the declining profits of the company. The management need to put controls over the costs being incurred up on purchases of the direct and indirect materials (Audit Committee Effectiveness: 2010).

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PART B - In relation to corporate governance research and justify your answer to the following questions:

1) Does your respective company have any process relating to corporate governance? Under which section of the annual report would you expect to find information on it?

2) Does your respective company have an audit committee and does the audit committee have the correct composition?

3) In your opinion, are audit committees of benefit to the auditor, the company, the auditing profession and/or society as a whole? Why or why not?

Answer -

Corporate governance -

The J B HI - FI has recognized the importance of governance, environment and society. The J B HI - FI continuously looks in to development of corporate governance which the group is determinant to work on (Keen, Paul 2009). The J B HI - FI ensures that the business of the company is done ethically and as per the set norms of corporate governance. Moreover the J B H I - F I have code of conduct, that is adhered by all the employees and the code of conduct also acts like a guide on what the company should consider as an acceptable behaviour. As per the corporate governance statement provided by the company in its financial report, the JB HI FI company's policies plus practices which are in accordance with the 4th edition compiled of A S X governance and corporatize council principles and recommends and in the year 2018 the company has complied with the A S X recommendations upon corporate governance (Butler & Marilyn, 2013). The company does not support gender discrimination and believes in gender diversity. The company has a special corporate governance section which has defined the role of board of directors, the composition of the directors in board, selecting the directors and the appointing the directors and so on.

The Audit committee -

The audit's committee is an operating committee which consist of directors of the company (Mason, Eudo C. 2011). Every members of audit committee is in - charge of the monitoring and over viewing the financial statement and financial report and to look that all the disclosures have been done in accordance to the set principles and standards. Every members of the committee of the J B HI - FI are Beth Laughton, non- executive director; Mr. Laughton is also the chairperson of the committee. Ms. Wai Tang is a non - executive director and she is a member of the committee too. Yes audit committee has right composition as it consist of non- executive directors plus board members.

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No, in general audit committee don't benefit auditors but it benefits company and the profession of auditing moreover it also the society as a whole ("KPMG AC Study 2008"). This is because the audit committee provides an insight up on the financial reporting and it improves the reporting and financial statements and practices. The audit committee meets with the C E Os, C F Os and other financial officers to review the effectiveness of the controls the company is following. The audit committee is also involved in creation, maintenance and monitoring of anti - fraud controls so that the fraudulent error and activities be minimized to a negligible level in the company (Prasad, Suresh). The audit committee also improves and enhances the internal audit functions as in some cases internal auditor report to the audit committee and it maintains integrity of the function of internal audit. Audit committee also keeps a close watch over the statutory auditors or the external auditors and the audit committee keeps in touch that the external auditor and monitors the services so that the independence of external auditors is not lost with management. Lastly audit committee also gives strength to the share holders in terms that audit committee provide higher level creditability to stakeholders of the company. it is said that the company's reputation is its biggest asset and an audit committee is the link between this message of independence, reliability, trust worthiness and it also creates and develops a confidence among the present and potential investors, stakeholders, bankers and financial institutions, creditors and so on to invest in company and assures them that the company is a going concern with many fruitful year to come (Stewart, Sally 2014).

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