How To Assess Inherent Risk In An Audit For Wesfarmers And Virgin Australia
Understanding the Inherent Risks
(A). Identify at least three (3) inherent risks that you would have considered for each company in the audit planning phase and justify your answer?
(B). What audit procedures and/or tasks would you have plan to carry out in response to the inherent risks identified by you in (A) above?
(C). Carry out an analytical review on the financial statements of these companies in the planning phase and identify areas of concern (high risk or problem areas) or comfort. Justify your answer – identify at least three (3) points for each company?
(D). What audit procedures and/or tasks would you have planned to carry out in response to the high risks or problem areas identified by you in (C) above? Alternatively, in relation to which area would you have minimised your evidence gathering procedure?
(E). An Independent Auditor’s Report to the Members has been issued for each company:
(a) Identify the type of audit opinion issued by each auditor, and justify your answer?
(b) Do you agree with the type of opinion issued by the auditor? Why or why not? Please indicate an alternative audit opinion if you do not agree with the one issued?
(c) Are there any other matters or events that have taken place after the issue of the audit report that strengthens or weakens the auditor’s opinion?
(F) In relation to corporate governance research and justify your answer to the following questions:
(a) Do the above companies have any process relating to corporate governance?
(b) Under which section of the annual report would you expect to find information on it?
(c) Do the companies have an audit committee and does it have the correct composition?
(d) In your opinion, are audit committees of benefit to the auditor, the company, the auditing profession and/or society as a whole?
a) What you (as a group/team) understand by audit quality?
b) Do you think that “audit quality” is an important issue? Why or why not?
c) Do you think that the directors and/or the audit committee assist ‘audit quality’? If so, how?
d) The CAANZ (formerly ICAA) in a document titled “The Benefit of Audit: A Guide to Audit Quality” identified five drivers of audit quality. What are these five drivers? Do they have any impact on audit quality?
e) Do you believe that literature of the above nature will be of benefit to the auditor, the auditing profession and/or society as a whole? Why or why not?
(A) The two companies are Wesfarmers and Virgin Australia. Wesfarmers is a trading company whereas the Virgin Australia is a company from aviation sector. The inherent risks involved in the Wesfarmers are:
- The slow moving inventory since it is a trading company. There are many cash dealings which get interrupted due to delay in stock being converted back into cash.
- The adverse commodity price movement increases the financial inherent risk.
- Also the dependency on the customer supplier chain on the local and overseas areas sometimes leads to operational difficulties which are also an inherent risk for the company. (Identify Inherence Riskof Westfarmer’s Essay, 2015)
Whereas for Virgin Australia following are the inherent risks:-
- Vulnerability due to the state of economy since the revenue from operations as well as major expenditure of the company is influenced by the period of recession or boom is it fuels prices or the tariff rates.
- There is very high competition in the market so easy switching of the customers is the inherent risk attached with the nature of the business.
- Due to globalization the risk of currency fluctuation is very high. (Rahul, 2011)
(B) Procedures that can be undertaken for Wesfarmers are to check the inventory statement in each operating cycle and draws management’s attention so that they can take proper steps to dispose off or sell the non-moving or slow stocks. The financial inherent risk can be checked by extending the substantive checking and extending the audit procedures.
Whereas the procedures for the Virgin Australia can be the impact of the economic scenario on the business can be assessed and given in the audit report. Also if there is any foreseeing event which can hamper the going concern concept of the company due to increasing competitors then it should be mentioned in the report. The fluctuation of currency is very evident so proper evidencing and documentation of the same should be maintained. (Loughran)
Procedures for Wesfarmers and Virgin Australia
(c) In Virgin Australia although the revenue from operations is higher than last year but since the operating expenses are so high the company is suffering losses. Also due to higher revenue from operations the tax expense has increased resulting in higher net losses. Also due to SkyWest Operations under the Game Change Program strategies the fuel consumption has increased as well as the labour and staff charges.
Similarly, in the Wesfarmers the revenue from operations has increased but Earnings before interest and tax & depreciation and amortization have decreased since 2013. The net profit after tax is shown at the higher figures but it can be considered a progressive sign as such profit is gained from the discontinued operations. The operations are shut down and also the capital expenditure is lowered down this may be said that the company is reaching its saturation point. (AU section 329A)
(D) The procedures that can be undertaken are the substantive checking of all the expenditures so that no unusual expenses are shown. Also the auditor must report in the audit report whether the company is going concern or not. It needs to check whether any kind of losses is going to impact the company and shutting it down. Also in the Wesfarmers the company has earned mostly from the discontinued operations this year so we need to carry out procedures for if any further discontinued operations. We would minimize the evidence gathering on the capital expenditure since it is evident that company is facing its saturation point so capital investment can be lowered.
(E) (a) The auditors of both companies have formed an unmodified opinion in their Independent auditor’s report since it is mentioned that they have gathered enough audit evidence to form their audit opinion. Also it is mentioned in the report that financial statements is complying all the corporations regulations, Australian accounting standards and the IFRS giving true and fair view of the statement. (A guide to understanding Auditing and Assurance, 2014)
(b) Yes, I agree with the opinion formed by the auditor because there are no qualifications generated so the opinion cannot be more than an unmodified one.
(c) Yes there can be events subsequent to auditor’s report which might change the opinion of the auditor. For example- a sudden economic crisis adversely affecting the going concern basis of the company thus the auditor will have to reconsider its opinion and reissue its report after changes. However it is the duty of the auditor to take back all the earlier reports in its custody and provide the amended one.
(F) (a) Yes both the companies have programs and procedures relating to corporate governance.
(b) In the introductory section where the policies and procedures as well as about the company is mentioned there corporate governance disclosures should be given.
(c) Both the companies have audit committee with a minimum of three members, at least one having required qualifications and expertise thus being the right composition.
(d) The audit committee is beneficial for the society as a whole since they are the barometers for the company’s compliance of regulations and standards. This compliance will save the company from any mishap and thus will help company, the profession, and the investors. In short, society as a whole since ethical values is too attached with this.
a) A systemised procedure of conducting audit by properly coordinating each team member and every activity maintaining a complete quality management. Audit quality not only involves conducting all required procedures but also includes the knowledge base of the professionals.
b) Yes audit quality is an important issue since in order to conduct any audit work and forming any opinion complete skill, proper qualification, required expertise and total conviction is needed. The entire above mentioned are the basic ingredients of audit quality.
c) Directors and audit committee are the top management of the company. In order to conduct any such thing proper support from the top management is very essential. It will only help the company to improve its reputation more by this total quality management in the audit procedures. The management can allow the auditors to conduct audit quality by cooperating enough.
d) The five drivers of the mentioned document are:
- The work culture of the audit firm appointed impacts the company since the firm with good culture will create a feasible environment of work for everyone.
- The expertise in their work as well as the personal qualities of auditor is also impactful as the auditor with good personality can make its stand and will be very clear in its opinion.
- The process should be efficient and effective so that the credibility of the organization is increased.
- Factors outside the control of the auditors are also important since the management can draw their attention to that.
- Audit reports reliability is impactful as investors follows the auditor’s report as their one of the barometer to judge the company before investing in it.
e) It is beneficial to the auditors as the auditors will have a proper guideline to not deviate from their path of responsibilities. It is not only beneficial for them but also for the profession and the society as society will gain trust on the profession and will have a better reliable source to form their opinion about the financial status of any company. The ethical values of any company can also be judged if the company is under the firm which are following the regime of the Audit Quality. (Driving audit quality, 2013)
A guide to understanding Auditing and Assurance. (2014, October). Retrieved 2015, from CPAAustralia.com: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/auditing-assurance/guide-understanding-audit-assurance.pdf
AU section 329A. (n.d.). Retrieved 2015, from PCAOB.org: https://pcaobus.org/Standards/Auditing/Pages/AU329A.aspx
Driving audit quality. (2013, August 13). Retrieved 2015, from Chartered Accountants.com: https://www.charteredaccountants.com.au/Industry-Topics/Audit-and-assurance/Current-issues/Recent-audit-headlines/News-and-updates/Driving-audit-quality.aspx
Identify Inherence Riskof Westfarmer’s Essay. (2015). Retrieved 2015, from Anti Essays.com: https://www.antiessays.com/free-essays/Identify-Inherence-Risk-Of-Westfarmer-s-666519.html
Loughran, M. (n.d.). How to Asses Inherent Risk in an Audit? Retrieved 2015, from Dummies.com: https://www.dummies.com/how-to/content/how-to-assess-inherent-risk-in-an-audit.html
Rahul, K. (2011, March 10). 10 Reasons Why Airline Industry is Unique? Retrieved 2015, from mbaskool.com: https://www.mbaskool.com/business-articles/marketing/207-ten-reasons-why-airline-industry-is-unique.html