Instructions: 1. You are a part of the team responsible for planning the Metcash (parent and the consolidated economic entity) audit engagement for 2017. You have been assigned to gather relevant background information and prepare a report for a meeting with your audit partner and audit managers. Your report must address the following issues:
a. What are the areas in which Metcash conducts its operations?
b. Which particular laws/regulations (other than financial related categories which include legislations such as: Corporation Act 2001, Australian taxation laws, etc.) affect its operations? You need to identify at least FIVE laws/regulations.
c. Who are its primary competitors? [6+5+2= 13 marks]
2. Identify and explain FIVE significant business risk factors that the auditor needs to consider for the Metcash group engagement. [5 marks]
3. Identify at least FOUR accounts susceptible to misappropriation or fraudulent financial reporting within the Metcash Group and explain why. Your answers should be reflective of your in-depth understanding of Metcash Group and its environment. [12 marks]
4. With specific reference to Metcash’s corporate governance arrangements, you need to assess the likelihood of the potential reliance that could be placed on the overall control environment. Your conclusion should be supported by at least FIVE factors. [5 marks]
5. Recently Metcash showed its intentions to acquire Woolworth’s Home Timber and Hardware business for about $250 million. The Australian Competition and Consumer Commission (ACCC) have also given approval to bid for Home Timber and Hardware business. How will the development of the proposed acquisition of Woolworth’s Home Timber and Hardware business affect your 2017audit plan for Metcash? [5 marks]
Solution.
Question 3. Accounts susceptible to misappropriation or fraudulent reporting
Cash account- Due to the nature of Metcash business (selling of grocery, liquor, fresh produce, fast moving consumer goods), there is a lot of cash transactions involved. Cash from sales and cash that is drawn from the bank for petty cash use carries a significant risk of fraud (Peter, 2013). Some of the areas where cash would be misreported include unrecorded cash receipts, unaccounted or unsupported cash payments, etc.
Bank account- The sheer size of Metcash means that there are many bank transactions such direct receipts, online payments, card transactions, direct debits, etc. This poses a reporting risk in that sometimes it is difficult to track all the transactions especially since debtors may not always communicate when they make direct payments to the company. Bank reconciliations also become difficult due to the many in and out transactions increasing the risk of fraudulent financial reporting. Increased use of technology in the banking business interface increases the risk that financial transactions could be altered.
Inventory- The Company deals with tens of thousands of inventory items most of which are perishable in nature. Valuation of inventory may not always reflect the actual situation on the ground, with an elevated risk of misreporting especially because some of the stock items may go bad. Physical loss of inventory through theft may also mean that some of the inventory figures are not correct
Sales account- The sales team at Metcash may decide to engage in bad sales practices so as to meet their targets. They may do these through selling to bad clients leading to large bad debts, overselling with the promise to take back the items, providing inappropriate and unapproved discounts so as to attract sales, which ultimately distorts the sales figures.
Question 4. Assessment of Corporate governance
Our assessment of the company’s corporate governance structure reveals that it can be relied upon to provide sufficient control environment that safeguards the shareholder’s interests. Firstly, the company has a list of shareholders who are tasked with the responsibility of approving all major business decisions such as acquisitions, the appointment of auditors, etc. The next annual general meeting that is scheduled for August 31 is a platform where shareholders will pass resolutions that will guide the major business decisions for the coming year.
Board of directors- the company has a board of directors that is responsible for overseeing the operations of the business. The CEO and managing director have a responsibility to report to the board of directors on all major issues. This board ensures that the CEO and his team do not run the company as a personal business but rather follow all the laid down procedures in the conduct of the business.
Auditors- External auditors Ernst & Young are contracted to independently audit the operations of the company and report specifically to the shareholders on how their funds have been invested and utilized throughout the year (Metcash annual report, 2016). This ensures that shareholders get an independent professional opinion on whether their funds have been properly utilized and whether the management assertions in the financial statements present a true and fair view of the state of affairs in the company as at a particular period.
Independent committees- The various independent committees such as the audit, risk, and compliance committees, and remuneration and nomination committees among others that are headed by non-executive directors present an opportunity for an independent assessment of the company’s performance about these key areas outside of the influence of the company management. In this case, for instance, the internal, risk and compliance managers do not report to the CEO but rather to these independent committees with enhances their independence in the conduct of their work.
Regulation by the ASX regulators- As a publicly traded entity, the company is under the keen regulations of the stock market regulators who have stringent requirements for listing. This enhances the protection of shareholders assets.
Question 5. Effect of an acquisition on the 2017 Metcash audit plan
The 2017 audit will benefit from more risk assessment procedures especially concerning the planned acquisition. The auditors would be interested in designing audit tests and procedures to verify whether the company did a proper due diligence during the acquisition and whether then proper accounting treatment has been done for the new acquisition.
Additional audit procedures to assess the company’s compliance with legal requirements concerning the acquisition will go a long way in ensuring that the company avoids possible future litigation concerning this particular transaction
Additional time will be required to be dedicated to the audit of this main transaction, which means that at the planning stage, the auditors may need to plan for more time to go to this particular item. This may translate to additional audit fees
On their part, the external auditors may need to evaluate whether there are enough skills in the proposed audit team for this particular assignment, especially about mergers and acquisition. If there are no sufficient skills, the auditor may see if there is a need to bring in an external expert to aid in the audit of the financial statements for 2017.
References
Peter E, G (2013). Audit Risk Assessment and Detection of Misstatements in Annual Reports: Empirical Evidence from Nigeria. Research Journal of Finance and Accounting, ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Metcash Annual report (2016). Available at http://www.metcashannualreport.com/