Analytical review of financial statement and identification of the area of concern
JB Hi-Fi is the leading brand of consumer electronics and technologies. The analytical review is performed by understanding whether the financial statements of the organization faithfully represent the true and fair view of their financial position and performance. The analytical review of the company helps in understanding the key areas of concern that need the assistance of the auditing procedures. The analytical review on the financial statement of the JB Hi-Fi includes the review on the operations and financial performance with the help of which the key areas can be identified. From the financial reporting of the company, it is observed that the operating and financial review underlying results exclude the implementation costs as well as the transaction fees that cost around $22.4 million which was associated with the Good guy business association in the year 2016. However, the charges of fixed assets impairment and goodwill for the business of JB Hi-Fi in New Zealand that costs around $15.8 million (Richards & Murray, 2018). All the results for the financial year of 2018 presented in this financial statement are statutory and underlying results. Total sales of the company were increased by the rate of 21.8% to $6,854.3 million as compared to the year 2017 when the sales were $5,628 million only. The company compared these terms between the underlying results of the 2017 and statutory results for the year 2018. This area has a great impact on the overall financial statements as it affects the profits and loss of the company. The statement also showed that the underlying net profit after tax grew by 12.3% to $233 million and earnings before interest and tax grew by 14.5% to $350 million.
After the acquisition of Good Guys, it is identified that goodwill of the company was included in the consolidated balance sheet of $712.2 million. Management also assessed the cash-generating units of Good Guy company through the application of value in use approach and it is found that all the judgments are based on the key assumptions like the future growth rate of the business and discount rates, working capital. Therefore, the accounting for the transaction of the Good Guys acquisition and its goodwill was very difficult and need an attention of the management to determine the fair value of assets and liabilities and separately allocate the purchase consideration to intangible assets (Audit IT, 2018).
The profit and loss and balance sheet accounts of the company are highly affected because of the acquisition of Good Guys and also because of the exclusion of transaction fees and implementation costs from the underlying results of the company. The calculations of the company are shown in the appendix.
Formulation of audit procedure for the identified concerned area
The areas that identified in the above part are in relation to the complex transactions in relation to the acquisition of Good Guy Company. The exclusion of some elements from the financial reporting always affects the overall financial performance of the company. The auditors are playing the most important role in handling these key matters as it is their responsibility to review the financial reports, analyze the risk and monitors the effectiveness of the financial performance. The procedure that formulated for the audit in response to the above areas of concern is mentioned as below:
- The auditors need to perform tests on the fair value of assets and liabilities and assess the actual amount of the implementation and transactional costs of acquisition and then include in the financial reports (Colbert, 1994).
- The assistance from the taxation specialists can be encouraged to assess the allocated cost associated with the entry of the Good Guys and its influence on the opening deferred tax balances.
- Auditors need to test the goodwill calculations associated with the acquisition transactions.
- The assessment of the goodwill in relation to the cash generating units also needs to perform as it will benefit the business combination synergies.
Therefore, auditors are responsible for reviewing and monitoring the internal process and all the transactions that take place while preparing the financial accounting reports. The auditors basically need to evaluate and ensure that all the statements are free from the material statements, fraud or error and also comply with the Australian auditing standards. The risks of fraud, error and material misstatement are basically analyzed and provide recommendations to the auditors and professionals regarding the overcoming of these risks. The auditing committee can review the performance of the auditors and monitors the effectiveness of the business internal processes. The committee is also responsible for reviewing the compliance of business activities and financial reporting with the set standards, rules and business practices (Appelbaum & Vasarhelyi, 2018).
According to corporate governance statement of JB Hi-Fi Company, the directors and managers are committed towards the ethical working of the business in accordance with the high standards of corporate governance. The information in relation to corporate governance is found under the heading of the code of conduct and corporate governance statements. The corporate statement of JB Hi-Fi company shows that all the policies and practices of group comply with the 3rd edition of the ASX corporate governance council principles and also in the year 2018, the company’s principles comply with the ASX recommendations. The procedure of the corporate governance starts with acknowledging the needs for directors, executives and employees and observing the ethical standards adopted for corporate behaviour. The acquisition of the Good Guy business by the group also represents that both have adopted their own separate codes of conduct and there is no single code applied for JB Hi-Fi (JB Hi-Fi Limited, 2017).
Auditing committee JB Hi-Fi and its composition
The company has the auditing and risk management committee that comprised of five members. According to section 177 under the companies’ act, it is found that the audit committee should have at least 3 or more independent directors and one chair of the committee and not the chair of the board. The auditing committee of JB Hi-Fi comprised of three independent or non-executive directors and one chair of the committee who is not the chair of the board. Therefore, the composition of the company is right as it includes Beth Laughton (Chair of the committee), Wal Tang, Stephen Goddard and Mark Powell. One of the members of JB Hi-Fi also has great experience and education in the field of finance. The chair of the committee has more than 25 years of experience and appropriate education in finance. This composition of the audit committee has the responsibilities to monitor and review the policies of the group and also manage the financial risks. This committee of auditing and risk management also provides some of the recommendations to the board regarding the auditing of reports. The committee reviews the performance of the auditors and monitors the effectiveness of the business internal processes. The committee is also responsible for reviewing the compliance of business activities and financial reporting with the set standards, rules and business practices (Francis & Khurana, 2012).
Benefits of the auditing committee
In my opinion, the auditing committee provides great benefits for the auditors, company, society and profession as a whole. The auditing committee is very beneficial in obtaining reasonable assurance about whether the company and its financial reporting have adopted the corporate governance framework or not. The main purpose of the auditing committee is to ensure that all the statements are free from the material statements, fraud or error and also comply with the Australian auditing standards. The risks of fraud, error and material misstatement are basically analyzed and provide recommendations to the auditors and professionals regarding the overcoming of these risks. The committee also held responsible for understanding the internal control processes relevant to auditing. The auditing committee also provides the benefit of evaluating the appropriateness of accounting policies and estimates and related disclosures made by directors. With the evidence obtained by the audit committee, the company can apply the going concern basis of accounting to identify the future growth of the company. The auditing committee also evaluates the overall presentation, structure and standards of the financial reporting. The auditing committee is of great advantage as it provides great assistance to directors of the company regarding the key audit matters and how to resolve the future risks to increase the effectiveness of the accounting statements. The committee also assesses changes in accounting policies and standards and its impact on the financial reporting of the company.
Therefore, from the above analysis of the financial reports of JB Hi-Fi, it is clear that the auditing is playing a very essential role in the organizations as it helps the organization in review and monitors the financial performance. The analytical review of company’s financial statement analyzed some of the confusing and complex transaction because of the acquisition of Good Guys business and hence, the formulation of the auditing procedure provides great benefits to the company, directors, professionals and society as a whole (Murray, 2013).
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JB Hi-Fi Limited. (2017). JB Hi-Fi Limited: Half-year financial report. Retrieved from http://member.afraccess.com/media?id=CMN://3A487513&filename=20180212/JBH_01949447.pdf
Murray, R. (2013). Annual Report 2017: JB Hi-Fi. Retrieved from https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf
Richards, G., & Murray, R. (2018). ANNUAL REPORT: JB HI-FI. Retrieved from https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf