Harvey Norman Holding Limited - Example

Harvey Norman Holding Limited Student’s Name: Instructor’s Name: Course Code and Name: University Date of Submission: Harvey Norman Holding Limited Executive Summary Audit risk relates to the risk that an auditor would possibly not identify intentional miscalculations or errors in their responsibility of reviewing companies’ financial statements. Harvey Norman Holding is not an exception from audit risks that are critical to users of their financial statements. Audits are supposed to review financial statements with a view of giving a qualified or unqualified opinion. Therefore, fraudulent misstatements that are material to the financial statements may be integrated in the financial statements based on the acceptable accounting standards, and may not be identified during an audit. Therefore, the aim of this report is to critically analyze Harvey Norman’s external and internal environment, operations, and strategies to identify potential audit risks facing the company. The report would also analyze the current financial reports for Harvey Norman with the aim of identifying the audit risks. Principle sources of Harvey Norman Holding Company’s Revenues Harvey Norman operates an Omni Channel strategy that diversifies the company’s operations which act as the principle sources of revenue for the company (Harvey Norman Holding Limited 2012, p. 5). The integrated operations include franchise, property, retail and digital operations. The company undertakes these operations in a variety of countries where their ownership ranges from wholly owned to joint ventures. The ownership is critical to the determination of revenue sources as they have a share in profits or losses and even dividends in the variety of ventures. One of the primary sources of Harvey Norman’s revenues is the franchise the business operates. Independent franchisees generated $4.83 billion in sales revenue in the financial year 2012 (Harvey Norman Holding Limited 2012, p. 6). In general, the amount from the franchise portfolio was generated from franchise fees earned from the independent franchisees. The property portfolio was the other revenue source where revenues are earned in the form of rent from the property either owned or leased by the company. Due to the integrated approach in the preparation of company’s books rent revenue earned by the company is integrated in the revenues from the independent franchises as the stores are first occupied by their franchise that attract superior third party tenants. However, rent revenue received from the independent franchisees amounted to $222 million (Harvey Norman Holding Limited 2012, p. 9). Rent received from third parties amounted to $50 million in the same financial year. The retail segment of Harvey Norman Holdings is the other revenue segment whose revenue is generated through the sale of the company’s products. The retail segments after consolidation generated $279.66 million in sales revenue for the year 2012. The other revenue source is the non-franchise retail segment that is wholly owned by the company whose sales revenue amounted to $106.26 million in the year ended June 2012. Finally, the other revenue source is in companies where Harvey Norman Holdings has joint ownership where revenue is eared in form of the share of net profits of the joint venture entities, which amounted to $13.742 million. The analysis of the primary sources of Harvey Norman is shown below: Source 2012 $‘000 2011 $‘000 IINDEPENDENT FRANCHISES Franchise fees 690,141 750,000 Rent 222,586 204,181 Interest 32,909 34,292 Total independent franchise revenue 945,636 989,036 PROPERTY REVENUES Rent 50,492 44,219 JOINT VENTURES REVENUES Share of net profit of joint venture entities 13,742 17,888 Share of joint venture property revaluation - 158 Total joint venture revenues 13,742 18,046 Harvey Norman Operations As mentioned above, the company employs an integrated strategy to their operations. The company separates its operations in terms of segments that work independently and also integrates on some aspects to gain competitive advantage. The operating segments include the property, retail, franchise and digital operations. The franchise segment consists of franchisees such as Harvey Norman, Joyce Mayne and Damayne. The franchises are responsible for the retailing the company’s brand to the markets where they operate namely Australia and overseas markets in Asia, New Zealand, Ireland, Slovenian and Croatian markets. The franchisees drive the rent income for the property segment of the company’s operations. This segment is responsible for the construction or leasing of buildings that usually house the three franchises. The company also has retailing operations in Australia that are separate from those of the company’s three franchisees. Competitors and Market Harvey Norman Holding Limited sells customer furniture, electronics, computers, bedding and flooring in more than 265 stores in New Zealand, Australia, Asia, Ireland and Slovenia. From the products mentioned above that the company deal in it is placed in a multi-sectorial market mostly the information technology market and retailing market. However, the retailing market takes dominance for this report. The major competitors of the company in the Australian market and the retail market by extension include Woolworths Limited, Davis Jones Limited and Myer Holdings Limited. Harvey Norman currently takes pole position in the retail industry a position they have held for many years now. However, the market dynamics have seen the company lose market share in the retail industry due to intense competition from the three competitors. The Omni Channels strategy has ensured that the company maintains market leadership due to diverse industries that the company. The digital segment has been performing well cushioning the retail and franchise segments. Also the property portfolio which amounts for about 50% of the company’s assets has been critical to the current market share position. Regulations affecting Harvey Norman’s Operations Harvey Norman is regulated by both federal and local laws which affect how the company’s operations in the Australian market. There are both internal and external regulations that affect the company’s operations. The internal regulations are within the control of the company but the external regulations are industry wide regulations instituted by the government and are beyond the control of the company. An example of internal regulations is the company’s code of conduct that every employee has to comply with. Its scope also covers the suppliers who deal with the company. The code of conduct is a tool used by the company to ensure integrity in the operations of the company as it increases accountability and reduces conflict of interest among employees in relation to particular contracts and operations on a day-to-day basis. External regulation relate to legislations that are enforced by the government in Australia. One of the legislations is the Trade Practices Act that is a competition and consumer law that regulates competition among players in the industry as well as protects the customers. The Consumer Law in Australia assures consumers some remedies when goods do not consumer with consumer guarantee provisions such as when the goods are found to be of low quality and fall short of the purpose for which they were sold. This law has the effect of introducing legal action from customers as have the right to question the quality of the company’s products. Specifically, the Trade Practices Act bans conduct such as resale price preservation, abuse of market power and price fixing practices that are considered anti-competitive conducts by retailers and manufacturers. The law also prohibits misleading conduct and establishment of standards for services and goods. These laws are material to the operations of the company as they may affect the bottom line of the company. The other regulation that may have an impact on Harvey Norman is the Environment Protection Act that requires Australian companies to embrace clean production technology, ensure they recycle their materials and embrace proper waste management to conserve the ecosystem. The company is also required to ensure its associates, employees, clients and supplier promote the environmental best practice in their operations. The company therefore has to comply with the environmental requirements so as not to attract fines and penalties or even censure of their operations. The Environment Protection Act therefore affects the company’s operations directly as well as their relation with their stakeholders. However, from the financial report published in 2012, the company did not attract any penalties or legal action in relation to the failure to comply with the regulations directly related to Harvey Norman. PEST Analysis The best analysis is a method that the company may be able to identify the prevailing situation of the macro environment where they operate. The macro environment is critical as it has material effect on the company either in the short run or long run (Henry 2008, p. 7). The PEST analysis specifically examines the political, economic, social and technological environment that is beyond the control of Harvey Norman yet has material influence to their finances. The political factors take the form of government policies or directives that affect the business environment in Australia. The recent elections in Australia may have had an impact on the company’s as the campaign period was extended and this heightened political tensions as debates raged on which was the most favored coalition. This state of the political environment had a material impact on the company as it increased the level of uncertainty and the business environment a ‘wait and see’ attitude. Also a comment by Senator Joyce during the election campaign that touched on the board membership of Harvey Morgan had a material impact on the company in relation to corporate governance guidelines as laid out by the Australian Securities exchange (Bester 2010, p. 6). The government is also in the process of increasing regulation of the electronic equipment sector of the economy. The regulations are aimed at protecting customers from low quality products. This may affect the company’s bottom line as it also retails electrical equipment’s. With regards to the economic environment, the Australian economy is affected by global economic conditions as it also trades with other countries of the world. The Eurozone crisis which affects the business operations of the company in Australia and overseas as it has led to individuals lacking disposable incomes to spend on luxuries. This has made customers to be price sensitive and this aspect may affect the pricing strategy of the company for them to survive in an environment where the customer behavior is changing. The financial crisis in the U.S has affected the economic situation in Australia as interest rates are high as well as the rate of inflation which has the impact on financing and commodity prices respectively. The high interest rates have an impact on the companies in that they have to apply for more expensive financing from commercial banks for their investment programs. The high inflation rate affects the company’s prices as it dilutes the value of the products and therefore affecting the profit margins of the company. The exchange rates have also not been spared as they have also increased and affected the Australian dollar and this may affect foreign earnings for the company which may reduce due to a strong Australian dollar against world currencies. However, the Australian economy is predominantly a mining economy which has been experiencing a boom and it would have an impact on the sales revenues of the company in the stores operating around the mining fields in Australia. With regards to the social environment, the Australian population is extremely diverse and the ASX has instituted regulations that require companies to embrace the diversity exhibited in Australia in terms of membership of company’s boards and workforce. This affects the recruitment policy of the company as they have to comply with the regulations regardless of the qualifications required. This may affect the staffing expenses incurred by the company. Finally, the technology landscape has been changing at a very rapid rate and with regards the retail industry, the business is shifting to e-commerce where online sales are dominating the industry. This has led to the dominance of e-commerce sites like Amazon and EBay that have directed affected Harvey Norman’s business operations even though the company has an e-commerce platform. The dominance of the two websites and the emergence of others mean the company has to undertake an aggressive marketing campaign to promote their online presence to counter the competition and this will have the effect on the expenses incurred by the company. Audit Risks Audit risks are risks that are inherent when an auditor fails to identify errors and material misstatements in financial statements for a company. These are the material misstatements that an auditor may not identify even after carrying out both substantive and analytical tests in the financial statements of the company. From the analysis of the operations, internal and external environments of Harvey Norman Holdings various types of audit risks may be in the financial reports of the company. The audit risks include inherent risk, controlled risk, detection risk and residual risk (Rittenberg 2010, p.5). Inherent risk relates to the risk that the financial statements are susceptible to a material misstatement. It relates to misstatements in a class of transactions, and account balances. Inherent risk may be affecting the foreign exchange transactions for the foreign stores operated by the company. This is due to the difference in currency in the nations where the stores are situated. The sales revenues from those oversea stores may have material misstatements that the auditor may find it hard to identify. The other aspect of inherent risk is inventory figures for electronic equipment in the stores that were restructured and foreclosed. In practical situations electronic equipment loose value faster due to changes in technology at it may therefore be hard for the auditors to detect the errors in the value of inventories as it may take time before the changes are effected in the balance sheet. Control risk relates to the risk that the company’s internal control systems may also not identify a material misstatement. The company’s digital system does not have proper controls or any controls on input components of the systems. The customer is required to input their orders. Also, the supply chain management systems my not reflect the discounts from suppliers or record purchases at the catalogue price which has the impact of increasing the value of inventories and cost of sales. Detection risks are those risks that the auditor may not detect a material misstatement even after carrying out the necessary tests. This can be reflected in revenues from joint ventures where the auditor may not have adequate information about the transactions of the joint venture. Residual risks are those risks that exist in the internal control systems even after controls have been enforced to mitigate the inherent risks. Audit of Property, Plant and Equipment and Investment Property Auditing of PPE is very critical as it affects many components of PPE that may pose the company to business risks and affect the credibility of the financial statements. The first procedure is to compare the balances on the trial balance with those of the individual accounts of PPE for the company (Puncel 2007, p. 6). For proper auditing of items of PPE, the audit team should also have a copy of the assets register for the company. The assets register would contain the cost of the PPE and the accumulated depreciation attached to the items. Also, an analysis of accounting policies relating to depreciation and property, plant and equipment should also be carried out so as to determine the following: 1. A description of the accounts by classification 2. Opening balances at eh beginning of the year. 3. Depreciation expense for the period. 4. Additions of PPE during the year. 5. Disposals of PPE for the period. 6. Revaluation gains or losses after adjustment of PPE 7. Total accumulated depreciation for the period. 8. Balances at the end of the period. Finally, the audit team should determine whether the accounts are prepared based on Australian Generally, Accepted Accounting Standards. List of References Bester, C 2010, “Barnaby Sounds Mine Tax Warning”. The Daily Mercury. Mackay, Australia. Retrieved from https://www.google.co.ke/search?client=opera&q=bester+2010+senator+Joyce&sourceid=opera&ie=utf-8&oe=utf-8&channel=suggest Harvey Norman Holding Limited 2012, 2012 Annual Report. Harvey Norman Holding Limited, Retrieved from http://www.harveynormanholdings.com.au/pdf_files/2012_Annual_Report_Final.pdf Henry, A 2008 Understanding strategic management, Oxford University Press, Oxford. Puncel, L 2007, Audit Procedures 2008. Cch Inc., Columbus, Nebraska. Rittenberg, LE, Johnstone, KM & Gramling, AA 2012, Auditing: a business risk approach. South-Western Cengage Learning, Mason, OH. Read More