Audit Planning is an Iterative and Continual Process

Question: Write an essay on Audit planning. Answer: Audit planning is an iterative and continual process that encompasses devising a comprehensive audit strategy for the engagement and analysing the various risks and planning the risk management procedures (Public Company Accounting Oversight Board, 2016). The nature and process of audit planning are closely related to the functionality and complexity of the organisation under consideration. In this report, an audit plan has been drafted for Woolworths Limited, an Oceania-based retail chain and Qantas Airways Limited, an Australian airline. Woolworths Limited manages some of the Australias most trusted retail brands. It offers a range of portfolio including apparel, food and drinks, petrol, home solutions, hotels and financial services (Woolworths Limited, 2016). The Australian retail industry is primarily affected by macroeconomic factors and consumers' willingness to pay. Low-interest rates along with modest GDP growth have positively affected the disposable income and expenditure of the consumers (Ferrier Hodgson and Azurium, 2015). On the other hand, the rise in unemployment and rapid decline of AUD is taking a toll on the retail sector margins. The coalition government has imposed a hefty tax burden to tackle the national deficits and it has also withdrawn government subsidies from various industries. The online retail space in Australia is booming at a faster pace compared to the overall retail industry. In spite of the geographic isolation of the Oceania region and the bullish view towards local brands, foreign r etailers have shown interest in the Australian retail space and this has increased competition. GAP, HM, Costco, Zara, Top shop and many others have stepped in and challenged the local retailers for market share. The technological advances in the consumer purchase cycle have the capability to reshape the industrial and competitive landscape further as omni-channel retailing is becoming more and more relevant in the retail industry. Inherent risk Justification Assertion and ledger account(s) impacted Audit procedure/task Operational risk The KPIs got affected due to the alliance between Woolworths and Caltex, the reducing average fuel sales price and not-so-promising trading figures in food and liquor and general merchandise in Australia. Sales revenue decreased by 0.2%. The cost of Doing Business (CODB) going up by 42 bps due to dip in sales growth resulted from the Woolworths-Caltex alliance (Woolworths Limited, 2015). Analytical procedures and inspection of records and assets(Association of Chartered Certified Accountants, 2016) Market risk The company is facing increasing competition from incumbent rivals and new entrants in the retail industry. Dilution or damage of Woolworth's brands, global economic disruption, and failure to effectively hedge against adverse fluctuations in the exchange rates or interest rates pose a significant risk. The Existence and Valuation assertions are impacted. Fluctuations in profitability indices can be a suitable KPI for this risk. Observation of market trends and competitive retail landscape, recalculation and re-performance of the brands Strategic risk Woolworths' retail chains may be negatively influenced if the customer demands are not properly met by customer value proposition. This could also impact results from future growth prospects and operations. Also, the profit margins may be compromised if Woolworths go for acquisition or divestment activities and face unforeseen liabilities from these activities The Existence and Valuation assertions are impacted. Fluctuations in profitability indices can be a suitable KPI for this risk. Observation of technological trends and competitive retail landscape, recalculation and re-performance of the brands An analytical review of the annual report of Woolworths suggests that the alliance with Caltex has negatively affected the company's profitability indices. Also, the company is planning to return 72% of its net profit to the company's shareholders in the form of $1.8 billion as dividends. This implies that the company is not having additional expansion or consolidation projects in mind and hence it does not require cash in hand. The company has been struggling in Australian supermarkets and this is due to the increased competition and price wars although the company stood firm in keeping its rates fixed when faced with the challenges.antas Airways Limited is the largest airline in Australia regarding fleet size, international flights as well as destinations (Qantas Airways Limited, 2016). The airline has performed strongly in 2014-15 since coming back from the global economic crisis in 2009. Qantas have consolidated their leverage ratio by reducing debts in 2014-15. It has also incre ased liquidity aspects and group-wide return on invested capital (ROIC) to 16% (Qantas Airways Limited, 2015). Inherent risk Justification Assertion and ledger account(s) impacted Audit procedure/task Liquidity risk Liquidity risk is the risk that Qantas may encounter in coping up with obligations related to financial liabilities. The Qantas Group proposes to manage this risk by fixing minimum liquidity level as objective. This ensures long-term obligations achieved in relation to forecasting present cash inflows, maintaining access to multiple additional sources of funding that include standby facilities and commercial paper, and managing maturity profiles. Cash flow statements will undergo fluctuations due to debt retirements or acquiring new shares through stock purchases in open market transactions. Analytical procedures and inspection of records and assets Market risk The company faces risk from the areas of market fuel price, foreign exchange and interest rate. Interest rate risk refers to the risk pertaining to the future cash flows of a financial instrument due to fluctuations in interest rate in the market. This will also fluctuate due to change in foreign currency exchange rates which are quite relevant to Qantas' international operations. Change in Aviation Turbine Fuel (ATF) costs will also affect the profitability of the company. The Existence and Valuation assertions are impacted. Qantas group has assets and liabilities in various currencies and exchange rate fluctuations will hamper the balance sheet. Observation of market trends and competitive retail landscape, recalculation and re- performance of the brands Credit risk Credit risk is the projected loss from an account transaction when the counterparty defaults during the period of the transaction or on settlement of the account. In this context, the cost to replace existing operations, when counterparty defaults, is known as credit exposure. Transactions through trade-debtor counterparties and other financial asset counterparties Analytical procedures and inspection of records and assets As per the systematic review, the Qantas group follows a financial framework with particular objectives. It aims to maintain an optimal capital structure by minimising the weighted average cost of capital. The company has achieved this by reducing $1 million debt in 2014-15 but keeping the same capital structure with increasing cost of operations and international expansion can pose a significant challenge. 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