Section I: Understanding the Business

I.A. Organization

PT. Matahari Department Store Tbk is the largest department store in Indonesia.
Matahari opened since October 24, 1958 in Pasar Baru District, Jakarta. Since then, Matahari
introduce and open the modern department concept in 1972 and has become the Indonesias
leading retailer of affordable fashion, accessories, beauty, and home-ware with 142 stores in
66 cities that provides employment for over 50,000 people in Indonesia, partnering with
approximately 850 trusted local suppliers as well as international suppliers. Matahari became
separate entity from Matahari Putra Prima and was renamed as Matahari Department Store in
2009. Furthermore, Matahari exercise Good Corporate Governance in which defined as the
mechanism and management structures within a company to create good relation between the
management, board of directors, and its shareholders.

Matahari committed to uphold highest standard of Good Corporate Governance and

assuring that the company applying all corporate governance principles which are
accountability, transparency, responsibility, independency, and fairness because Good
Corporate Governance plays a significant role in market economy as it able to influence the
investors confidence to invest in both companies and overall business environment. Other
key elements of good corporate governance framework that Matahari exercises are strengthen
its internal control framework, an audit committee, internal and external audit, risk
management, a whistleblowing programs, full and timely disclosure of information online,
and a proactive Corporate Secretarial function.

I.B. Business Process

The companys main process is the process that describes the activities undertaken by
the company to produce products or services that will be offered to the consumers. In
Matahari Department Store, the business process include supply chain management and
trading activity. Supply chain management process in Matahari Department Store divided
into primary activities which consist of inbound logistic activity which is the process of
procuring and keeping the inventory from the suppliers, operations activity, internal
distribution activity as the activity in which the inventory being distributed from the storage
to the display rack, as well as services activity to the customers. Then, the support activity in
Matahari Department Store are procurement of supplies, technology development, human
resources management, and firm infrastructure such as accounting, finance, and strategic
planning that will evaluate the performance of the primary activities so that it can be more
effective and efficient. Besides, trading activity is other process in Matahari Department
Store that involving the customers, service workers (SPG), cashier, and security in one
activity. Moreover, Matahari Department Store also have supporting business process such as
price, product, marketing strategy, etc. By having the strategies in operating the business,
Matahari will be able to gain loyal customers, increase the sales, and brand awareness.
Matahari always gives unique and special offers to the customers such as great sale in holiday
session like Idul Fitri and Christmas sessions or buy 2 get 1 offer, etc. Matahari also differ in
products and brands since they provides fashion for all gender and age, accessories, etc.

I.C. Business System

The business system within Matahari Department Store is start from the head office
up to logistic-operational outlets. Matahari head office consists merchandising team, financial
management team, human resources management team, etc. Merchandising team division
assigned to look over the trend of fashion in the market, design purchasing and selling
schedule, decide what products need to be purchase and marketed in Matahari. Financial
management division in charge to manage all financial activity within the company such as
managing financial budget revenues and expenditures, management financial risk and
managing taxation matters within the company.

I.D. Business Risk

As retail business, Matahari Department Store has its inherent and controllable risks.
The risks are risk from suppliers, risk from the competitors, changing taste and preference
risk, human resources risk, government regulation risk, as well as risk from fire occurrences.
Supplier risks is related to companys dependency with the supply of goods from the
suppliers, so that in case the shipment of goods delayed the business process in Matahari may
be disturbed. Then, another risk is risk from the competitors in which relates to the presence
of the competitors engaged in the same business industry like Matahari. The intense
competition between the retailers may lead to the potential disruption to the company.
Changing taste and preference risk is another risk that can be classified as inherent risk for
retail companies because this risk plays a significant role in this business industry. For
instance, Matahari might plan on sold all the model A shoes in year 2016. However, there
is new model of shoes come up in the mid-year of 2016 and people are prefer to have this
B model of shoes since many of their idol use it. As a result, model A shoes might not be
able to be sold out. Human resources risk is that might happen if the relationship between HR
Company is not built up well that affect the social inequalities that may result in poor
company performance. Finally the last risk is government regulation risk, regulations issued
by the government relating to business activities will influence the business activities. If the
company is not able to overcome the obstacles result from government regulations, then it
will cause the losses for the business.

I.E. Control

Control is defined as the method within the company used to ensure the integrity of
financial and accounting information, assure that the company is on track with its operational
and profitability objectives, as well as to transmit management policies to entire organization.
As one of leading retailer in Indonesia, Matahari Department Store have their own risk
management policy to minimize and control potential risk that might disturb the company to
achieve the objectives, as well as to guarantee the sustainability the business growth. The
designed policy involving all the parties within the business to actively participate to
controlling the risk. Moreover, Matahari Department Store implemented Risk Control Self-
Assessment (RCSA) to every business process by analyze, identify, measure, and control any
potential risk exist in the company and implement the strategies to mitigate any potential
disadvantages in operational, financial, business, and reputation. To be actively function, the
risk control is reported to the Management and Audit Committee periodically.

Section II

II.A Audit Planning

Audit planning is defined as the process in which the strategy is designed to obtain
sufficient appropriate evidence for the circumstances as well to avoid misunderstanding with
the clients. There are eight major parts in audit planning which are accept client and perform
initial audit planning, understand clients business and industry, access clients business risk,
perform preliminary analytical procedures, set the materiality and access acceptable audit risk
and inherent risk, understand internal control and assess control risk, gather information to
assess fraud risk, develop overall audit plan and audit program. The auditors have to
understand thorough the business and industry as well as the internal control of the company
being audited in order to assess the risk of material misstatement in financial statement that
cause either by error or fraud, as well as to understand the risks associated with the industries
since it may affect auditors assessment. Besides, the preliminary analytical test procedures
assist the auditor to better understand the business and risk that the company being audited
had. One of the way is by comparing the ratios such as liquidity activity ratio, short-term debt
paying ability, profitability, and other ratios of the company with its competitors to be used as
the indication of company performance and to identify the areas that have high risk of
material misstatement. Another way to do preliminary test to understand business is by
looking at the time series analysis of the company. Table below shows the time series analysis
of Matahari Department store from year 2010-2014.

Ratio 2010 2011 2012 2013 2014 Averag

e
Liquidity ratio
Current ratio 1.05 0.92 0.80 0.90 0.84 0.90
Quick ratio 0.77 0.65 0.56 0.52 0.46 0.59
Activity Ratio
Inventory turnover 2.93 3.45 3.68 3.30 3.01 3.27
Average collection period 5.88 9.29 8.46 5.68 8.15 7.49
Total asset turnover 0.85 1.07 1.08 1.38 1.44 1.16
Debt Analysis
Debt ratio 2.41 2.12 1.66 1.27 0.95 1.68
Times interest earned 1.29 2.72 2.99 4.08 4.29 3.07

ratio
Debt to equity ratio (1.71 (1.90 (2.52) (4.76 18.19 1.46
) ) )
Profitability ratio
Gross profit margin 1.13 1.20 1.17 1.08 1.03 1.12
Operating profit margin 0.36 0.48 0.50 0.45 0.43 0.44
Net Profit margin (1.84 0.18 0.24 0.28 0.29 (0.17)
)

The result shows that the liquidity ratio of Matahari Department is commonly decreasing
although in year 2013 it was slightly increase but then decrease again in 2014. The decreasing
in liquidity ratio happen because the increase in current liabilities is not proportional with the
increase in current assets so that the companys ability to pay short-term debt is declining
every year. Then from activity ratio there is inventory turnover is decreasing from 2012
onwards since the company holds more inventory and need more time to collect its
receivable. As a result, the auditor is likely to focus on liquidity activity ratio since it is likely
to be assessed as high inherent risk.

II.B. Test of Control

In developing audit plan, auditors performed test of control to determine the financial
statements, detect the risk within the company, as well as to find sufficient evident to support
the assessment. Understanding the internal control of the company is very essential since it is
used to access control risk for each transaction-related audit objective. Test of controls will
used some types of evidences such as make inquiries of appropriate client personnel,
examining the documents, records, and report, observe control-related activities, as well as
re-perform companys procedures. Besides, system walkthrough in which defined as the
procedures to gain better understanding to determine whether control of the company are in
place will be used by the auditors by looking at the specific transaction and follow the entire
process of the transaction. Test of control also used to analyze whether the control within the
company are effective or not. In this case, Matahari Department Store have the key elements
regarding its internal environment to ensuring the implementation of goals within the
company. First, Matahari Department implementing the ethical code in which respect a good
management principles which are accountability, transparency, independency, responsibility,
and fairness. In addition, Matahari Department Store have compliance and risk committee
that assign to review and assess the adequacy of risk management framework, policies,
programs to identifying, measuring, monitoring, and controlling risks as well as extent to
which that operating effective. Then, they also have to reviewing the development and
implementation and effectiveness of company compliance program and internal control,
monitoring and ensuring that all the department are comply and on track with the
implementation of standard operating procedure.

Furthermore, as we have known that Matahari Department Store have the control
inside the company, the next step is to access whether the control function or not. The auditor
may determine the control of the company functioning well or not by having test of control
by testing sample of transaction. There are several typical test of control that can be used for
Matahari Company which are examining the sample of sales invoice and compare customer
order to authorized credit limit (re-performance), examine the sample of duplicate sales
invoices to know the one that supported by an authorized shipping document and approved
customer order (documentation), observing whether the shipping documents are forwarded
daily to billing and observe when they are billed (observation), account the sequence of
shipping document and trace each to sales journal (documentation and re-performance),
examining the sample of daily batches, recalculate the shipping quantities, and trace totals to
reconciliation with input reports, examining the sample of sales invoices and agree prices to
authorized computer price list and review changes to price file throughout the year for proper
approval, Observe whether statements are mailed for 1 month and inquire about who are in
charge to mailing the statements.

II.C. Test of Substantive

Substantive test is the procedures of test in which designed to access dollar

misstatement (monetary misstatement) that affect the accuracy of financial statement. There
are three types of substantive test which are substantive test of transaction, test of details
balances, and substantive analytical procedures. Substantive test of transaction is used to
determine whether all transaction- related audit objectives have been satisfied. The
transaction-related audit objective are closely related with managements assertion regarding
classes of transaction. Besides, the transaction-related audit objectives is also divided into
two categories which are general transaction-related audit objectives and specific transaction-
related audit objectives. Both categories are applicable to every class of transaction, but
general transaction-related audit objectives are stated in broad terms while specific
transaction-related audit objectives are stated in terms to specific class of transactions such as
sales transactions. However, once the auditors established general transaction-related audit
objectives, it can be used to develop specific transaction-related audit objectives for
transaction that being audited. The six general transaction-related audit objectives are
occurrence (recorded transaction exist), completeness (existing transaction are recorded),
accuracy (recorded transaction are stated in the correct amount), posting and summarization
(the recorded transaction are properly included in master file and correctly summarized),
classification (transaction in the journal are properly classified).

Another types of substantive test is test of detail balances that focus on the ending
general ledger balances in income statement as well as balance sheet. This may test may
include confirmation of customers balance for account receivable, physical examination of
inventory, and examination of account payable of suppliers. In Matahari, the procedures used
to do substantive test are analytical procedures, inspecting, confirming, inquiring, counting,
tracing,
vouching, observing, and re-performing. Analytical procedures involving the use of financial
ratios, common size statement, as well as comparing the actual and budgeted amount for
statistical sampling. Inspecting involves scrutiny of documents, records, as well as physical
examination of tangible resources. Confirming is the type of procedures that will enable the
auditors to gain important information from the independent source outside the entity being
audited. Inquiring is the procedures that require written and oral inquire that directed to the
management or employee or even the outside sources such as attorney in order to obtain the
collaborating evidence. Counting procedures applied when there is physical counting of
tangible resources such as cash and inventory. Tracing is the procedure used by auditors to
select the documents related to the transactions and assuring that the information is recorded
properly and extremely useful to detect understatement in accounting records. Vouching is the
procedure to select the entries written in accounting records and look over the document that
support the entries, this procedures is especially useful to detect overstatement in accounting
records. Observing is watching and witnessing the activities performance, and the last is re-
performing which is repeating the calculations and the reconciliation made by the entity
being audited.

Section III: CONCLUSION

In a nutshell, Matahari Department Store as the leading retailer in Indonesia have its
own inherent and controllable risk. However, in order to minimize the risk they apply good
corporate governance code to transmit management policies to entire organization as well as
implementing internal control and involving Risk Control Self-Assessment (RCSA) by
analyze, identify, measure, and control every business process that have any potential risk and
look over the strategy on how to minimize the risk. In addition, the test of control in Matahari
Department Store includes examining the sample of sales invoice and compare customer
order to authorized credit limit (re-performance), examine the sample of duplicate sales
invoices to know the one that supported by an authorized shipping document and approved
customer order (documentation), observing whether the shipping documents are forwarded
daily to billing and observe when they are billed (observation), account the sequence of
shipping document and trace each to sales journal (documentation and re-performance),
examining the sample of daily batches, recalculate the shipping quantities, and trace totals to
reconciliation with input reports, examining the sample of sales invoices and agree prices to
authorized computer price list and review changes to price file throughout the year for proper
approval, Observe whether statements are mailed for 1 month and inquire about who are in
charge to mailing the statements. Finally, the substantive test procedures used in Matahari
Department Store are analytical procedures, inspecting, confirming, inquiring, counting,
tracing, vouching, observing, and re-performing.

References
Arens, Alvin A., Randal J Elder and Mark S Beasley. Auditing and Assurance Services. 14th
edition. New Jersey, n.d.
Unknown. n.d. November 2016. <http://ir.matahari.co.id/phoenix.zhtml?c=171562&p=irol-
homeprofile>.
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perusahaan>.