Audit Strategy and Materiality Identification for Woolworths Limited

Question: Discuss about theAudit Strategy and Materiality Identification for Woolworths Limited. Answer: Introduction The title of the report is Audit strategy and materiality identification which itself suggest that the report has been prepared to analyze and assess the environment of the client as tool for effective and efficient auditing. Woolworths Limited, a company listed in ASX is chosen so that aim of the report can be achieved. The body of the report is divided into three main parts. First part helps in finding the factors which audit manager should investigate so that understanding of client can be obtained. The second part helps in understanding the weakness present in internal control system of the company along with identification of control risks. The third part helps in ascertainment of materiality level at the preliminary stage of audit. The report has been prepared using the annual report for the year 2017 along with other reliable sources available on internet. Factors Effective Audit Strategy Issues at Industry and Economic Level The following are major three factors which the audit manager should investigate while gaining the understanding of the client and its business: Understanding of Industry and Competitor The first major factor that each audit shall consider for the planning of the audit is to analyze the industry in which the company is operating and then whether there any competitors of the business. The company is engaged in the business of retail chains which provide all the home and domestic items at one place. Thus the industry in which the company operates is the departmental Chain industry. Along with the industry knowledge, the information of the competitor shall also be checked and reviewed. For instance the company major competitor is the Wesfarmers Private Limited. The market share of the competitor along with the different products supplied and any other advancement shall be checked (Company Official Website, 2017). Understanding the Riskiness in business Identifying the business risk is the very important part in planning the audit. It is because due to the risk present in the business the auditor is required to modify his plan accordingly. In the given case, the major risk to the company is competition for which the auditor shall modify his plan. Understanding the needs of the stakeholders The audit plan shall be developed in accordance with the needs of the stakeholders. For instance the regulating authority prescribes that the disclosure of impairment of assets shall be made in accordance with the new accounting standard. Thus, the strategy of the auditor will get changed with the applicable provisions of the new accounting standard. Issues at Entity Level The following are major three factors which the audit manager should investigate while gaining the understanding of the client and its business at the level of the entity and its environment: Understanding nature of the entity As per paragraph number 11 of the ASA 315, It means before planning of the audit, the auditor shall understand the following to know the nature of entity (AASB Official Website, 2013): The operation of the company The structure of the company with regard to its ownership and governing bodies The details of the proposed investments if the company is planning to have and The details with regard to the source of finance of the company and how the same has been placed with regard to the proportion It will help the audit team to understand the heads of various account balances and transactions therein. Understanding the application of accounting policies The accounting policies plays a very significant role in developing the audit strategy because of the fact that the accounting policy shall be in accordance with the applicable reporting framework and according to the nature of the business. Measurement and review of financial performance The financial performance of the company shall be measured and reviewed with the help of the financial ratios like net profit ratio, gross profit ratio, current ratio and so on. It will help the auditor to focus on the areas which requires the special consideration. Assessment Of Internal Control And Control Risk Ruth view and suggestions at times will meet the requirements but in most of the cases, it will fail very badly. It is because of the fact that the risk is measured in accordance with the nature and size of the business. In the given case of Woolworths Limited, the questionnaire alone will not serve the purpose in any way. The auditor is required to evaluate each of the processes and procedures so as to find the deviations in the applications of the same. For instance purchase process shall be examined in detail from the procurement and shall end with the sale thereon. Preliminary Assessment Of Materiality The audit team should consider the different assertions level for different transactions, account balances and the different policies disclosures made by the company in the financial statements that would lead to material misstatement at the preliminary assessment level of materiality (AASB Official Website, 2013). For example, in Woolworths Limited, increase in gross profit margin by 70 bases points in 2017 which become 28.07% of sales (Company Official Website, 2017). Conclusion And Recommendation Understanding of client and its business environment along understating of materiality involved in the financial statements should the main focus before start of audit by the Auditor or its team. The audit should identify all risks involved in internal control system of the company so that audit risks can be identified and audit trail can be predefined by the auditor to substantiate his opinion on the true and fair view of the financial reporting. It is concluded the Woolworths has good internal control but its open for material business risks which can affect the decision of stakeholders. It is recommended from the report to apply AASB 315 appropriately before the starting engagement as decided in engagement letter. References AASB Official Website, (2013), Auditing Standard ASA 315- Identifying and Assessing Risks of Material Misstatements through Understanding the entity and its environment Online available at https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standar d_ASA_315.pdf accessed on 30-04-2018 AASB Official Website, (2013), Auditing Standard ASA 306- Materiality and Audit Adjustments Online available at https://www.auasb.gov.au/admin/file/content102/c3/AUS_306.pdf accessed on 30-04 -2018 Company Official Website, (2017), online available at https://www.woolworths.com.au/ accessed on 30-04-2018