Westfarmer Audit review Essay Example

Audit Report

Question two

Other than general corporate law, accounting standards, taxation, and ASX listing requirements, there are other several laws that govern the operation of business in Australia hence applicable for Wesfarmers Ltd. Some of other laws include

  1. Australian Competition and Consumer Commission (ACCC)

The ACCC administers the Competition and Consumer Act 2010. The main objective of the Act is to promote the competition among companies and together with other similar provisions in States and its territory for fair-trading. This law is applicable to Wesfarmers as the company also operates in a competitive market and serves wide consumers as stated in their corporate policy. The law also helps in protecting consumers from exploitation by traders (SBP 2003). The Act covers anti-competitive and unreasonable prices and market practices, company mergers and acquisition. The Act also includes safety of product, product liability and the third party access to facilities of national significance, this Act regulates the functions of Wesfarmers Company.

  1. Australian Securities and Investments Commission (ASIC)

ASIC is the only regulatory commission that is mandated to regulate the registered companies and corporations in Australia (SBP 2003). ASIC is the body mandated to implement the Corporation Act 2001. ASIC is responsible for coming up with laws that are responsible for supporting the company’s integrity of and in financial markets. The consumer protection policy of ASIC extends to the financial systems by regulating the advising, selling and disclosure of financial products and financial services to consumers. These laws and regulation affects Wesfarmers Ltd and since they are registered company, they have to disclose their financial statements as prescribed by ASIC (Rolland 2008).

  1. Licenses and permits

Like any other business, WesFarmers are required to have operating licenses of operation in the area of specialization. This is laws that affect the company apart from the disclosure requirements

  1. Anti-trust and completion regulation

The main objective of completion and consumer Act 2010 is to enhance the welfare of the Australian through the promotion of competition and fair-trading and provision of consumer protection. Companies involve in production of consumer goods must abide with this regulation. Since WesFarmers is such a company operating within Australia, they are required to abide with this law hence the law affect them. The main provisions of this Act include

  • Probation on anti-competitive conduct

  • Obligation on infrastructure owners to allow others to access that infrastructure

  • Country of origin and labeling requirements

All registered companies must abide with this legislation and WesFarmers is not the exceptional.

Question three

  1. Inventory Accounts

The Company uses different valuation methods in accounting for inventory in their position. WesFamers Ltd, the inventories are being valued at the lower cost and at the realizable. Costs incurred in bringing the stock used in the production to the Company and place of production are accounted (Wesfarmer 2013).

Raw material- The cost of purchase is accounted for on weighted basis according to the Company policy. Manufactured stock, work in progress, finished goods, cost of direct material, labor, and part of manufacturing overheads are calculated based on the normal operating capacity and the Company excludes borrowing costs in the calculation. In calculating cost of stock, work in progress also includes Run-of Mine coal stock, cost of drilling, blustering and other associated cost are included here (Wesfarmer 2013). .

On the retail and wholesale merchandized, and finished product, the purchase cost are calculated on average basis, and it is done after deducting any settlement discount and also including other logistic expenses incurred during the process of bringing the inventory into the Company (Wesfarmer 2013).

The rebates that are related to volumes and suppliers, promotional rebates in situations where it exceeds the actual amount spend on the promotional activities are normally recognized as a reduction to the cost of inventory. The net realizable value is normally estimated by deducting the cost of completion and other estimated cost from the selling price. In the inventory turning ratio of the company,

Inventory turnover = sales/inventories of finished goods

Year 2011= 52,891/4,987=10.61;

Year 2012=55,897/5,006=11.17;

Year 2013=57,467/5,047=11.37

The methods of stock valuation though consistence within the three financial years, its shows some misappropriation in method of recognition specifically on how promotional activities are being recognized as a cost reduction in closing inventory. This can lead to misappropriation of funds within the Company.

  1. Bad debts accounts

In the company financial statements of WESFARMERS LTD, provision for bad debts is recognized in the consolidated balance sheet at the time when the consolidated entities have presented their legal obligation because of present activity or event. They present legal constructive obligation because of a past activity in the Company and most probably an activity, which result in the outflow of an economic benefit, which requires settlement of that obligation. The account receivable is recognized in the balance sheet as an asset if it is virtually certain that it will be recovered with high reliability. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date and at the same time taking into consideration the risk involve and other surrounding uncertainties, which surrounds the obligation.

2011= 52,891/122,200= 47%

2012=55,897/238400= 23%


The rations on bad debts turnover reveal fraudulent activities within the reporting for bad debts. The variation is wide and the way accounts are recognized reveals fraudulent activities.

Question four

The level of reliance in the internal control system is very low given the fraudulent activities, which has taken place in the reporting of the company financial statements. There are Inherent risk factors relating to the industry condition as started in the company policy. The Company needs to consider new accounting, regulatory and any other statutory requirements that could result into impairments of the financial stability and profitability of the Company in long run. The accounting policies might result to inconsistency on the figures being reported resulting to lack of prudency one of the major key GAAP principles. Inherent risk is indicated by high degree of market competition and market saturation that result into declining profit margins of WesFarm. It also result into general industry decline and increase in business failure. Rapid changes in industry are also an inherent risk that an auditor needs to take into consideration like technological changes and high rate in product obsolescence. The management should consider restructuring the company to improve its performance in the stock exchange since there is misstatement of the profit of the company. Sales revenue of the company also continue to decline though poor management practices has poised risk to the company performance has the managers and executive continue to reward themselves bonuses while the company is reporting losses as can be seen in Wesfarmers income statements where there was misstatement. This is the maximum amount you believe the financial statements can be misstated and not affect the judgment of users. The two key components of this estimate are the base and the percentage

= (59,832- 58,080)

= 1752/59832

0.0293 as the extend through which the financial statement have been misstatement starting from the revenue recognition to the profit misstatement.

Question 5

Base is for the preliminary judgment is given as the net income or an estimate of a net income in case the estimates are used before the year-end (Rolland, 2008). However, in the last financial year the evaluation stage it is normally important and relevant to consider the base

Percentages are typical percentage of net income used to establish materiality for public companies. Lower percentages are more likely to be used with larger bases total revenue or asset.

For Wesfarmers

Profit percentage is given by;

= 2,261 /59,832

Materiality = Base x (function of client)

Percentage (function of audit risk)

(0.29*23) / (37.80%*2)


=0.886; this shows high level of risk


Rolland, H. (2008), “Using IT to drive effective risk management”, The Risk and Insurance

Management Society, Inc. (RIMS

SBP (2003), “Risk Management Guidelines for Commercial Banks & DFIs”, State Bank of

Pakistan, from http://www.sbp.org.pk/about/riskmgm.pdf

Wesfarmers | Annual Report (2013) Westfarmers LTD http://ir.wesfarmers.com.au/phoenix.zhtml?c=144042&p=irol-irhome; Retrieved on 24th April 2014