Faculty of Business, Government & Law
Auditing PG – 6223
Dr Harun Harun
1. For this case study, we choose two different companies operating in totally different businesses and also listed in the Australian stock exchange with the name of Qantas Airways (QAN) and Woolworths Group Limited (WOW).
Woolworths begins in 1924 at stupendous bargain basement and they opened a first self-service store in 1955 at Beverly Hills, NSW and till 2013 Woolworths complete 20 years in Australian stock exchange (Woolworths Group Limited, 2018). Woolworth Group Limited: this group consists of three core businesses 1 Australian food which includes Woolworths supermarkets, Woolworth rewards – Most attractive supermarket loyalty program, Petrol – Caltex Woolworths co-branded fuel outlets offering discounts off the standard fuel price of fuel 2 New Zealand Food – Countdown serves more than 2.5 million customers every week 3 Endeavour Drinks – Dan Murphy’s – The destination for the widest range of liquor at Australia’s best prices, BWS- A convenient standalone liquor outlet offering consumers a wide range of products (Woolworths Group Limited, 2018).
Qantas Airways – It was founded in 1920 in Queensland Outback and registered originally as the Queensland and Northern Territory Aerial Services Limited (QANTAS). Qantas Airways employee over 30,000 people with approximately 93 per cent of them based within Australia. It is widely regarded as the world’s leading long-distance airline and operates regional, domestic and international services. The main business of this group is the transportation of customers using two complementary airline brand – Qantas and Jetstar. In addition to these businesses, they operate a number of subsidiary companies which includes QantasLink, Qantas Loyalty, Q Catering, Qantas Freight, Express Ground Handling and Qantas Holidays (Qantas, 2017).
2. Both companies are operating a different business and have a different range of customers. Woolworth’s group is dealing more in retailing business whereas Qantas is dealing in providing air transportation to the customers and freight. They both started a business in around 1920’s and become Australian stock exchange listed companies. If we talked about both companies Profit during the last year 2017, as per consolidated income statement of Qantas Airways, they made $13,857m as passenger revenue and $808million as freight revenue which makes a total of $16,057m for the year 2017 (Qantas, 2017). On the other hand, Woolworths made revenue of $55,475m from sales of goods and services and $193.6m from other operating revenues which makes altogether of $55,668.6m for the year 2017 (Woolworths Group, 2017). From the annual report of both companies, we can analyse that Woolworths is making 3.5 times more profit than Qantas as Woolworth is dealing is different businesses and the area of dealing is also large than Qantas. If we talk about Earning per share attributable to equity shareholders either basic or diluted of Woolworths which is around 110 cents (Woolworths Group, 2017) whereas Qantas EPS was around 46 cents during 2017 (Qantas, 2017). Both companies’ annual reports were different from each other like Woolworth group present consolidated income statement mentioned different subsidiary businesses profit, revenue and expenditure before doing final consolidated statement. However, Qantas did not mention any revenue, expenditure, assets and liabilities of different subsidiary businesses. They just prepared a consolidated statement which comprises of all things together. Another difference in both statements was that expenditure and revenues are from different sources like Woolworth had revenue from goods and services, whereas Qantas had revenue from passengers and freight.
2017 Woolworth Group Ltd. Qantas Airways
Total current & non-current assets $22,915.8 million $17,221 million
Total current & non-current liabilities $13039.7 million $13,681 million
Total Equity $9,876.1 million $3,540 million
3. Woolworths Group Ltd. key business is to deal with retailing of goods and services. As we mentioned above in part 1 of this case study, Woolworth’s deals in these major sectors Food Supermarket, Petrol, Woolworths financial service and Endeavour Drinks. Dealing with these kinds of businesses includes high inherent risk. Inherent risk is those risks which posed by an error or omission in a financial statement due to a factor other than a failure of control. In a financial audit, the inherent risk is most likely to occur when transactions are complex or in situations that require a high degree of judgement in regard to financial estimates (Investopedia, 2018) Now in the context of Inherent risk, Woolworth group deal in food market which supplies Perishable goods like Fruits and Vegetables, Petrol Fuels prices which hikes according to market and Financial service business includes Interest rate which increases or decrease according to other factors (Woolworths Group, 2017). In this kind of businesses inherent risk is more and auditor can’t predict any situation like fuel price and vegetable prices as these are mostly depend on climate, market demand and supply and other factors. If we talk about Qantas Airways inherent risk, the risk is very less as compare to Woolworths. Qantas Airways can control cost at the initial stage as they knew how many passenger book tickets already for a trip (Qantas, 2017). So, among both companies, Woolworth has a more inherent risk.
4. The Woolworth Annual report 2017 was audited by Deloitte and the key finding obtained by auditors relating to the key business was related to carrying value ($514.3 million) of BIG W (Subsidiary of Woolworth) Property, Plant and equipment. The reason behind why auditor was worried about this matter is that the trading performance of BIG W has deteriorated in recent years. As a result of the group’s impairment review of BIG W, an impairment charge of $35.3 million was recognised in the financial year ended 25 June 2017 (Woolworths Group, 2017). As disclosed in the financial statements of 25 June 2017 the group held inventories of $4,080.4 million (Woolworths Group, 2017).
The Qantas Airways Annual report 2017 was audited by KPMG and key finding obtained by auditors relating to the key business was Passenger revenue recognition, Frequent Flyer revenue recognition, Derivative financial instrument accounting (Qantas, 2017). Our audit effort was directed at assessing these conditions, in particular, the accounting process complexity, which is influenced by — the application of estimates to recognise revenue for the proportion of tickets that are unused on the scheduled flight date, but with terms and conditions that allow future usage (Qantas, 2017). Auditing these judgments is inherently complex due to:—the estimation of the fair value of the Frequent Flyer points which is based on the observable values of available awards weighted in proportion to expected redemptions (Qantas, 2017). Qantas uses actuarial specialists in making this estimate. Cash-flow hedge accounting and valuation of financial instruments is a key audit matter due to the following factors: —the complexity inherent in estimating the fair value of derivative financial instruments. The Group uses valuation techniques to determine the fair value of options, swaps and cross-currency swaps that are not traded in active markets—the complexity in the Group’s cash-flow hedge accounting relationships driven by an active financial risk management strategy including the restructuring of hedging of specific exposures over time (Qantas, 2017).
5. KPMG gives several recommendations for handling the risks that Qantas Group is currently facing. The most significant ones include building key airline partnerships to improve its network, strength and customers satisfaction so as to remain ahead of their competitors. Putting in place a comprehensive hedging program aimed at lowering fuel prices will assist in managing fuel and foreign exchange volatility. In addition, the management is encouraged to invest more in technology to help them provide better data management profiles including data privacy and maintenance of compliance with the regulators (Qantas, 2017).
Similarly, the Deloitte auditing company recommends that the Woolworths management can lower interest rate risks by having a mechanism for maintaining a reasonable balance between fixed and floating rate borrowings. Additionally, in order to reduce foreign currency risks, the management have been advised to consider using the foreign currency options available to help in covering 100% exposure. This must include hedging of foreign currency risk, use of cash flow hedges and establishing 100% hedge relationships against the threat (Woolworths Group, 2017).
6. The control tests done on various auditing areas within the two companies helped in revealing gaps that need to be filled by the management so as the companies remain stable in their operations. For example, the key audit matters identified at Qantas include derivative financial accounting, frequent flyer recognition and passenger revenue recognition. When evaluating the ticket processing accuracy there were some errors that were recognised such as printing and miscalculations thus leading to recommending the use of more advanced technological equipment in managing patient revenue recognition (Qantas, 2017). On the same note, the derivative financial instrument accounting mechanism that was used within the company was found to be effective thus showing a great step made by the company in securing its finances.
Woolworths was similarly put on a check by the Deloitte which came up with mixed results upon auditing of its various functions. After auditing the firm’s carrying value totalling to $514 million, an impairment charge at a tune of $35 million was identified. This is a show that the management of the firm’s property is weak and necessary adjustments need to be done to prevent such cases in future. Auditing the information technology systems revealed the existence of complex systems at Woolworths (Woolworths Group, 2017). Such complex IT systems are favourable for managing the business operations and ensuring financial reporting integrity. These results, therefore, help company management to know their status according to the standards required of them in governing the two companies. It can be noted that while Woolworths have an efficient IT system, Qantas lack the same hence the management is encouraged to work on that. Similarly, the Qantas Airline has a better financial management compared to that at Woolworths.
7. The two auditing companies have taken more or less the same approach in auditing their respective client firms. This includes identifying the key auditing areas then coming up with strategies for performing auditing tests. The Deloitte in testing the IT systems at Woolworths discussed the IT environment with the management especially in financial reporting and examined the IT designs that related to financial reporting systems. In carrying the value of Woolworth’s property the testing procedure used included making an understanding of the board and management’s control over assessment of the firm’s properties. Tests on the accuracy of cash flow models were also carried out. These were important in giving a close monitor of the operations at the firm (Woolworths Group, 2017).
KPMG, on the other hand, developed various mechanisms for testing key auditing matters at the Qantas Airline. For example, in examining the financial instrument accounting tests were done on key internal controls e.g. reviews on management and approval of trade details to contemporary confirmations. Balances were also compared in the accounting records of the Group to those of the treasury risk management system (Qantas, 2017). Another activity was the passenger review recognition where the auditor worked with its IT specialist to carry out a procedure that included doing analysis on the end to end the flow of information on tickets, testing of controls that relate to changes in records on revenue accounting and checking of accuracy in calculations. These tests were important in achieving the major objectives of the external auditors thus the results can be relied on.
8. Klynveld Peat Marwick Goerdeler (KPMG) is the auditor of Qantas Airways Australia.
Deloitte Touche Tohmatsu (DTT) auditors of Woolworths Group Limited.
The key information presented in the Qantas audit reports is that the accompanying financial report of Qantas Airways Limited Australia is in accordance with the corporation’s Act 2001.
As per the Woolworths report, the auditor draws a conclusion by stating that by providing key information for example; home improvement, carrying a value of Big W property, Plant and equipment, inventory provisioning, accounting for the rebate and IT system. The financial statements may well contain errors or omission and lack of other information, However, Auditor of Woolworths expressed that the company director is responsible for this miss material and statement.
The auditors of Qantas and Woolworths have ensured the financial reports were in accordance with the Corporations Act,2001, ensuring they are a true and fair view of financial position and performance, and they comply with Corporations Regulations 2001, and Australian Accounting Standards and interpretations; and International Financial Reporting Standards. Moreover, both auditor’s reports concluded with their opinions on the remuneration reports comply with section 300 of the Corporations Act 2001.
9. Both Audit review report exclusively introduced a subjective sentiment that sufficient confirmation has been acquired to supply relate review feel. Due to the deficiency of the quantitative capability of the feeling the clients need to rely on the notoriety and sentiment of the examiner and inspecting organization, that is a further space of hazard for clients.
The review aspect of Audit report covers the far side establishing the auditors have given a standard precedent inadequate feeling is confined, in light of the fact that the report incorporates no capability of particular examples of resistance or practice. The report provides limited knowledge into the Audit review reports, levels of recognition chance and natural hazard inside the audit risk. Users haven’t been familiar with the measure of recognition chance the reviewers set and what extent of information was assessed through administration as well as substantively testing. These limitations make it intense for users to work out the standard of auditors dissected in giving inadequate cheap assurance to users.
10. Klynveld Peat Marwick Goerdeler (KPMG) is the auditor of Qantas Airways Australia.
Deloitte Touche Tohmatsu (DTT) auditors of Woolworths Group Limited.
There are many objectives of the auditors but the main objective is to obtain fair assurance mean that the financial report should be free from material misstatement, for example, check all the figures, entries, examine the evidence which supporting the amount and assessing the management principles. The risk of misstatement material never appears a reasonable assurance. The auditor should design an audit process to identify the material weakness; identified the fraud wheatear or not material, may be part of the senior management, to examine the previous restatement about the financial statement to reflect the correction of material misstatements.
Both companies of directors are responsible for the preparation of true and fair financial report. The financial report should be prepared under the Australian accounting standard board and Corporation Act 2001. The Qantas director represented the principal activity, dividend and other shareholder distribution, review operation and director meeting in the annual/ financial report(Qantas, 2017) Other side Woolworths directors represented about customer store led culture team, empower portfolio business, discontinue operations, remuneration, non-executive director arrangements and governance (Woolworths Group, 2017).
At the end , the financial report preparing , the directors are in charge of evaluating the group’s ability to continue as a going concern, divulging, as relevant, matters related to going concern and using the going concern introduce of accounting aside from if the officials either mean to offer the group or to stop errands, or have no sensible alternative anyway to do all things considered.
Investopedia, 2018. Inherent Risk. Online
Available at: https://www.investopedia.com/terms/i/inherent-risk.asp
Qantas, 2017. P O S I T I O N I N G F O R S U S TA I N A B I L I T Y, s.l.: Qantas Airways.
Woolworths Group Limited, 2018. About Us. Online
Available at: https://www.woolworthsgroup.com.au/page/about-us/
Woolworths Group Limited, 2018. Our Businesses. Online
Available at: https://www.woolworthsgroup.com.au/page/about-us/our-brands
Woolworths Group, 2017. 2017 Annual Report, s.l.: Woolworths Limited.
Leung P, Coram, P, Cooper, BJ, Richardson, P 2015, Modern auditing ; assurance services, 6th end, John Wiley ; Sons Australia, Ltd, Queensland.