ASA 701: Key Audit Matters in Banking Industry

The ASA 701 focuses on the Key auditing matters which are considered by the auditors after the analysis of the financial statements. The report outlines the overall meaning and importance of the Key auditing matters along with the case of four different banks in the Banking industry in Australia.

Running head: ASA 701
ASA 701
Name of the Student
Name of the University
Author Note

1ASA 701
Executive Summary
The ASA 701 talks about the overall role of the auditors in a firm and the manner in which the
organization will be required to deal with the different key matters which may have an impact on
the future of the firm. The ASA 701 focuses on the Key auditing matters which are considered
by the auditors after the analysis of the financial statements. The report outlines the overall
meaning and importance of the Key auditing matters along with the case of four different banks
in the Banking industry in Australia.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Analysis...........................................................................................................................................4
The Commonwealth Bank...............................................................................................................5
Australia and New Zealand Banking Group....................................................................................6
National Australian Bank (NAB)....................................................................................................7
Westpac Bank..................................................................................................................................8
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

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Introduction
Sirois, Bédard and Bera (2018) define the Key Audit matters as the matters which under
the judgement of the key financial officer can be deemed to be a matter of utmost significance.
The key audit matters are usually selected from those set of individual matters which are
identified from the financial statement of the organization and hence, are required to be
communicated to the firm in the right manner. The given report aims to outline the overall
importance of the new standard named as the ASA 701 and how the different companies as
present in the banking sector tend to use it and reflect it in the financial statement of the firm.
Discussion
The key audit matters can be rightfully understood as those matters which the key auditor
deems to be relevant and those matters which can later on turn out to be against the favour of the
firm (Köhler, Ratzinger-Sakel and Theis 2016). The key audit matters are generally outlined by
the analysis of the financial statement of the firm when the review undergoes for a particular
period of time. These audit matters are taken to be of utmost importance because, they may have
an overall impact on the overall performance of the firm. The different aspects of the new
standard can be stated to be as follows:
 The key audit measures are required to be adequately communicated in the books of
accounts of the different companies.
 It becomes considerably important for the firm to ensure that it will be able to understand
the point of view of the auditors and take the decisions in that aspect (Knechel and
Salterio 2016).
 The key auditors will be provided with the responsibility of considering the different
areas of risk, which often require additional assessment. Moreover, it can also be
considered to be relatively important for the firm to ensure that, they are successfully able
to make the management realise the overall importance of the issue outlined.
 The documentations required in relation to the Key Audit matters must be identified
adequately (Johnstone, Rittenberg and Gramling 2019).
 The standard ASA is compulsory to be included in the reports as of 15th December 2016.

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 The main purpose of the firm can be considered to be to ensure that the different
decisions are undertaken by outlining the overall crucial matters to the firm and keeping
the overall continuity of the firm in the mind of the different decisions.
The ASA 570 has been formulated in lieu to guide the different auditors and help them in
the overall analysis of the firm. In line of this, it can be considered relevantly important for the
different auditors to understand that the key assumptions, key analysis and the key decisions
which are made by the firm are made keeping in mind the overall responsibility and continuity
aspect of the firm (Jermakowicz, Epstein and Ramamoorti 2018). This is commonly known
going concern whereby it is important to ensure that the auditors would be required to see to it
that the firm is always existing and the different aspects of the firm are made successfully after
the consideration of the longevity of the firm.
One of the most popular cases of any firm can be stated to be relating to the case of the
Lehman brothers with respect to which the firm had filed for bankruptcy back in the year 2008
and in addition to this, the firm had $640 billion as the assets and the $619 billion as the debts.
The bankruptcy of the firm came as a big surprise for the markets around the globe. The firm
began its operations with humble roots and gradually began to perform well and expanded into
other domains (Brasel et al. 2016). The firm lost considerable resources when the US housing
market took a dip. The case is assumed to be a concern related to the Key audit matter because,
the different auditors as present in the organization were not successfully able to identify the key
defaults in the overall operations of the firm and had the auditing department been successfully
in figuring out the performance defaults, the downfall could have been prevented (Altawalbeh
and Alhajaya 2019).
Analysis
In order to understand the overall implementation of the Key Auditing matters in a better
manner, the analysis of the Banking industry shall be undertaken which will assist in
understanding the overall operations. The Banks chosen are as follows:
1. Commonwealth Bank.
2. Australia and New Zealand Banking Group (ANZ)
3. National Australian Bank (NAB)

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4. Westpac Bank.
The Commonwealth Bank
Loan impairment provisions
The PWC group had been chosen as the auditors of the bank and hence, had taken up the
loan impairment provisions as the Key audit matter because they believed that subjective
judgements were being made in order to ensure that the impairment provisions were held against
lending (Commbank.com.au 2019). Various analysis in lieu of this were carried out and hence,
the different cash flow and other related documents were analysed in order to determine the
provisions with respect to the disclosures.
Judgemental valuation of financial instruments
The fair value system is used and the group tends to hold all the financial instruments and
measures them at a rate of 17% of the assets and considers it as 5% of the total liabilities. The
financial statements of the firm can be understood to be noncomplex in nature and hence, the
prices reflect this aspect in the market. The firm defined the financial assets under different
levels and hence, it is due to this reason, that the matter was held as a key issue because
judgement was required in the value. Various measures were designed to solve the matter.
Provision for conducting risk and regular action
The audit group understand it to be important to undertake an analysis of the provisions
which were required for the risk and regular action and in line of this, they undertook the
investigations of the legal proceedings involved in the same (Commbank.com.au 2019). The
determination of the profitability of the financial outcomes were required to be undertaken and
the estimates had to be paid under each investigation and hence, the matter was taken to be a key
financial matter.
Valuation of insurance policyholder’s liability
The issue was taken up as a key audit matter as the valuation of the insurance claims and
settlement were quite complex and subjective in nature. Hence, the audit group undertook
various assumptions in line of this and developed certain methodologies to ensure success with
respect to this.

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Operation of financial reporting Information technology
The operation of the financial reporting was taken as the Key audit matter because, all the
functions as involved in a business are greatly reliant on the IT systems and in line of this, the
committee felt it necessary to evaluate the procedure and hence, carried out some tests to ensure
the effectiveness of the same (Commbank.com.au 2019).
Australia and New Zealand Banking Group
Provision for credit impairment and disclosures for the expected impact of AASB 9
Financial Instruments applicable on 1 October 2018
The matter related to the credit impairment of the firm was understood to be a Key Audit
Matter as it reveals a significant risk exposure to a large counterparties group across various
complexities involved in the industry. To resolve the query and the matter, the audit team
undertook various measures so as to inspect the provisions made under the specific loans and
analyse the other related provisions as well.
Valuation of Financial Instruments held at Fair Value
The valuation of the financial instruments was undertaken as a key audit measure as the
financial matters were being held at a significant value and it was concerning the derivate held
by the Group to be quite sensitive in nature and required specialist valuations (Anz.com 2019).
The auditing team testing the access rights, change management controls for the evaluation and
also the office management reviews so as to ensure and come up with the different measures.
Provision for Customer Remediation
The provision for the customer remediation is being considered as a key auditing matter
because the judgements which are to be assessed belong to the Group`s determination of the
reliable estimates of the number of investigations, existence of a legal probably proceedings. The
audit team resolved the matter by making several enquiries and obtaining and understanding of
the information by testing and investigation.
Accounting for Divestments

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The accounting for disinvestments was consider to be a key audit matter because the
disinvestment business can be considered to be very relevant for the group and hence, in line of
this, it involves the estimation of costs involved and related matters (Anz.com 2019). The related
transaction documents were read and assessed to check into the matter of disinvestment.
IT Systems and Controls
The IT systems is being considered as a key auditing matter because the overall
effectivity and efficiency of the business greatly depends on the IT.
National Australian Bank (NAB)
Provision for credit impairment on loans at amortised costs
The provision for credit impairment on loans at amortised cost was taken as a key audit
matter because of the judgements involved to determine the overall provision of the credit
impairment. It also needs to be understood that, they key areas included in this part involved the
interpretation of the requirements, identifying the different exposures as present and taking in the
assumptions mad for the credit loss model (Nab.com.au 2019). Lastly, it also involved the
incorporation of forward information. The credit loss model was analysed effectively and the
costs related to the data were assessed adequately with respect to the modelling assumptions. The
collectives were also undertaken on a collective basis.
Conduct risk and provisions
The risk related provisions can be considered to be a key audit matter because it involved
strong judgement and the conduct related matters required immediate attention. It is important
for the group to ensure that they are able to consider these matters to be serious and assess them
on a regular basis. To identify such matters, the crucial matters were assessed and in line of this,
the procedures to deal with them were tested and assessed adequately.
Restructuring provision
The particular issue was considered to be a Key auditing matter as it required significant
judgment with respect to recognition and measurement of the restructuring provision. Moreover,
the audit team also undertook a key analysis on the restructuring plan of the firm and carried out
certain tests with respect to the same (Nab.com.au 2019).

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Information technology systems and control over the financial reporting
The IT systems form an integral part of the firm and hence, the testing of the matter is
considered to be crucial. The audit team carried out various tests and automated procedures to
see to it that the alternatives were undertaken relatively in a better manner.
Westpac Bank
Provision for impairment charges
The issue was taken to be a crucial matter because, the different loans are subject to
complex judgements being made by the particular group and in line of this, it can also be
considered crucial to be understood by this that, the auditors conducted various tests as well as
designs in order to determine the key operating effectiveness of the different key controls which
take over provisions for the impairment charges on the loans and other borrowings as well
(Westpac.com.au 2019).
AASB 9 Financial Instruments
In order to ensure that the financials were taken into consideration, the key auditing
matter was taken into consideration so as to ensure that the accounting standard is relatively
complex in nature. The overall effectiveness of the key controls was estimated and understood.
Fair values of financial assets
The matter was focused upon a key auditing matter because it was difficult to determine
the overall magnitude of the financial instruments which were being held at a fair value
(Westpac.com.au 2019). The team in order to audit the same issue gathered the price and
analysed the particular issue.
Conclusion
Therefore, from the given analysis as undertaken in the report, it could be understood that
the new Standard, the ASA 701 was developed in lieu of investor concerns and clarity. The
Standard of ASA 701 focused on the key auditing matters which need through examination as it
has the capacity to affect the organizations growth and prosperity. The report underline the
meaning and importance of the Key audit matters and ASA 701 along with an analysis of the

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growing concern and Lehman Brothers. The example of the Banking industry in Australia has
been undertaken.

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References
Altawalbeh, M. A. F., and Alhajaya, M. E. S. ,2019. The Investors Reaction to the Disclosure of
Key Audit Matters: Empirical Evidence from Jordan. International Business Research, 12(3),
50-57.
Anz.com 2019. Annual Reports [online]. Available
at:https://shareholder.anz.com/sites/default/files/anz_2018_annual_report_final.pdf (Retrieved
on: 22 May. 2019).
Brasel, K., Doxey, M.M., Grenier, J.H.and Reffett, A. ,2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The
Accounting Review, 91(5), pp.1345-1362.
Commbank.com.au 2019. Annual Reports [online]. Available
at:https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf (Retrieved on: 22 May. 2019).
Jermakowicz, E. K., Epstein, B. J., and Ramamoorti, S. ,2018. CAM versus KAM-A Distinction
without a Difference?: Making Judgments in Reporting Critical Audit Matters. The CPA
Journal, 88(2), 34-40.
Johnstone, K. M., Rittenberg, L. E., and Gramling, A. A. ,2019. Auditing: A Risk-based
Approach. Cengage.
Knechel, W.R. and Salterio, S.E., ,2016. Auditing: Assurance and risk. Routledge.
Köhler, A., Ratzinger-Sakel, N.V. and Theis, J., ,2016. The effects of key audit matters on the
auditor's report's communicative value: Experimental evidence from investment professionals
and non-professional investors. Available at SSRN 2838162
Nab.com.au ,2019. Annual Reports [online]. Available
at:https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2018-annual-
financial-report.pdf (Retrieved on: 22 May. 2019).
Sirois, L. P., Bédard, J., and Bera, P. ,2018. The informational value of key audit matters in the
auditor's report: Evidence from an eye-tracking study. Accounting Horizons, 32(2), 141-162.

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Westpac.com.au ,2019. Annual Reports [online]. Available at:
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2018_Westpac_Annual_Report.pdf (Retrieved on: 22 May. 2019).