As and is one of the largest supermarket

As no two
companies are alike, auditors need to understand the entity and its environment
to ensure an effective and efficient audit. The environment a company operates
in can affect the company and financial information disclosed. ASA315.A1
reports that preliminary research can help gain knowledge on the entities
internal control, identify risks including material misstatement, help develop
and design a sufficient plan for an adequate audit and assess what areas may
require special audit considerations or procedures (Gay & Simnett, 2015).
This preliminary research looks at the nature of the business, its organisation
and structure, method of operation and industry it is involved in (Gay &
Simnett, 2015). This enables auditors to understand which events and
transactions are likely to have a significant effect on financial statements.

Woolworths Limited
is a publically listed company founded in 1924 with over 202,000 employees and
is one of the largest supermarket chains in Australia (About Us – Woolworths
Group, 2018). Woolworths’ principal operations are in food, general merchandise
and specialty retailing through chain store operations and subsidiaries –
including liquor and hospitality (Our Brands – Woolworths Group, 2018). This
includes Woolworths Supermarkets and Thomas Dux stores in Australia (Countdown
Supermarket in New Zealand), liquor retailing with Dan Murphy’s, BWS and
Cellarmasters, department store Big W, and many others.  As retailers, Woolworths’ key processes are
purchasing, selling and distribution. Discontinued operations include the sale
of Masters and Home Timber & Hardware (both home improvement operations) and
Woolworths-owned fuel convenience stores to BP (Woolworths
Group FY17 Full Year Earnings). Woolworths works in close
cooperation with Australian cultivators and farmers to ensure that customers
have access Australian-grown products (Arli, Dylke, Burgess, Campus &
Soldo, 2013).

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Woolworths is
listed on the Australian Stock Exchange (listing name WOW) and has over 445,000
shareholders, as well as millions of indirect shareholders via superannuation
funds (Investors – Woolworths Group, 2018). The organisation is structured so that there is a Board of Directors
and Group Executive Committee, as well as Board committee to ensure that the
board maintains its responsibilities. The primary objective of the Board of
Directors is to increase, manage and serve the interests of shareholders whilst
ensuring the company is operating properly (About Us – Woolworths Group, 2018).
There are also committees established by the board related to auditing, risk
management and compliance, people performance, nomination and sustainability
(About Us – Woolworths Group, 2018). The Group Executive Committee is
responsible for overseeing managerial decisions, day-to-day operations and
reporting directly to the board of directors.

Woolworths is one of the largest retailers in Australia, there is solid rivalry
from industry rivals, particularly Wesfarmers (Keith, 2012). One of the major
supermarket competitors is Coles (owned by Wesfarmers) and they are considered
a duopoly in the industry with a constant power struggle for market share (Keith,
2012). However, other supermarket competitors such as Aldi (known for cheaper
prices than the duopoly), Harris Farm and IGA have also increased their market
share in Australia as customers are choosing to shop more local and support smaller
independent businesses (Barrowclough, 2016). 
Competitors for other sectors include Vintage Cellars, Liquorland, Target
and Kmart – all subsidiaries of Wesfarmers.

At the end of
Financial Year 2017, Woolworths had a profit in sales from continuing
operations (up 3.7% from 2016) of $55 billion showing an increase of sales in
food and liquor (up 4.5% and 4.3% respectively) (Woolworths
Group FY17 Full Year Earnings). However, overall,
earnings before interest and tax (EBIT) showed a loss of $2326 million as a
result of higher losses in Big W (Woolworths Group FY17 Full Year
Earnings). More so, there was a gain following the sale
of the home improvement operations and fuel stores which made the Group EBIT of
$2642.9 million.


and assess its business risk.

ASA 315.A38 states business risk can
have an effect on an entity generally leading to financial consequences, which affects
financial reporting (Gay & Simnett, 2015). To ensure that there are no
significant errors in the financial information, the audit has to be planned
and designed efficiently and specifically for the entity. During the plan and
design process, the auditor can make decisions about what to focus on and
generally, the information being reviewed is the information where there is a
higher chance of risk for significant misstatements (Gay & Simnett, 2015).
Different risks can arise depending on the industry that the entity operates in
because certain risks may only be applicable to certain industries.  Generally, they can be financial, operational,
reputational or compliance risks.

Business risks in the retail industry,
particularly with Woolworths who purchase, sell and distribute inventory – can
vary depending on the goods being sold. For supermarkets, theft and damage to
inventory, fraudulent returns and data breach are some examples of risks that
can occur.

Theft can happen in different parts of
the business – from internal or external sources – and can be difficult to
monitor or discover. For external sources, the use of self-serve checkouts
allows shoppers to scan expensive loose items (fruits or vegetables) for
cheaper products (i.e. scanning avocados as onions) (Brook, 2017). This results
in loss of income over time, and in 2017 it was estimated that Australian
retailers lost $4.5 billion a year due to theft (Brook, 2017). At Woolworths,
there is no notification when unexpectedly placing an item in the bagging area,
a loss prevention measure that has been enforced by Coles (Brook, 2017). This
can greatly affect sales and inventory at the end of the financial year. Internally,
similar theft can occur as it may be simple for store employees or staff to
take product and mark as damaged, spoilt or unfit for consumption or use. For
example, a staff member was found to steal thousands of dollars in groceries
for 6 months before being noticed by another staff member (Fowles, 2016), but this
was unnoticed by management (particularly those in charge with inventory and
stocktake) or sales during the time.  This
could be a common occurrence over hundreds of stores which represent staff
dishonesty in terms of stealing cash or goods, which over time can have
significant effects on potential cash flow and revenue (Philp, 1995). This is a
financial risk which results in a financial loss, as well as operational risk
where staff has had an effect on the day-to-day operations of the entity. Auditors
will want to look at different areas of cash flow (i.e sales and returns, as
well as inventory accounts) to see if there are any anomalies or cause of
concern in the financial reports for these areas.

Another business risk is damage to
inventory. Power outages or environmental and electronic hazards can cause some
inventory to spoil or damage. If this occurs, these losses must be accounted
for accurately and noted in the reports, especially if quantities are large
(i.e. fire in one of the central warehouses). This would need to be disclosed
in the financial reports and Inventory accounts affected would need to be
adjusted. This is a financial risk as there is financial loss in the inventory
that is to be written down, as well as operational risk as this can interrupt
the entities core processes with costs of fixing the problems and prevention of
orders being delivered, resulting in loss of income.

Fraudulent returns are a common
occurrence that can be difficult to monitor – particularly due to competition
in the retail market (Philp, 1995). This occurs hand in hand with theft, where
a product is stolen from the store and returned for full refund, but is also
done using fraudulent receipts. For example, a woman was found to use fake receipts
to get store refunds from stolen items and would be credited the money (SBS
Online, 2015). This can have significant repercussions with inventory and sales
as it can be difficult to monitor and differentiate between authentic and
fraudulent returns. Retailers can lose twice with this risk – when stolen and
then when refunded – which can result in mark-ups for losses this may result in
(Philp, 1995).

Another risk seen commonly due to
technological developments, is data breaches resulting from hacking of credit
cards via online website or app shopping or through in-store credit card and
Eftpos systems. One example is a leak in $1 million worth of gift cards where customers’
names, email addresses and redeemable codes for the gift cards were emailed
accidentally (Visentin, 2015). Similarly, customers faced a glitch where money
was withdrawn from their accounts and old transactions were reprocessed, which
led to customers being concerned about the security of their bank details
(Armitage, 2017). The processing error was due to the payment processor company
Cuscal (Armitage, 2017), however, Woolworths customers who were affected blamed
the entity for the data breach. This is not only a financial risk of loss of
inventory and income, but also a reputational risk where customers may be vary
to return to your business and there is an immediate loss of income and
negative publicity. This can also be considered a compliance risk as website
security, data protection and confidentiality rules were breached, which can
negatively impact the entity.