Auditing of Dominos Pizza Enterprises Ltd - Case Study Example

Individual Research Report Assessment Name Institution Date Individual Research Report Assessment Introduction The focus of this report is on auditing of a selected article on a specific company’s activities. The company in this report is Domino’s Pizza Enterprises Ltd. Domino’s is the biggest pizza chain within Australia and among the largest Pizza brand worldwide. However, the company has been facing various problems as reported by various media articles. The selected article is “Domino's needs to stop hiding behind averages”, published on 17th February 2017. Australian auditing standards will be applied to deconstruct the information provided in this article and audit the company. Australian auditing standards (AAS) sets up requirements on auditing. Discussion and Selection of the Media Article The article presents various issues in the company (Domino’s) that need to be audited. The main concerns are the underpayment, non-payment of wages as well overworking of the workers. In addition, the article clarifies that the company fails to pay for all hours worked for, underpaying penalties and also the company does not provide pay slips for the workers. There are also instances where workers, especially drivers are forced to use their own money to do the company’ deliveries and the company does not compensate them. This represents a defective compensation system by the company. The second main issue is the risk of financial statement fraud as portrayed by misrepresentation of the company’s financial status. According to the article, Domino’s is not only involved in fund hedging but also provides misleading information regarding its profitability. For example, in some of its financial records, the company claims that break-even for a store ranges between $15,000 and $21,000 a week in sales and average profit for a store ranges between $138,000 and $145,000 annually. However, this is misrepresentation. For example, Bathurst store was up for sale last year and documents indicated the store’s operating profits was $216,118 annually. However, key figures had been left and after inclusion of the figures the alleged profit dropped to $13,651 annually. Average figures are also equally misleading according to the article. Nominated Key Account No. 1 Wages Expenses Expenses on wages and payment of the workers represent a key account for the company. This is because this represents a fraud risk due to the defective compensation system in the company. This is evident in Domino especially with the commission based on revenue that Domino uses to compensate its workers. Such form of compensation system creates a fraud risk known as bad debt expense. Consequently, any estimate that the company makes regarding the expenses on wages poses a fraud risk (Chan & Siu, 2010). Similarly, the article shows that at times employees are forced to work under circumstances likely to make them break the law, for example over speeding to do deliveries in order to be compensated and this presented a fraud risk. Australian Auditing Standards (ASA) Auditing Standard ASA 102 is one of the ASA applicable to the identified issue. This standard stipulates that auditors should comply with ethical requirements when conducting an audit. The relevance of this standard to the issue is that the company might attempt to compromise or coarse the auditor to conceal information regarding wages expenses and the under-payments that workers face in the company. As such, it is important for the auditor to be independent and comply with the ethical requirements that require an auditor to be independent, fair and just and uphold integrity during audit process (ASA, 2007). The second auditing standard applicable in the identified issue is ASA 260, which involves regarding the responsibility of the auditor to communicate the auditing report to those charged with governance. The relevance of this standard in the identified issue is that by communicating with those responsible for governance the auditor will be able to understand all the issues related to wages of workers (ASA, 2007). In addition, when the auditor upholds this standard, the auditor will involve for instance the accountants who are in charge of paying the workers and hence the auditor will obtain raw information and avoid material misstatement regarding the wage payment. More importantly, this standard will facilitate those responsible for governance to be provided with timely observations from the audit and hence this will enable them to make the necessary changes regarding under-payment of the workers and other wages’ problems in the company (Robert & Timothy, 2013). Prime Assertion 1 Accuracy: Accuracy involves amounts that ought to be recorded suitably and appropriate measurement and description of disclosures. In this regard, it is important for the auditor to audit the company’s expenses on wages to establish the exact figure and because these figure might have not be disclosed and recorded appropriately. Substantive Test of Detail The auditor will collect data from sources such as wages recordings, clock cards, payroll software, and payroll taxes to form an opinion on the company’s financial statement. This will help the auditor to obtain reasonable view on whether the financial statement have or do not have any material misstatement and in case of a material misstatement to determine if it is due to fraud or error (Pinkasovitch, 2015). Therefore, the auditor should consider the potential for fraud risk by auditing aspects such as; if workers are paid only for the work done; if wages are only paid to valid workers; if all wages are authorized; if wages are calculated correctly; and if wage transactions are recorded properly within the books of account (Pinkasovitch, 2015). Prime Assertion No. 2 Occurrence: The auditor should ensure that transactions that have been recorded have occurred and pertain to the entity. In this case, the auditor should validate whether the recorded wages have indeed occurred and at the recorded amounts. Substantive Test of Detail The auditor should collect the data from the employees. By collected data from the employees, the auditor will get first-hand information regarding their wages and the problems they face in regard to their payment. In addition, the auditor needs to collect the data from the company’s books of account in order to establish if the data collected from the workers correlates with the wages records in the company’s accounts. This will assist in determining if there is a fraud risk when it comes to the company’s expenses on wages (Antle, 2012). Nominated Key Account No. 2 Selling Visa Sponsors According to the article, Domino has been selling sponsorship. This makes the company liable of many offenses including possible visa fraud. The significance of this account is that Domino finances can be affected significantly because of possible fines and penalties. Normally, companies found guilty of visa fraud are charged with breaching of Foreign Corrupt Practices Act and face high penalties. Australian Auditing Standards (ASA) For the identified key account, ASA 315 is applicable. This standard involves identification and assessment of risks of material misstatement by identification of risks of material misstatement by understanding the company and its environment. This is because the article indicates that at times Domino is involved in visa sponsorship which may cost the company greatly and these costs may not be represented in the company’s financial reports (ASA, 2007). Performing risks of material misstatement is important to ensure that the company is not at any risk due to heavy fines and penalties results from maybe visa fraud (Fogartly et al, 2006). Auditing Standard ASA 220 is also an appropriate standard for the identified key account. This is because this standard addresses specific duties of the auditor when it comes to quality control for the audit procedures for the audit. In regard to selling visa sponsors, the auditor will have the role of assessing if the financial reports of the company were supported by evidence regarding how aspects such as penalties and fines due to the visa sponsorship affected the company’s finances. Prime Assertion 1 Occurrence: The auditor should ensure that all transactions and events have been recorded in the financial reports. The rationale for this is for the auditor to establish whether all transactions regarding fines and penalties have been recorded. Substantive Test of Detail The auditor will collect data from the company’s records for instance the company’s annual reports and accounting records. This will help the auditor in detecting if there is any manipulation or alteration of the company’s accounting records or supporting documents that were used to prepare the financial statements (Klaus & Martin, 2014). This data can help the auditor in detecting any financial information that was left out during financial repoting, for example fines and penalties resulting from visa sponsorship (Bertucelli, 2013). Prime Assertion 2 Completeness: This involves recording of all transactions and events. Therefore, the auditor should determine if any fines or penalties allied to visa sponsorship have been recorded. Substantive Test of Detail The auditor will collect data from the company’s internal controls as well as the financial reporting process in order to find out if indeed the financial misstatement due to some financial occurrences being left out and in this case the visa sponsorship. The rationale of the auditor investigating the company’s internal controls is because the management has the duty to adopt sound accounting policies in the company and to establish internal controls that should be embodied within the financial statements (Antle, 2012). In addition, the management has the responsibility of overseeing the financial reporting process and hence by the auditor investigating the financial reporting process the auditor can establish if defects in the reporting process are deliberate. Moreover, the auditor will be able to detect the role the management played in having the misstatements regarding the company’s financial status published (Beattie et al, 2001). References Auditing and Assurance Standards Board (2007). Australian Auditing Standards (AAS., Melbourne: Auditing and Assurance Standards Board. Antle, R (2012). The Auditor as an Economic Agent. Journal of Accounting Research. 20(2), pp.503-527. Bertucelli R. (2013). The benefits of captive insurance companies. Journal of Accountancy, 2(1). Beattie V, Fearnley, S & Brandt, R. (2001). Behind Closed Doors: What Company Audit is Really About. New York: Palgrave. Chan A & Siu K. (2010). The Mechanisms Underpinning Low Wages and Excessive Overtime in Chinese Export Factories. Journal of Critical Asian Studies. 42(2), p.167-190. Ferguson A. (2017). Domino's needs to stop hiding behind averages. Sydney: The Sydney Morning Herald. Fogartly J, Graham L & Darrel S. (2006). Assessing and Responding to Risks in a Financial Statement Audit. Journal of Accountancy. 1(1). Klaus R & Martin S. (2014). Misstatements in Financial Statements: The Relationship between Inherent and Control Risk Factors and Audit Adjustments. Auditing. A Journal of Practice & Theory. 33(4): pp. 247-269. Pinkasovitch A. (2015). Detecting Financial Statement Fraud. Robert L & Timothy B. (2013). Financial Statement Disaggregation Decisions and Auditors' Tolerance for Misstatement. The Accounting Review. 88(2), pp: 641-665. Rosett J. (2001). quity Risk and the Labor Stock: The Case of Union Contracts. Journal of Accounting Research. 39(2). pp:337–364. Read More