Audit Procedures for Key Audit Matters in Three Companies

This document discusses the audit procedures adopted by the auditors for dealing with Key Audit Matters in three companies, namely AMP, Bank of Queensland, and Commonwealth Bank. It also highlights the changes in KAMs and the negligence of auditors. The document further explains the importance of KAMs for the users of financial statements and the role of the Banking Royal Commission in suggesting measures for the banking industry. Lastly, it emphasizes the responsibility of auditors and regulators in setting up performance procedures and implementing regulations in the banking sector.

ACCT1111 Research Assignment S22019
MASTER OF PROFESSIONALACCOUNTING

Audit
PART-A
Answer -1
With regard to the audit procedures adopted by the auditors for dealing with Key Audit
Matters, following are the details of changes between the year 2017 and year 2018:
AMP
The key audit matters included:
i. Valuation of Life Insurance Policy Liabilities.
 Auditors have included the valuation of Life Insurance Policy liabilities under the key
audit matters as according to them, this point needs consideration by the users of
financial statements. Further, the changes in reporting of this key audit matter that are
evident from the Audit Report are:
 The key assumptions that were involved in the valuation of life insurance policy
liabilities included taxation; surrender values, and mortality and morbidity in the year
2017 whereas these assumptions were neglected in the year 2018 by the auditors due
to certain audit procedure requirements.
 The assumptions and audit procedures were assessed by the auditors with the
involvement of actuarial specialists in the year 2018 whereas this was not the case in
every assumption in the year 2017 (AMP, 2018).
 The auditors had conducted an examination with regard to the liabilities of the
policyholders, the capital balances and the relevant disclosures in the financial
statements. All this was done in accordance with the Life Prudential Standards and the
Australian Accounting Standards. This part of the procedure was initiated in the year
2018 only and not in the year 2017.
ii. The other key audit matters were IT Environment- where the audit procedures
were almost similar, Goodwill and Intangible assets- where in comparison to
2017, there were more clear and actual valuations and procedures used by the
auditors in 2018 (AMP, 2018). They also included the help of actuarial specialists
wherever they were required for making assumptions. Apart from this, the key
audit matters were not common in both the years.
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Audit
BANK OF QUEENSLAND
The following changes were noted in the Key Audit Matters in the year 2018 as compared to
the year 2017:
i. AASB 9 was introduced in September 2018, so the auditors followed an apt audit
procedure to check the compliance of the same in the financial statements. This
standard relates to disclosures of expected credit losses. Hence the auditors tested
the accuracy and correctness of data keeping in mind this standard of accounting
and also involved the credit specialists to complete the audit procedures (BOQ,
2018).
ii. From the year 2018, the auditors considered IT Systems and Environment to be a
key audit matter for which the audit procedures were performed in detail together
with the IT Specialists (BOQ, 2018).
COMMONWEALTH BANK
The following changes were noted in the Key Audit Matters in the year 2018 as compared to
the year 2017:
i. AASB 9 was introduced in September 2018, so the auditors followed a vast audit
procedure to assess the accuracy and correctness of the financial statements
according to the new accounting standard introduced. This standard relates to
disclosures of expected credit losses (CBA, 2018).
ii. In the year 2018, the valuation of retirement benefit obligations was no longer a
key audit matter for the auditors.
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Audit
Answer-2
The disclosures of KAMs in the audit reports of the three companies have been done in a
detailed manner by all the related audit firms. The KAMs have been mentioned along with
the reason for their being key matter and the audit procedures performed for the checking of
their accuracy and correctness as per the financial statements. But there are few points of the
three auditors which differentiate the audit reports from one another:
 In the audit report of Bank of Queensland, the audit firm KPMG has mentioned the
valuation of the KAM as per financial statements in the headings of KAMs to give a
brief understanding of the same through the headings which shall benefit the users of
financial statements. This has not been done by the other audit firms that are PWC &
Ernst & Young.
 In the audit report of AMP, the audit firm Ernst & Young has disclosed the key audit
matters in a very descriptive and easily understandable form. Firstly, it has explained
what the key matter is (AMP, 2018). Secondly, it has described what the key areas of
judgment have been during the audit. And, thirdly it has described the audit
procedures performed for determining and assessing the key areas of judgment. The
other audit firms have also detailed the KAMs but not in a well-organized matter.
In the audit report of Commonwealth Bank, the audit firm PWC has mentioned the
relevant components in the heading part of KAMs, unlike the other two audit firms.
An example of the same can be seen from the below extract from the audit report of
CWB
.
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Audit
Answer-3
The disclosures of KAMs play a very important role for the users of the financial statements.
KAMs are those matters which are determined from the study of financial statements and
which depict significance about the financial statements (Niemi & Sundgren, 2012). These
matters may have occurred during the financial year under audit or after the end of the
financial year but before the date of completion of the audit. The KAMs are an important
aspect for the users of financial statements as they communicate the areas of risks involved in
the business (Livne, 2015). The auditors have very clearly mentioned the areas of risk, their
point of determination and the audit procedures adopted for checking the accuracy of the
risks, in their audit reports of the respective companies. The clarity can be seen from the
disclosures and details of the key audit matters wherein the auditors have explained the high-
risk areas along with quantitative data of the risk and its impacts in the financial statements.
Also, the auditors have mentioned every step taken to check the area of concern and how they
have concluded that the particular area of concern is a key audit matter. Hence, the users of
the financial statements can rely on the authenticity of the KAMs mentioned in the reports
and take their decisions on their basis.
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Audit
PART-B
Answer-1
The KAMs for the three companies for 2017 and 2018 have depicted the risks and the audit
procedures adopted for arriving at such risks. The Banking Royal Commission has made
various recommendations towards the Banking and Financial Services such as for consumer
lending, lending to small and medium enterprises, adherence to industry codes, etc. These
recommendations have been given so that the banking and the financial institutions avoid
misconducts to their maximum possible. In the KAMs of the three companies, the auditors
have laid down those points which according to their opinion were significant in terms of
risks in the company and the mitigation level of these risks. The audit procedures have also
been updated by the auditors in the audit report. The banking industry and other financial
lenders need to check the credibility and authenticity of the borrowers and the mortgage
agents should favor the borrowers and not the lending institution (Matthew, 2015). This is the
main crux of all the recommendations issued by the commission. There should be no
misconduct concerning the industry codes specified as well.
Yes, the auditors have been negligent, which can be seen from the below information:
AMP
As the findings of Royal Commission regarding the Banking, Superannuation and the
financial industry were not encouraging and uncertain at this time, AMP took this opportunity
to make the findings of Royal Commission be implemented in their company and to show
their intent to bring stability and restore the trust and faith of the stakeholders (AMP, 2018).
One of the measures that AMP took was to manage the risk appropriately by describing and
categorizing the risk into 7 types of risk which the auditors had not treated as KAM in their
audit report but were very important for the growth and development of the company.
In the year 2018, AMP started a structural reform to improve its business position and
performance measures like wealth protection was initiated so that business could be sustained
and decent returns could be delivered to the shareholders (AMP, 2018). AMP sold its
Australian and New Zealand business to an insurance group Resolution Life to move to a
stable business and to increase its shareholders worth. The findings of Royal Commissions
were not highlighted by the auditors but implementing those proved to be a turning point in
our services and rebuilding the trust in the customers.
BOQ
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Audit
The Royal Commission reviewed many processes and measures adopted by the financial
sector and found out various problems in the industry mainly misconduct in banking,
superannuation, and financial services industry, where there were exclusions of regulatory
and compliance cost to the tune of $ 9million after tax which was neglected by the auditors in
KAM. Also, there was the negligence of legal and settlement costs ($5m after-tax) and
software changes ($11 m after-tax) which were not incorporated in the books which were a
huge economic loss and effect on profit (BOQ, 2018).
CBA
The Royal Commission highlighted some cases where the mistakes were committed in the
areas of customer satisfaction, staff management and compliance of regulations. The
company implemented a banking reform program like a set of reforms to address problems
like customer satisfaction, staff management and compliance of regulations. The company
also appointed an industry expert to overlook the implementation of all reforms. The auditor
had not highlighted the same (CBA, 2018).
Answer-2
The Commission had recommended its measures in the areas of governance, remuneration,
and culture where it bestowed the responsibility to implement best industry practices in these
areas at low cost. The Commission had a view that the staff's remuneration and incentives
should be linked to their misconduct so that the hardworking employees shall be rewarded
suitably. The Commission suggestion was to induct independent non-executive directors on
the board which was industry experts so that the companies shall be managed properly with
no bias to the shareholders. The auditors were restricted to the financial figures and
sometimes non-intentionally also; they do not cover the organization's culture in their audit
program. The Commission played a vital role in bringing out the industries’ problem through
intensive research and observations and made suggestions in the areas of culture, governance,
and remuneration (Baldwin, 2010).
Yes, we agree that organizational culture is a matter which should be included in the KAMs
and the auditor should look into the organization's approach and measures taken up by them
in this matter. Such as- board of directors should be frequently rotated, remuneration and
misconduct of the employees should be linked and the auditor should check whether
independent industry experts are hired for their reports on key areas of business and
implementation of those measures as well (Fazal, 2013). In case the company does not follow
the measures, the auditor should suitably give comments on the same.
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Audit
PART-C
Answer
As the Banking Industry is always prone to the external risks like IT system risk, operation
failures, known recovery, etc., the auditors and regulators have a prime responsibility to set
up performance procedures and implementing of those measures and regulations in the
company (Geoffrey et. al, 2016). The banking sector is a trust and faithful place of investors
who believe in the banking system and want to be assured of their returns. The commission
has played a big role in suggesting measures to the banking industry about the reforms and
the best industry practices to be implemented in the banking system (Gay & Simnet, 2015). It
is not easy for the auditors as well to inform about all the shortcomings and their measures.
They can check and verify the data produced to them.
As a responsible organization, the companies have to adopt and implement the reforms to its
core and non-core activities and to maintain the trust and faith of the stakeholders in them.
The companies should use the latest technology in the system to avoid all the cyber and its
attacks (Gay & Simnet, 2015). The company’s measures and controls are foremost important
in the first place to avoid all the problems.
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Audit
References
AMP. (2018). ASX Announcement 2017 AMP Annual report. Retrieved from:
http://www.annualreports.com/HostedData/AnnualReportArchive/a/OTC_AMLTY_2
017.pdf
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
BOQ. (2018). BOQ 2018 annual report & accounts. Retrieved from:
http://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_BOQ_2018.pd
f
CBA. (2018). CBA 2018 Annual report & accounts. Retrieved from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
results/fy18/cba-annual-report-2018.pdf
Fazal, H. (2013). What is Intimidation threat in auditing? Retrieved from:
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/
Gay, G. and Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016). Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors.
Accounting Horizons. 30(1), pp. 143-156. DOI: 10.2308/acch-51309
Livne, G. (2015). Threats to Auditor Independence and Possible Remedies. Retrieved from:
http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. 90(2), pp. 495-527. DOI: 10.2308/accr-50871
Niemi, L., and Sundgren, S. (2012). Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. 21(4), p. 767-
796. DOI: 10.1080/09638180.2012.671465
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