Audit Planning Memorandum Final

AUDIT PLANNING MEMORANDUM Client Name: Woolworths Limited Year end: 1st July 2011/30th June 2012

Date: 9th Oto!er 2012 "re#ared !y: $r%Nirmal De&al ' (0))9)3 $r%*rdo+an $r%*rdo+an ,alman ' 10-03). $r%madou $r%madou Diallo ' 3)39(.. $r%aian hmed3)122. 4e&iewed !y: $r% "andula 5ama+e 1.TERMS OF ENGAGEMENT  6ull statutory audit o6 the t he Woolworths Woolworths Limited will !e arried out under the Cor#oration t 20017 8his audit #lan 6ouses on the eonomi entity Woolworts Woolworts o&erall% 2. BRIEF SUMMARY OF SIGNIFICANT BACK GROUND INFORMATION Woolworths Limited is a su!sidiary om#any their head o66ie is loated at 1 Woolworths Way Way7 ella ista7 N;W7 N;W7 ustralia% ustralia% 4e+istered with ;<= as a 6ood and sta#les retailer% 8he >ey #eo#le are 5rand O?rien is C*O and 8i+eel Je+en is Diretor 6or the su#er mar>ets and the #etroleum% Durin+ 2011 the re&enue was @ -(%1(3 !illion A(%B7 net #ro6it a6ter ta @2712(%0 million inreased -%1B7 inrease in 6ully 6ran>ed Di&idend is 122 ent #er share .%1B .%1B77 inr inreas eases es in *arn *arnin in+ + #er #er ;har ;haree is 1(% 1(%. . ent ents s77 em#lo em#loy yees are are a##% a##%19 1907 0700 000 0 A Woolworths Limited nnual re#ort 2011 #%3 2.1 Business Risk Fac!"s usine usiness ss ris>s ris>s would would result result 6rom 6rom si+ni6 si+ni6ia iant nt ondit ondition ionss and irum irumstan stanes es that that ould ould ad&ers ad&ersely ely a66et a66eted ed the Woolwort olworths hs Limited Limited%% We will will o!tain o!tain and und unders erstan tand d analy analytia tiall  #roedure inludin+ disussion with mana+ement% "er6ormin+ analytial #roedures as well as o!se o!ser& r&at ation ionss o6 #ro #roes esss in atio ation n and and ins# ins#e etio tion n o6 rele rele&a &ant nt dou doume ments nts%% 8he 8he ris>  ris>  assessment #roedures o6 !usiness ris>s to res#ond to a##ly o6 ; 31-%(0% We must analyse 6inanial statements and internal ontrol inde#endently and #ro&ide an un!iased &iew o6 the 6inanial ondition o6 Woolworths Limited% 8he standin+ as an auditor ensures the om#any and 6inanial loss 6or the sta>e holders et% 8here6ore needs to assess ris> and redue it unae unae#ta #ta!le !le le&el le&el were were minimi minimise se misstat misstateme ement nt o6 6inan 6inanial ial stateme statements nts o6 Woolwort olworths hs Limited% We wor> on these om#onents o6 an audit ris>% We assume that there were no assoiated internal ontrols% 2.1.1 Fac!"s #a inc"ease "isk 8he relationshi# o6 materiality and le&el o6 audit ris> is o##osite to it?s e#eted hi+her the materiality the lo&er l o&er the audit ris>% ordin+ the Woolworth?s Woolworth?s 2011 annual statement an audit ris>s hi+h as materiality le&el has !een set at -B o6 *8% 2.1.2 Fac!" #a $ec"ease "isk

When When we on& on&er ertt to dolla dollarr amou amount nt this this has has a si+ni si+ni6i 6ia ant nt in6l in6lue uen nee on the the 6inan 6inania iall  #er6ormane we a##ly s#ei6i ation 6or derease ris> 6ator throu+h reduin+ in ontrol ris>s and dedution ris>s% With the inreased le&el o6 inherent ris> we need to #lan detailed  #roedure !ased on the audit e&idene leadin+ to su!stanti&e #roedure rather than relayin+ analytial #roedure% Eee#in+ the materiality le&el low to ensure that the audit ris> inreased as a result o6 hi+h inherent ris> is su!stantially reused aordin+ly no material misstatement is re6let in 6inanial statement%

2.2 C!n"!% en&i"!n'en

We ma>e initial assessments o6 ontrol ris> when #lannin+ and doumentin+ our  understandin+ o6 aountin+ system and the ontrol en&ironment to determine audit a##roah% 8he audit ris> mana+ement and om#liane ommittee A8$CC is res#onsi!le 6or ontrol mana+ement?s ations in the identi6yin+ material !usiness ris> in their mana+ement and the re#ortin+% 8he !usiness units are res#onsi!le 6or identi6yin+ o6 mana+ement7 re#ortin+ and ontrol ris> within their area A4is> mana+ement #oliy #%3% 2.( Risk !) F"au$ )!" *!!%+!"#s

We onsider internal ontrol there is a ris> suh a lar+e amount o6 ash that would inrease and derease asset le&el in the !alane sheet% 8he diretors should determine to ena!le the  #re#aration o6 the 6inanial re#ort that is 6ree 6rom material misstatement% 2.(.1 Misa,,"!,"iai!n

8he om#leity o6 the transations and the e&ent that im#at the transations as well as the de+ree o6 Fud+ement o6 the #eo#le in&ol&ed in the re#orta+e o6 the aount !alanes all +enerally im#at its 6inanial assertions% Losses suh as assets and misa##ro#riations an also a66et the Woolworth?s in the lon+ term as in the ase o6 arried 6orward !alanes% 2.(.2 F"au$u%en )inancia% "e,!"in-

Deision ma>in+ with a small num!er o6 #eo#le there6ore there is a ris> in ertain irumstanes and this mi+ht result in loss 6or Woolworths Limited% We must ensure that mem!er o6 the !oard and the a##ointed head o6 6inanial de#artment should #artii#ate in the analysis o6 the Woolworth?s 6inanial statement%

(. P%annin- Mae"ia%i )!" C!ns!%i$ae$ Ec!n!'ic Eni  ase @ mount seleted and #erenta+e AB a##lied:

 8otal sset: 2109(%- million  $ateriality threshold "erenta+e seleted 1%0 $ateriality mount 210%9- million

Base C#!sen an$ *#

  Di66erent #roess o6 understandin+ the #ro6ita!ility and ris> o6 the 6irm?s A!usiness7 su!  !usiness or any o6 the #roFets with the hel# o6 analysis o6 6inanial re#ort in6ormation s#eially annual and Guarterly re#orts% With the hel# o6 this the 6inanial statement an easily analysed ty#ially and starts with the re6ormulated 6inanial in6ormation% 8he relation to the inome statement one ommon re6ormulation is to di&ide re#orted items into reurrin+ or  normal items and nonreurrin+ or s#eial items% e that we ha&e a di66erent 6ied asset whih omes with urrent assets nonurrent assets7 ash7 in&estment and many others as well% 8hese total assets are an im#ortant #art o6 the !usiness7 with the hel# o6 this the !usiness +ra#h +oes u# and u# with suess6ul ste#s% nd alon+ with this a !usiness whih is listed in the sto> ehan+e ha&e #lenty o6 in&estors and shareholders wor>in+ with their or+anisation they ha&e !een materially misstated many times and they ha&e to 6ae a !i+ a loss and a !ad re#utation 6or the onerned or+anisation% Pe"cena-e /0 a,,%ie$ ! #e ase a!&e an$ +#

8he #erenta+e le&el whih we ha&e hosen in this re#ort is !etween A0%- ' 1%0 it means that in !etween the 6i+ures may &ary little !it u# and down on the !oth sides !ut mostly they omes aurate in !etween these #erenta+es% <6 we ta>e 0%.B it is ae#ta!le whereas more than 1B o!&iously that ha&e inreased 6rom the #artiular 6i+ure% Li>e the Guestion arise here is that A,ow easy it is to ommit 6raud or misstates to han+e the &alues o6 asset aounts so o!&iously it means the sometimes the om#any whih ha&e di66erent assets and they mention that assets #rie whih is not same as om#are to the mar>et so that?s also the main misstated  #art in this setion that?s why they ha&e set some standards to a&oid this #ro!lem%

3. LA*S AND REGULATIONS APLLICABLE TO T4E *OOL*ORT4S LIMITED

8he Woolworths Ltd has used many Laws and re+ulations 6ew o6 them are here: ;31- ha&e !een a##lied in the usiness ris> 6ator in this re#ort althou+h it desri!es that understandin+ o6 entity and its en&ironment and assessin+ the ris> o6 material misstatement ;210 8erms o6 udit *n+a+ement ;21- Huality ontrol 6or udits o6 ,istorial inanial s ;-20 nalytial "roedures ordin+ to these standards all rules and re+ulations ha&e !een im#lemented in the 6inal re#ort o6 the Woolworths Limited% 5.

P"e%i'ina" Ana%ica% P"!ce$u"e

 5.1

Rai! Ana%sis )!" Ec!n!'ic Eni

LiGuidity 4atio

ormula Ised

BChan+e 2010

De!t 4atio

8otal Lia!ilities to total assets

Current 4atio

6rom 2011

201

)%)(B

0%.2)

0%-

Current sset to Current Lia!ilities

9%3-B

0%9-

0%

Hui> ratio

Cash7 mar>eta!le seurities and net trade reei&a!le to urrent lia!ilities

(0%02B

0%3((.

0%2

8imes interest earned

 Net #ro6it 6rom ordinary ati&ities  !e6ore inome ta e#ense to annual interest e#ense

1.%-0B

10%0(9

12%

"ro6ita!ility rate

ormula Ised

BChan+e 2010

2011

201

5ross #ro6it ratio

5ross "ro6it to net sales

0%(.B

0%2.03

0%2

*arnin+s #er shares

 Net #ro6it attri!uta!le to the mem!ers o6 Woolworth Ltd to annual interest e#ense

(%)0B

0%29

0%2

ormula Ised

BChan+e 2010

2011

201

*66iieny "er6ormane ratios

and

6rom

6rom

4eturn on assets

%9)B

0%1(29

0%1

 Net #ro6it attri!uta!le to the mem!ers o6 Woolworths Limited to eGuity 4eturn on ;hare holders attri!uta!le eGuity to the mem!ers o6 Woolworths Ltd

(%)0B

0%29

0%2


3%-B

2-%19

2(%

2011

201


 Net #ro6it 6rom ordinary ati&ities  !e6ore inome ta e#ense to total assets

;im#le om#arisons "ro6it and loss

BChan+e 2010

;ales ood and liGuor

(%(B 02%).B

-(71(2%90 2)1

-17 3-

i+ W

392-B

1.1

(

Consumer eletronis

)-%11B

(1.

(

1031%3B

-

-1

8otal +eneral merhandise 5.( C!''ens !n s#!" an$ %!n- e"' %i6ui$i

6rom

Woolworths? urrent ratio is lower om#ared to the !enhmar>% 8his raises a serious onern a!out the liGuidity le&el o6 the om#any% ordin+ to Clemens and Dyer A19). the  !enhmar> should !e !etween 1 and 2% ratio is also !elow the !enhmar> o6 @1% assets 6or e&ery @1 o6 urrent lia!ilities a+ainst @0%2- o6 Gui> assets 6or eah @1 o6 urrent lia!ilities% 8his means that Gui> ratio has im#ro&ed !y (0%02B whih &ery im#ortant% When om#ared with the urrent ratio7 it results that in&entory re#resent an im#ortant #arts o6 the om#any?s urrent assets% ,owe&er the 6at that Woolworths has a hi+h in&entory turno&er shows that there is no a onern that the om#any does not ha&e enou+h Gui> assets to meet its un#redited demand in ash or de!ts !eause its in&entory is &ery liGuid % 8he om#any?s in&entory turno&er was 2-%19 in 2011 and 2(%2) in 2010 whih show a ontinuous inrease turno&er whih shows that in&entory is !eomin+ more easily on&erti!le into ash% Woolworths? de!t ratio was 0%.2) in 2011 and 0%- in 2010 this shows that the om#any?s de!t ratio is !elow the lower !enhmar> o6 1 there6ore the om#any is usin+ less le&era+e to 6inane its ati&ities% ,owe&er the ratio has inreased !y )%)B !etween the two years% 8his &alue o6 de!t ratio !elow the minimum !enhmar> raises a onern a!out whether  Woolworths is usin+ le&era+e at its ad&anta+e% ,owe&er the 6inanial statement shows that Woolworths is usin+ le&era+e e66iiently to aGuire other om#etitors suh as 5unns 4etail and e>?s ,ome whih is the result o6 inrease o6 de!ts !etween 2010 and 2011 !y -99%( million !y the issue o6 senior notes in the I; and other 6orm o6 !orrowin+s%

C!''en !n #e *!!%+!"#s P"!)iai%i

5ross #ro6it has inreased !y (%)B indiates that the om#any has ma>e a !etter use o6 its e#enses !eause it is en+a+ed in an industry where the #ro6it mar+in &ariation is &ery low% C!''en !n Pe")!"'ance !" E))icienc

Woolworths return on asset has shown a downward trend !etween 2010 and 2011% in+ an e66eti&e use o6 the 6unds in&ested % 5.(.3 Su''a" !n *!!%+!"#s7 )inancia% ,!sii!n

7 Woolworth?s 6inanial  #osition is &ery stron+ !eause this result shows that it use o6 le&era+e 6or runnin+ its ati&ities is &ery low% 8he onern is in relation o6 the liGuidity o6 the om#any !eause its urrent and Gui> ratios are !elow the minimum !enhmar>% ,owe&er the 6at that Woolworth sells 6ast mo&in+ #roduts whih is re6leted !y its hi+h in&entory turno&er +i&es on6idene a!out the a!ility o6 the om#any to meet its une#eted ash demand% urthermore7 its inrease o6 return on eGuity !etween 2010 and 2011 +i&es inenti&e to shareholder a!out the o##ortunity to ma>e #ro6it 6or shareholders %

8. Ke Au$i Risk A"eas 8.1 Ke Au$i "isks a"ea9 "ro#erty "lant and *Gui#ment

8he most im#ortant issues that should !e onsidered in Woolworths are eistene o6  unreorded dis#osal o6 assets suh as the dis#osal o6 a tru> or a landK and o!solete assets suh as aident tru>s that are not su##osed to !e re#aired and also ha&e om#letely lost their mar>et &alue7 or a !ro>en #om# mahine or 6rid+e that annot !e re#aired %$any assets may !e o&er or understated% 8he assets mi+ht !e wron+ly &alued% Ke asse"i!n an$ au$is ,"!ce$u"es9

8here are 6ew transations 6or #ro#erty7 #lant and eGui#ment and most o6 the time indi&idual there6oreK ontrol ris> assessment 6or these transations is most o6 the time unneessary% 8he audit #roedure to use 6or lon+ term assets is su!stanti&e t estin+ tehniGues % 8he #roedure should in&ol&e: 4e&iewin+ +ain and losses on sold eGui#ment !y reGuirin+ su##ortin+ douments 6or them%% isit the #lant and note the amount o6 idle o6 nonurrent assets that eist% % "er6orm an estimate o6 aumulated de#reiation and de#reiation e#enses o6 the nonurrent assets%% <6 there are lar+e di66erenes that mean mana+ements are tryin+ to o&erstate or understated #ro6it 6or s#eial #ur#oses%8he su!stanti&e #roedure in&ol&es initial  #roedures7 analytial #roedure and tests o6 details o6 transations7 and also test o6 details o6   !alanes and #resentation and dislosure% in+ #a#ers  aumulated de#reiation aounts % 8he test o6 details o6 transations re#resents a om#arison !etween the reorded amount in the 6inanial statement and the amounts reorded in the su##ortin+ doumentation % 8.2 Au$i "isk a"ea9 In&en!"

Ou%ine !) issues9

8he main issues are that: s o6 mani#ulation o6 in&entory to mani#ulate #ro6it % Ke asse"i!ns an$ au$i ,"!ce$u"e:

"ar>in+: the om#any may shi6t ertain +oods to an intermediary and onsiders it has soldK ill and holdK reordin+ in&entory as sales while the +oods are still in the om#any?s ware house Channel stu66in+: +oods may !e shi6ted to a ustomer who has not the intention to !uy it% Au$i ,"!ce$u"es9

in+ #a#ers used and also the in&esti+ation o6 entries that sound not re6letin+ the amount or soure e#eted% 8est o6 details in&ol&es he>in+ the in&entory reords 6rom the su##ortin+ douments and also the uto66 o6 #urhase%

8.( Au$i Risk A"ea9 Reae Inc!'e Ou%ine !) Issues9

8he >ey issues 6or the Woolworth are where to in&est re!ate inome% #art 6rom that mana+in+ re!ate inome in a #ro#er way is also maFor onern% Ke Asse"i!ns ; Au$i P"!ce$u"e9

"resentation  dislosure7 4i+hts  o!li+ation: 8here must !e ins#etion 6or the #resentation o6 re!ate inome% s well as reGuired dislosure are there or not should !e analysed% <6 reGuire doumentary e&idene should !e assessed% #art 6rom that it must !e &eri6ied i6 ri+hts relates to re!ate inome are !elon+ed to Woolworth% 8.3 Au$i Risk A"ea9 Li6u!" License Ou%ine !) issue9

the liense ty#e  #oliies %$oreo&er i6  there is any im#airment indiation eists in the &alue o6 liense than what is the +ain or loss Woolworth has o!tained 6rom that%  ontrol measures is also o6 the >ey issue assoiated with liGuor liensin+ Ke Asse"i!ns ; Au$i P"!ce$u"e9

1% Classi6iation: 8here must !e he> that liGuor liensin+ as an intan+i!le assets must !e reorded with that headin+ alled liGuor liense %,ere 6inanial statement with neessary  !oo> reords will !e o!ser&ed% 2% lloation  aluation: alue to !e onsidered 6or liense i6 there is any im#airment% Doumentation must !e ins#eted #ro#erly relates with liGuor liense  #oliies de&elo#ed !y or+anisation% 8.5 Au$i Risk A"ea9 G!!$+i%%

Outline o6 % 4eGuirement o6 any im#airment is there or not must !e identi6ied% Ke Asse"i!ns ; Au$i P"!ce$u"e9

aluation  *istene: 8here should !e he>ed that intan+i!le assets are #ro#erly &alued  authorised at the time o6 #urhasin+ !usiness% $oreo&er all the douments related with the a+reed &alue at the time o6 aGuisition must !e measured with mathematial orretness% s there is im#airment #resent7 there must !e disussion  ins#etion o6 related e&idene to +et aurate &alue o6 +oodwill% 8.8 Au$i Risk A"ea9 Se%) Insu"e$ Risk

Outline o6 is hi+her in this area the amount #ro&ide to the sel6insured ris> are as #er the +uidelines or with reGuire a##ro&als or not should !e monitored% 8he  #oliies 6or #ro&idin+ s#ei6i amount are mathin+ with aountin+  ta rules or not% Or+anisation has atually s#ent on sel6insurane or not also need to !e ins#eted% Ke Asse"i!n ; Au$i P"!ce$u"e9

Ourrene: ed the e&ent related with sel6insurane ha&e ta>en #lae or not% 8he e&idene 6or the same must !e ins#eted #hysially as well as with douments% *istene: mount alloated to sel6insurane is atually #resent in the aount or not should  !e he>ed% or the same &arious aounts must !e ins#eted%

<. Deai%e$ C!n"!% P%annin-

8here must !e onsideration eah 6ator durin+ audit #ro+ram de&elo#ment7 and they must desi+n a##ro#riate inGuiries and tests when assessin+ ontrol e66eti&eness% *ah ontrol om#onent and 6ator to !e addressed7 to ensure +reater onsisteny in audit #er6ormane and to maimie audit e66eti&eness 6or ontrol% <.1 Acc!uns a Risk9 T"a$e Paa%es Ke asse"i!n9

Com#leteness: ll the transation related to trade #aya!les is reorded as #er it should !e reorded% s here there is hi+h ontrol as well as detetion ris> is #resent 6ollowin+ ontrols should !e used to miti+ate ris>% C!n"!%s )!" T"a$e Paa%es9


    

;e+re+ation o6 duties ontrols is eerised 6or in&oie #roessin+ aordin+ to in&oie  #ayment terms% endor should !e #aid one and only one onsiderin+ disounts% endor in&oie is #aid u#on &alidation with +oods reei&ed and #urhase order% endor is #aid at the a##ro#riate #rie in aordane with the ontrat% "urhases are authoried and in aordane with the om#anys a##ro&al le&els%
Dis!ursement Controls:  dis!ursement within a om#any is ritial to adhere to the 6ollowin+ #roess ontrols to detet and #re&ent 6raud within a timely manner% 

 

    

Che> reGuests should !e routed to the a##ro#riate #ersonnel 6or re&iew #rior to  #ayment release% Dis!ursement ati&ities should !e traea!le to the +eneral led+er and !an> statement% ##ro&ed #urhase orders7 reei&in+ transations7 and in&oies must su##ort reGuests 6or #ayment% endor disounts should !e ta>en aordin+ to om#any #oliy% Dis!ursements must !e reorded in the #eriod o6 #ayment *nsure #ro#er aountin+ 6or &oid or anelled he>s% ;#ei6i limits o6 si+ned authority must !e esta!lished 6or !an> transations% *nsure that the utomated Clearin+ ,ouse AC, networ> aounts ha&e de!it  !lo>in+ a#a!ilities%

<.2 Acc!un a Risk9 *a-es Ke Asse"i!n9

Ourrene: One o6 the im#ortant assertion is that #ayroll e#enses the om#any reords are 6or em#loyees who eist and wor> durin+ the #ay #eriod asually% lso7 all arued #ayroll and #ayroll ta lia!ility !alanes should re#resent amounts the om#any owes at the date o6  the !alane sheet or not should !e assessed% C!n"!%s )!" *a-es9

8estin+ 6or terminated em#loyees:

8o ma>e sure no terminated em#loyees are !ein+ #aid7 selet a sam#le o6 the lient?s terminated em#loyees and trae them !a> to the #ayroll re+ister% eri6yin+ new asual em#loyee in6ormation: ;elet a sam#le o6 em#loyees hired in the year under audit% 4e&iew the #ersonnel 6ile and ma>e sure eah new em#loyee has a##ro#riate doumentation aordin+ to the audit reGuirement%

Re)e"ences9

htt#://www%oso%or+/auditMsho#%htm re&iewed on 31092012 at (#m% htt#://www%auas!%+o&%au/admin/6ile/ontent102/3/Jun11MCom#iledM;M31-%#d6  on 31092012 at (%30#m

&iewed

"hilomena Leun+ et al7 2009 $odern uditin+ and ssurane ser&ies ( th  ed% #2) John Willey  ;ons 4is> $ana+ement "oliy7 Woolworths Limited7 ersion No&em!er 2010 #%3% Woolworths Limited nnual re#ort 2011 #%3 *ili6sen7 7 Enehel7 W4  Walla+e7 " 20017 ##liation o6 the !usiness ris> audit model:  6ield study7 Accounting Horizons7 &ol% 1-7 no% 37 ##% 19320% ;athye7 $ 20037 Credit analysis and lending management 7 John Wiley  ;ons ustralia7 $ilton7 Hld% Leun+7 " 20117  Modern auditing & assurance services7 John Wiley7 $ilton7 Hld% ;ott7 ,$ 200-7 ID<8 4<;E7 The Secured Lender 7 &ol% .17 no% 17 #% 22% 4onald7 *$  Eennard7 ; 20097 udit 4is> and <4;7 The CPA Journal 7 &ol% 97 no% .7 #% 32% ,ylas7 4*  shton7 4, 19)27 udit detetion o6 6inanial statement errors7  Accounting   Review7 ##% -1.-%

5len7 L57 Jerry7 L87 "aul7 JC  8heodore7 J$ 20117 "ere#tions and $is#ere#tions 4e+ardin+ the InGuali6ied uditors 4e#ort !y inanial ;tatement "re#arers7 Isers7 and uditors7 Accounting Horizons7 &ol% 2-7 no% (7 ##% .-9)(% ,ylas7 4*  shton7 4, 19)27 udit detetion o6 6inanial statement errors7  Accounting   Review7 ##% -1.-% Leun+7 " 20117  Modern auditing & assurance services7 John Wiley7 $ilton7 Hld% 4onald7 *$  Eennard7 ; 20097 udit 4is> and <4;7 The CPA Journal 7 &ol% 97 no% .7 #% 32% ;athye7 $ 20037 Credit analysis and lending management 7 John Wiley  ;ons ustralia7 $ilton7 Hld% ;ott7 ,$ 200-7 ID<8 4<;E7 The Secured Lender 7 &ol% .17 no% 17 #% 22%