Type of Audit Opinions for Australian Companies
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Analytical review: Wesfarmers
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Ratio
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2016
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2015
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(Decrease)/ Increase
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Extent of risk
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Short term liquidity ratio
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Current ratio
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Current assets / current liabilities
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–
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–
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0
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Low
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Acid test ratio
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Liquid assets/current liabilities
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–
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–
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0
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Low
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Activity ratio
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Receivable turnover ratio
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Net credit sales/average accounts receivable
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–
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–
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0
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Low
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Days in receivables
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365 days / receivables turnover
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–
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–
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–
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Low
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Inventory turnover ratio
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COGS/average inventory
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–
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–
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–
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Low
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Days in inventory
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365 days /inventory turnover
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–
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–
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–
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Low
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Profitability ratio
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Gross profit ratio
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Gross profit/Net sales
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–
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—
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—
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Low
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Net profit ratio
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Net profit/Net sales
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27.81%
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35.56%
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-7.75%
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High
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Return on total assets ratio
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Net profit before- interest and taxes / Total assets
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.63
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.90
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-0.27
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Low
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Return on shareholders’ equity ratio
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Net profit/Ordinary shareholders’ equity
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9.92%
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14.19%
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4.27%
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High
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Solvency ratio
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Debt to equity ratio
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Total liabilities/shareholders’ equity
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.38
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0.30
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0.08
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Low
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Interest coverage ratio
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Net profit before interest and taxes/ interest expense
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–
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–
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—
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Low
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Analytical review area of concern identified
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Justification of answer
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Assertion and ledger accounts affected
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Audit procedure
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Net profit ratio
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Computation of this ratio is done by dividing net profit by annual turnover of the banking entity (Sanderson, 2013). For net calculation profit, non-operating expenses are reduced from gross profit. This shows the annual performance of the bank.
In audit program, this ratio is essential to evaluate as it is showing high deviation in the figure.
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Evaluation of this ratio assists auditor checking that figures are recorded in the correct manner or not.
It is because there are probabilities of overvalued or misstatement due to which overall financial position of the business is affected.
For this evaluation following assertions are required to be considered:
· Accuracy
· Completeness
· Classification
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Accuracy
All accounts associated with net profit such as operating income and expenses will be checked for verification of price, interest rate, provisions in banking transactions.
Completeness
Associated accounts will be verified by checking it with to supporting documents like legal documents.
Classification
It will be assessed that recording of finance income and operating expenses and income has been done in an accurate manner or not.
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Return on shareholders’ equity ratio
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Return on equity ratio evaluates the ability of a firm in generating profit from the investment which is made by its shareholders in the company (Carson, Farghe and Zhang, 2016). It is the indicator for assessing the effectiveness of management in the application of equity financing in operations of the organisation. In present case, deviation is assessed in the ratio while auditing than the same is being considered for further analysis.
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Assessment of this ratio assists the auditor in evaluating the share price of the company and assess in case the figures are not in accordance with actual figures. Capital account, Current profit transferred to retain profit and reserves are to be assessed properly for ascertaining the rate of return earned by the company. The assertions which should be considered are as follows:
· Existence
· Completeness
· Occurrence
· Classification
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Existence
It is to be verified that all the operating as well as capital profit has been accounted in the capital account and included while evaluating shareholder’s profit.
Completeness
Assure the figures of profit with the figure available in profit and loss account which is relating to operating profit and the details relating to the sale of investment should also be assessed appropriately.
Occurrence
Capital profits should be verified by supportive documents as the percentile of the risk factor is high in case of capital profits.
Classification
Evaluate appropriate account and assure that classification of operating and capital profit is made appropriately.
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Debt to equity ratio
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Debt to equity ratio assesses the ability of the organisation to pay off its liabilities, or it can also be said that it evaluates the financial leverage of a company (Azim, 2013). In the present case, the ratio is .38 which means that company is capable enough of paying its debts. The same should be assessed by verifying other accounts such as loan and creditors; that whether the company is paying its debts timely or not.
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Evaluation of this ratio provides the real picture of the company relating to its ability to pay its liabilities. The lower ratio is more preferable, and the same can be verified by the performance of other accounts such as:
Provisions
Bad Debts
Interest Payment
Loan Repayments.
The assertions which should be considered are as follows:
Completeness
Occurrence
Allocation and valuation
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Completeness:
It should be made sure that all the long-term liabilities have been included while assessing the debt equity ratio. The same can be reconciled with the loan statement and bank statement for ascertaining whether they are paid timely or not.
Occurrence
To check whether interest has been paid on time or not; entries can be verified from bank statements.
Allocation and valuation
The historical balance can be overviewed from last year balance sheet or loan statements for assuring that appropriate balance of loan has been presented in books of accounts.
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Analytical review: Wesfarmers
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Ratio
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2016
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2015
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(Decrease)/ Increase
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Extent of risk
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Short term liquidity ratio
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Current ratio
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Current assets / current liabilities
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0.93
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0.93
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0
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Low
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Acid test ratio
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Liquid assets/current liabilities
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0.22
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0.22
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0
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Low
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Activity ratio
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Receivable turnover ratio
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Net credit sales/average accounts receivable
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42.39
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40.76
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1.63
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Medium
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Days in receivables
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365 days / receivables turnover
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8.61
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8.95
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-0.34
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Low
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Inventory turnover ratio
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COGS/average inventory
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7.74
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7.97
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-0.23
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Low
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Days in inventory
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365 days /inventory turnover
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47.13
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45.82
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1.31
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Medium
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Profitability ratio
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Gross profit ratio
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Gross profit/Net sales
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-39%
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-38.90%
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-0.100%
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Low
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Net profit ratio
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Net profit/Net sales
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0.62%
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3.93%
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-3.31%
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Medium
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Return on total assets ratio
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Net profit before- interest and taxes / Total assets
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1%
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6.09%
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-5.09%
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High
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Return on shareholders’ equity ratio
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Net profit/Ordinary shareholders’ equity
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1.71%
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9.61%
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-7.90%
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High
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Solvency ratio
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Debt to equity ratio
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Total liabilities/shareholders’ equity
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.49
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0.37
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0.12
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Low
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Interest coverage ratio
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Net profit before interest and taxes/ interest expense
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4.37
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11.96
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-7.59
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High
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Analytical review area of concern identified
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Justification of answer
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Assertion and ledger accounts affected
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Audit procedure
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Receivable turnover ratio
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It is an activity ratio calculated to determine the efficiency of business in issuing credit policy for their customers and for the collection of funds from them in a timely manner.
This ratio is beneficial for tracking the trend of accounts receivable turnover to see if turnover is decelerating down; to have a review why the situation is worsening ( Sanderson, 2013).
This ratio has been considered for analysis due to increased despite a reduction in gross profits. It has been increased by 1.63 in 2016 (Annual Report and Shareholder Review of Wesfarmers, 2016). This aspect leads to a probability of issues in financial data of the company.
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Wesfarmers belong to the retail industry; receivable turnover includes their operating debtors and annual credit turnover.
By considering this factor, there can be common mistakes in the recording of sales and debtors due to which figures of the ratio is affected. For example, lower debtors are recorded due to which amount of ratio is increased.
In order to improve financial position, managerial authorities had overstated their revenues.
For this evaluation following assertions are required to be considered:
· Accuracy
· Completeness
· Compliance
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Accuracy
All accounting records related to this will be scrutinised to ensure that recorded figures are accurate. For this purpose, recalculation will be done. The outstanding balance will be verified through external confirmation.
Completeness
Associated accounts will be checked to ensure complete accounting has been done.
Compliance
It will be checked that all accounting principles and relevant standards have been followed for the recording of accounting information.
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Return on total assets ratio
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Computation of this ratio is done to determine the return earned by the company on the amount invested by stakeholders (Arens 2007).
It shows the efficiency of the company regarding asset management.
By making use of this ratio, the auditor will be able to compare movement and can check whether variation in the figure is justified or not (Cannon and Bedard, 2015).
The financial ratio shows that there is an a negative difference of 5.09% in 2016 which is significantly high.
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With this ratio sales account and operating and non-operating expenses account are affected.
For this evaluation following assertions are required to be considered:
· Accuracy
· Completeness
· Existence
· Classification
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Accuracy
All accounting records associated with the sales will be checked for verification of price and quantity in invoices.
Completeness
It will be ensured that assets and sales are recorded in an appropriate manner.
Existence
Vouching will be done for the document as well as physical verification of assets. For this purpose legal title and utility of business will be assessed.
Classification
It will be assessed that recording of sales has been done in an accurate manner or not.
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Net profit ratio
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This ratio is computed by dividing net profit by annual turnover of the company. For net calculation profit, non-operating expenses are reduced from gross profit ( Carcello and et.al. 2015). It shows overall financial performance in particular accounting year.
This ratio is significant for audit because despite negative gross profit there is positive net profit (Annual Report and Shareholder Review of Wesfarmers, 2016). In addition to this, there is achange of -3.31 in theratio in 2016.
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By considering this ratio auditor will be able to determine profit earned by business and comparison of the same can be madethrough trend analysis.
Usually, figures are overvalued for window dressing of financial position of business thus it is necessary to evaluate this account.
For this evaluation following assertions are required to be considered:
· Accuracy
· Completeness
· Classification
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Accuracy
All accounting records related to net profit will be checked for verification of price and quantity in invoices.
Completeness
Associated accounts will be checked to with the supporting documents like vouchers and subsidiaries books.
Classification
It will be assessed that recording of sales and operating expenses and income has been done in an accurate manner or not.
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Opinion
The auditors have provided an unqualified opinion which is also called as a clean opinion for the financial report of Australia and New Zealand Banking Group Limited as the accounts have been prepared in accordance with Corporation Act 2001 and the same have also been in compliance with AAS and with IFRS (Annual Report and Shareholder Review of ANZ. 2016).
Justification
An auditor provides an unqualified opinion when each of the financial statements is free from misrepresentation. The same represents that financial accounts have been maintained in accordance with generally accepted accounting principles. In the present case, as the financial statements have been prepared in accordance with applicable law as well as standards, thus unqualified opinion is appropriately provided by the auditor. It has been stated that Company and Group’s financial statements provide a true and fair view as at 30th September 2016; hence it can be concluded that provided opinion is justifiable.
The provided opinion of both the companies ANZ Bank appropriate and correct; the justification of same is provided below:
The auditor is accountable for conveying an opinion after viable evaluation of financial report on the basis of results of audit procedures applied while assessing the financial records of the organisation. Auditing standards necessitate the auditors to act in accordance with with ethical requirements in order to attain judicious assurance while performing and planning audit relating to the availability of material misstatements in the financial accounts (Carcello and Li, 2013). The procedures and methods which have been applied by the auditor for procuring audit evidence relating to the amounts and disclosures provided in the financial report. These procedures which are selected for forming the opinion are based on auditor’s judgement, and it also comprises evaluation of risk of material misstatements of the financial statement.
Our team agrees with the provided unqualified opinion by the auditor; as no misstatement has been ascertained in case of ANZ Bank. The auditors have satisfied the provisions of independence as per the Corporation Act 2001. All the provision of section 300A of Corporation Act 2001 has been complied by ANZ Bank. Thus, in this situation when the true and fair view observed by the auditor is viable, an unqualified opinion can be provided by the auditor.
ASA “700 Forming an Opinion and Reporting on a Financial Report”:
The scope of specified standard includes consist auditor’s responsibility for forming an opinion of the financial report and the form and content of report issued as a result of an audit conducted in the financial report. ASA 705, ASA 706 and ASA 800 are also considered by an auditor while forming an opinion on financial statements (Jones, 2016). According to this standard, the foremost purpose of the auditor is to form an opinion on a financial report in accordance with the conclusions on the basis of audit evidence and to provide a clear opinion by a written report which also specifies the basis of the opinion.
Corporate Governance and Audit Committees
Requirements specified in ASA 700
- An auditor has to specify whether the financial statements have been prepared in accordance with the accordance with applicable financial reporting framework.
- For the purpose of forming an opinion, the auditor has to assure that whether he has obtained reasonable assurance regarding the existence of material misstatement in the financial information that can be either due to intentional fraud or unintentional error. The conclusions shall be taken on the following basis:
- Whether sufficient appropriate evidence has been obtained in accordance with ASA 330 (Kaptein, 2012).
- Whether uncorrected material misstatements which have been found during the audit are material in accordance with ASA 450; either individually or aggregate.
- Evaluation which has been made in accordance with paragraph 12-15 of this standard.
By considering the auditor report of ANZ bank it can be said auditors have satisfied all viable condition enumerated under provision of ASA 700. Auditor of ANZ bank had provided assurance that all financial statements are prepared on the basis of Australian accounting standards and applicable financial reporting framework (Annual Report and Shareholder Review of ANZ. 2016). Further opinion is provided by auditors by evaluation of financial accounts and notes to accounts and developing viable audit evidence. Further, structure report of Wesfarmers and ANZ bank is as per guidance provided by ASA 700. It has been said that because audit report contains all viable aspects such as: appropriate addressee signature, date and address of auditor.
Opinion
Ernst & Young and DS Lewsen, the auditors of Wesfarmers, have stated an unqualified opinion in the auditor’s report of Wesfarmers (Annual Report and Shareholder Review of Wesfarmers, 2016). It has been stated in the report that the annual report has been provided by considering all guidelines of Corporation s Act 2001 and the entities financial position as on 30th June 2016 provides a true and fair view of books of accounts.
Justification
Auditor’s opinion is considered as certification that whether the financial statements of the company have been formed by company by following applicable law and standard or not. Opinion is provided on the basis of procedure and records which have been used for preparing the statements regardless of the fact whether material misstatements exist or not. In the present case, as the financial statements provide a true and fair view in the opinion of the auditor and no material misstatement is present in the same. The auditor’s report specifies that the financial statements have been prepared by considering all applicable Australian Accounting Standards (AAS) and International Financial Reporting Standards (IFRS). The same has been appropriately disclosed in notes to accounts of financial statements. Thus, justifiable opinion has been provided by the auditor.
Our team totally agree with the provided unqualified opinion by the auditor. It is because there is no misstatement has been ascertained in financial statements of Wesfarmers. The auditors have complied with the required independence as per the provisions of Corporation Act 2001, and even no misstatement has been ascertained by them in remuneration report of the company (Annual Report and Shareholder Review of Wesfarmers, 2016). All the provision of section 300A of Corporation Act 2001 has been complied by managerial authorities of Wesfarmers. Thus, in this situation when the true and fair view has been observed by the auditor, an unqualified opinion can only be provided by the auditor and the same has been provided.
In accordance with the provisions of ASA 700, the scope of standard comprises responsibility of auditor for forming an opinion of the financial report and the form and content of audit report issued in annual reports is on the basis of unbiased audit. Auditors of Wesfarmers had satisfied all the provisions described by ASA 700. For forming audit opinion they had evaluated whether financial statements have been prepared by complying with applicable framework in all material aspects or not. Along with this they had considered essential qualitative aspects of the practices which have been followed by the entity. In accordance with the auditor report of Wesfarmers it can be said auditors have satisfied all conditions of ASA 700 (Annual Report and Shareholder Review of Wesfarmers, 2016). Auditor of Wesfarmers had provided assurance that all financial statements are prepared as per of Australian accounting standards and applicable financial reporting framework.
References
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research. Australian Accounting Review, 26(3), pp.226-242.
Azim, M.I., 2013. Independent Auditors Report: Australian Trends From 1996 to 2010. Journal of Modern Accounting and Auditing, 9(3), p.356.
Sanderson, J., 2013. Audit issues. SMSF Guide: Current Issues and Strategies for the Self-Managed Superannuation Funds Adviser, p.331.
Arens, A.A, 2007. Auditing and assurance services in Australia: an integrated approach. Pearson Education Australia.
Cannon, N.H. and Bedard, J.C. 2015. Auditing challenging fair value measurements: Evidence from the field. Available at SSRN 2220445.
Carcello, J.V. and et.al. 2015. The Value to Management of Using the Internal Audit Function as a Management Training Ground. Available at SSRN 2691535.
Carcello, J.V. and Li, C. 2013. Costs and benefits of requiring an engagement partner signature: Recent experience in the United Kingdom. The Accounting Review. 88(5). Pp.1511-1546.
Jones, P., 2016. ‘Internal audit: An integrated approach’, Company Director. 32(5). P.50.
Kaptein, P. S., 2012. Ethics Management: Auditing and Developing the Ethical Content of Organizations. Springer Science & Business Media.
Annual report of Wesfarmers. 2016. [Pdf]. Available through < https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=8 >. [Accessed on 28th April 2017].
Annual Report and Shareholder Review of ANZ. 2016. [Pdf]. Available through < https://www.shareholder.anz.com/pages/annual-report-and-shareholder-review>. [Accessed on 28th April 2017].
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