Auditing and Assurance in Australia - Commonwealth Bank

This report analyzes the implementation of ASA 701 in the audit report of Commonwealth Bank in Australia. It discusses the main audit matters and their communication to the management. The report also highlights the hidden audit matters that should have been reported. Recommendations are provided for improving the transparency of the audit report.

Auditing and Assurance in Australia
2019

Commonwealth Bank
Executive Summary
The analysis revolves around the concept of ASA 701 that is newly implemented and based on
the communication of major audit matters in the independent audit report. It came into operation
aftermath global economic crisis. The report is based upon the banking industry and to
conduct the study, Commonwealth bank that is listed on the ASX is selected. The report sheds
light on the main audit matters of Commonwealth bank. The report initiates with the introduction
followed by the explanation of the main audit matter and the explanation.
2

Commonwealth Bank
Contents
Introduction.................................................................................................................................................4
Interconnection present between the audit report and ASA 701...............................................................4
The case of the Commonwealth Bank.........................................................................................................5
Matters that have been kept hidden by the auditors in the audit report but should have been reported
as main audit matters..................................................................................................................................6
Recommendations.......................................................................................................................................9
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
3

Commonwealth Bank
Introduction
One of the leading banking companies in Australia with strong market share is Commonwealth
Bank. The organization is a public listed company and ensures strong business in order to
generate revenue by conducting various operations throughout the year. The operations
conducted by the organization make it vulnerable to the statement that can be present in the
financial statements of the organization. Also in accordance with the principles, it is the duty of
an auditor to identify the risks that are associated to the financial statements of the organization
so that the users of the financial statement can be safeguarded from any kind of false or
misleading information present in the account of the company (Lapsley, 2012). It has been
clearly stated in the ASA 701 that an auditor needs to communicate all the auditing matters to the
management of the organization so that they can use their information to prevent themselves
from any kind of risks and further enhance the Goodwill of the company.
Interconnection present between the audit report and ASA 701
In accordance to them as a 701, it has been clearly stated that the main audit matters should be
conveyed by the auditor to the organization by preparation of an independent report which can
further help the organization to govern the business. The main audit matters are the points which
are most important for the decisions of an auditor so that clear the financial statement can be
created. The auditor is not relieved from his liability of performing the audit process even after
giving the declaration on the main audit matters that are affecting the economic position of the
organization (AUASB, 2015). Proper reasons also should be provided by the auditor to ascertain
the fact that the points are main audit matters and hence required by the organization to be
looked after carefully.
Hiding material information from the organization is not good for the business because it can
create problems in auditing procedures (Livne, 2015). Although financial information is used by
the stakeholders in order to determine the position of the firm that takes decisions of investment
that is to be made in the firm. Hence, it is necessary for the auditor to analyze all the points so
that any kind of manipulation in the financial statement can be computed (AUASB, 2015). All
the information and facts that were provided to the auditor are mentioned in the audit report that
4

Commonwealth Bank
can be accessed by various users for making their decisions. Manipulation of the financial
statement of the organization will not only period problems for the employees but also will
decrease the organizational performance because of which the profits of the organization will
decrease (Manoharan, 2011). The ASA 570 clearly represents the primary roles of the auditors
that are to be undertaken effectively in order to carry out the process of auditing ethically. The
standard also helps to determine the going concern concept of the organization and hence helps it
to stay within the framework of their corporate governance structure (Azim, 2013). The use of
such standards will also help the organization to ascertain the financial statements properly
because of which material information which are relevant in nature can be disclosed to the
stakeholders and other users of financial statements (Hoffelder, 2012). The organization should
also record the assets and liabilities based on this standard so that it can realize all the costs and
expenses that have been charged on them while calculating the net profit.
The case of the Commonwealth Bank
It was observed that the Commonwealth Bank has no fixed assets because all of them were sold
in order to conduct the business easily. The business sold its asset for increasing the capital and
further improves the profit by using the current assets. Hence, it is very important for the
organization to work in relation with the going concern concept so that it can earn profit and also
function properly at the same time. It has also been observed by the group that the situations like
this lead to problems while calculating the nominal value of the property asset that is being
warned by the firm on the basis of the market valuations and annual terms.
The assets of the organization revalued because of which they should be recognized in the new
value and also a comparison should be made with the previous income statement so as to
determine the efficiency of the organization to maintain its assets. Generally, it is noticed that
when an asset is disposed of, the amount collected from the revaluation reserve is settled with the
help of the profit that is being retained by the organization. Fixed assets like property, plant, and
assets need to be charged with depreciation and other impairment charges that have been
collected with the time because of which direct and incremental costs are being deducted from
them (Matthew, 2015). The announcement was being made by the company in its annual report
which stated that the organization was working in relation with the going concern concept
5

Commonwealth Bank
because of which all the above statements are relevant in nature. The basic meaning of the going
concern concept for an organization is to believe that the organization will work for an infinite
period of time in order to fulfill all the commitments, obligations and objects that have been
ascertained by it for conducting the business (CAANZ, 2016).
Matters that have been kept hidden by the auditors in the audit report
but should have been reported as main audit matters
It had been noticed that the Commonwealth Bank experienced a significant fall in the total
income when compared to the last few years. Also, the earnings before interest and tax were
decreased in the year 2017 when compared to the date of last year. The profit earned by it on
each share was decreased by 2.06% as compared to that of previous year. A decrease in sales has
been observed because of which the profit organization also decreased. This decrease was a
result of the changes in currency values over the period. The organization works on the award by
skill and hence the value of currency changes affected the overall business of the firm. The
constant increase and decrease in the selling prices also an important factor for the decrease in
sales. Hence, it is very important for the Commonwealth Bank in order to reduce the costs so that
the balance sheet can be improved and also all the matters can’t be mentioned in the audit report
because they are main audit matters that are needed to be assessed by the stakeholders while
making decisions .
Auditors of the organization are trying to hide information that can affect the organizational
structure of the organization. Also, this information can be used by the stakeholders for the
assessment of various investment decisions (Carson, Fargher & Zhang, 2016). Hence, the auditor
should make proper disclosure of data so that both organization and stakeholders can use the
information profitably. It is very important for the organization to enhance the safety measures of
the workers and the neighbors living nearby so that they can act socially and implement the use
of safety measures like fire safety measures for environmental improvements. The organization
should also try to keep all the research and findings in a proper manner so that they are not made
public. Proper use of intellectual rights and removal of risks by using the corporate governance
principles should be done in order to save the organizations research.
6

Commonwealth Bank
In order to safeguard the firm from improper utilization of papers and analysis findings, the
Australian banks which are listed in ASX ought to conjointly understand IPR (intellectual
property rights). Nevertheless, the company’s financial status cannot guarantee a correct analysis
of its total activities and performance given by it. In relation to the present conditions, economic
and daily safety plans have conjointly been punctually monitored by the firm. This may be
evidenced by the very fact its undertaken increased safety measures for the well-being of its
entire folks. Moreover, once it involves the Commonwealth bank, the committee has conjointly
competed for an awfully vital role in serving to the board to watch each safety measures and
policies among deadlines (Commonwealth Bank, 2017). This can be the explanation of why the
bank has become capable to achieve a worldwide benchmark by the help of its trade.
Also, the company’s profits were not analyzed in the normal currency value of dollar. Further,
the Commonwealth bank was conjointly expecting that it face high volatility because of the high
interest rates of such currencies. This can be why all its revenues also are believed to be full of
these currencies. Moreover, it is clear that the global market among that the corporate operates is
displayed with a danger of increased volatility that's a bad indicator. Further, the investments
made by the corporate should be made after proper quality checks and quality groups so the
quality of the merchandise cannot get impacted on a whole. The Commonwealth bank has
conjointly been primarily hooked into information technology systems so as to facilitate smooth
flow of operations and thus, complications in such setup will cause large issues for continued
swish affairs. In reference to this, it should be noted that this risk has conjointly not acquired
over the auditor’s report.
Besides, since Commonwealth bank is primarily a global company among its trade, an the
organization may face threats from other primary competitors of the same market. Hence, the
corporate might face problems during this phase likewise so it will encounter all the hurdles in its
overall affairs for issues associated with each political and cultural value of various countries.
Additionally, since the corporate could be a producing company, it's conjointly witnessed a big
quantity of plant and machinery being put in among its operating space (Commonwealth Bank,
2017). However, the safety of staff could be an important situation for the corporate and thence,
it's suggested that it should take steps to style correct safety policies and measures that may
enable it to make a secure and sound setting. It is noticeable that the auditors haven't offered such
7

Commonwealth Bank
info associated with a similar within the financial audit report that's a bad indicator (Merchant,
2012).
Also, Commonwealth bank has thought of hiring of latest administrators among its board
structure World Health Organization area unit of good quality and skilled in nature. Such process
is thought of as a good step from the company’s side however it's evident that there has been no
revealing of finance for its investments (Arnold, 2010). Therefore, it's important for the
Commonwealth bank to know about all of its assets and investments do as to make decision after
analyzing such facts. This can be as a result of if the corporate doesn't undertake such a step, it
should face extreme problems within the future. Moreover, these problems are very important ot
be mentioned in the auditor’s report as main audit matters. Therefore, to draw in and retain a
huge range of staff among the operations of the corporate, these stages should be punctually
thought of so an efficient hand is managed by providing them shares to increase their
involvement within the organization’s development. Such rewards are money and equity in
association to issues connected with time unit and CSR problems whereby the corporate has the
flexibility to analyze and attract the best measures for the future. Additionally, The
Commonwealth bank and alternative banks have tried to pay the community back by providing
them by variety of employment, management of pollution, etc. Therefore, the associate
exaggerated quantity of price is altogether needed for the enterprise a similar. Howsoever, the
worst and unhealthy impacts of those policies or measures were being accounted by the auditor
in his report (Niemi & Sundgren, 2012). The differences in foreign currencies has conjointly not
been thought of by the auditor in his report because of which it may create a negative impact on
the firm.
The auditors should acknowledge these issues as main audit matters as these facilitate in helping
investors in their decision-making processes. Therefore, ASA 701 has been defined to eradicate
the non-disclosure approaches undertaken by the corporate. Additionally, the auditor should
account for average cost accounting in association with the antecedent mentioned situations and
future expectations and plans of Commonwealth Bank. This can be as a result of this may assist
in eradicating exaggeration or statement of price within the company’s money statements
(Commonwealth Bank, 2017). Withal, the corporate financials may also encounter material
misstatements thanks to such risks and any vital issue that may establish these risks should be
8

Commonwealth Bank
properly recognized by the company in its statements and thenceforth, the auditors should take
steps to disclose a similar in their audit reports (Roach, 2010). Overall, the revealing of risks that
area unit associated with the misleading information should be punctually recognized and further
should be disclosed by the auditors in the report. This comes to intent on the most important
reason why ASA 570 should be punctually taken into consideration by the corporate when such
situation arises (Cooper & Coram, 2015).
Recommendations
It is very important for the auditor to display the financial and nonfinancial situation of the
organization in the audit report so that proper decision-making task can be conducted by the
stakeholders and other users of financial statements. The company should also maintain
transparency levels so as to enhance the financial reporting system. The internal and external
auditors of the organization that have been hired by them should be able to scrutinize all the
tasks of the organization and align them in the standard so that the company can fulfill the goals
and targets. Hence, if the auditors will play fairly with the organization, then the smooth flow of
affairs can be attained which will further help improve the corporate governance structure of the
organization.
9

Commonwealth Bank
Conclusion
It is necessary for the Commonwealth Bank to work in relation to the accounting standard so that
all the financial and nonfinancial data are given proper attention by preparation of the financial
statements. Specified pattern should be followed by the organization for reporting the financial
performance of the organization to the accountants. The financial statement of the organization
should represent an actual view of the operations that have been conducted by the company.
Therefore, necessary auditing and accounting standards should be followed by the organization
while preparing the financial statements. The auditors must always try to provide the best audit
report so as to help the users of the financial accounts to get a true and fair view of the
performance of the company.
10

Commonwealth Bank
References
Arnold, G. (2010) The Financial Times Guide to Investing. Prentice Hall.
AUASB. (2015 )Auditing Standard ASA 701 Communicating Main Audit Matters in the
Independent Auditor’s Report. Available at:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
[Accessed 20 May 2018].
Azim, M.I. (2013) Independent Auditors Report: Australian Trends From 1996 to
2010. Journal of Modern Accounting and Auditing, 9(3), p.356. Available from:
http://hdl.handle.net/1959.3/367646 [Accessed 14 May 2019]
CAANZ. (2016) Auditing, and Assurance Handbook 2016 Australia. Australia: John Wiley &
Sons.
Carson, E., Fargher, N. and Zhang, Y. (2016) Trends in auditor reporting in Australia: a
synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Available from: https://doi.org/10.1111/auar.12124 [Accessed 14 May 2019]
Commonwealth Bank. (2017) Commonwealth Bank Annual Report and accounts 2017.
Available from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/annual_report_2017_14_aug_2017.pdf [Accessed 14 May 2019]
Cooper , B. and Coram, P. (2015) Modern Auditing & Assurance Services. 6th ed. Australia:
Wiley.
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management. [online]. 9(3), p. 291-292. DOI:
https://doi.org/10.1111/1468-0408.00081
11

Commonwealth Bank
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. Available from:
http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-
possible-remedies?full [Accessed 14 May 2019]
Manoharan, T.N. (2011). Financial Statement Fraud and Corporate Governance. The George
Washington University.
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management Misconduct?.
The Accounting Review [online]. 90(2), p. 495-527. Available from:
https://doi.org/10.2308/accr-50871 [Accessed 14 May 2019]
Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific
Accounting Review. [online]. 24(3), 1-34. Available from:
https://www.emeraldinsight.com/doi/abs/10.1108/01140581211283904 [Accessed 14 May
2019]
Niemi, L., and Sundgren, S. (2012) Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. [online] 21(4), p. 767-
796. Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 14 May 2019]
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
12