Auditing

This report is the analysis of the responsibility of the auditors to review the governance of the audit client by considering ASA 15. The incorporation of the statutory cap of the auditors has major impact on the process to limit the liability of the auditors.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................7
Answer to Question 3......................................................................................................................9
References......................................................................................................................................11

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Answer to Question 1
Executive Summary
The analysis of different sections of ASA 15 states that the auditors are needed to gain
understanding as well as information about some of the major factors of the audit client like
industry nature, governance mechanism, internal control, processes to implement accounting
policies and others. The analysis of Commonwealth Bank issues states that the main governance
issues in the bank are ineffective oversight of the board, lack of urgency in resolving issues,
ineffective risk management framework and others. As a recommendation, the bank is needed to
establish effective governance mechanism along with effective risk management framework.

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Introduction
At the time to conduct the audit operations, the auditors are needed to take into
consideration all the relevant factors and one of them is the governance mechanism in client. In
Australia, the presence of ASA 315 can be seen that contains all the standards and principles for
the auditors to consider the governance of the audit clients. The main aim of this report is the
analysis of the responsibility of the auditors to review the governance of the audit client by
considering ASA 15. The next part of the report includes the analysis of the key governance
issues in Commonwealth Bank along with ASIC recommendation.
Discussion
At the time of the auditing process, the auditors should take into account the governance
mechanism of the clients. For this purpose, they are needed to follow the principles of Auditing
Standard ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of
Material Misstatement as it provides the auditors with the required steps to review the
governance mechanism of the clients (apesb.org.au, 2018). This section is considered as a major
aspect for the auditors as they are needed to follow these guidelines while conducting the audit
operations. The main parts of this regulation are discussed below:
According to the standards of ASA 315, the auditors are responsible for gaining
understanding about some of the major factors of the clients like industry nature, major
regulatory bodies and other external factors such as financial reporting framework and others. In
addition, the auditors should gain information some other aspects like business operations of the
client, ownership structure, investment types and the available financial resources of the clients.
Most important, the auditors need to gain such information that helps them in understanding

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about the client’s processes to select and apply accounting policies along with their
appropriateness with the client’s business operations (Xu et al., 2013). All these aspects are
required for the auditors for the preliminary stage of the audit operations in order to obtain
information about the major activities of the audit clients.
This particular standard of ASA 315 puts the obligation on the auditors to understand the
implementation process of internal control of the audit client so that they become able in making
judgment on the appropriateness of this control with the business risks. While gaining
understanding about the internal control of the audit clients, they should also consider the
internal control design process. On the overall basis, it can be said that ASA 315 makes the
auditors obliged in gaining all the information about all the dimensions of the internal control of
the audit clients (Rahman, 2013). In this process, it is needed for the auditors to take into account
the evaluation process of the staffs that are responsible for the implementation of effective
governance. Information about all these factors helps the auditors to understand the fact that
whether the culture of honesty as well as ethical behavior is present in the client’s business.
According to the standards of ASA 315, in the process of the review of the client’s
internal governance, it is responsible for the auditors to obtain understanding about the fact that
whether the employed governance procedures are appropriate for identifying the financial
reporting related risks of the companies (Sanderson, 2014). In this process, the main roles of the
auditors can be found in the process of risk estimation and the process of risk assessment as the
results of these assessments and identification is needed for the formulation of apposite auditing
strategies. Apart from all these, ASA 315 also puts the obligation on the auditors for obtaining
information about the internal information system within the organizations along with its role
towards the process of financial reporting of the audit clients. On the overall basis, ASA 315 puts

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the obligation on the auditors for reviewing all aspects of governance and internal control of the
audit clients (Margret & Hoque, 2016).
Commonwealth Bank Governance Issue
Issue Impact on Raising
Audit Risk
Recommendations Reduction in Audit
Risk Because of the
Recommendation
One can observe the
ineffective oversight
from the bank’s board
members along with
the committee related
to finance and audit
(apra.gov.au, 2018)
This factors leads to
the increase the
potential of financial
reporting fraud as
well as manipulation
This aspect indicates
towards the
requirement of
establishing legal
governance
procedures so that
potential fraud and
manipulation can be
minimized. It is also
recommended for
forming more
effective board and
executive committee
in order to establish
control in financial
reporting (Beck &
Mauldin, 2014)
This strategy
development process
will lead to effective
governance of the
financial activities of
the bank so that the
audit risk can be
reduced.
The presence of
unclear accountability
can be seen from the
side of senior
management of CAB.
Additionally,
ownership lacks can
In the presence of this
issue, the senior
management of CAB
denies to be
accountable of any
kind of illegal
financial activities
In this context, it is
recommended to the
senior management of
CAB for the
reinforcement of
different standards of
accountability of the
This strategy will
make the senior
management of CAB
more responsible for
the bank’s financial
activities; and it will
lead to the decrease in

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lead to key risks from
the side of executive
committee
that can increase the
audit risk
financial reporting
related fraud activities
(apra.gov.au, 2018)
audit risk
Major issues in CAB
can be seen in the
decision-making
process that is highly
complex and
bureaucratic
This aspect slows
down the risk
detection process
from the financial
statements. Moreover,
it leads to the
development of
obstacles for gaining
financial reporting
outcomes
In this process, the
main recommendation
is taking into
consideration all the
required factor for the
decision-making
process (Latif et al.,
2014)
The main outcome of
this strategy will be
the reduction of errors
in the financial
decision-making
process
One can identify the
next issue in the
operational risk
management
framework for CAB
as this has not been
operating in the most
practical way. One
can also observe the
presence of an under-
resourced and
immature compliance
function in bank
The presence of this
type of immature and
ineffective risk
management
framework can
contribute to the
increased possibility
of risks related to the
financial reporting. In
addition, the auditors
face obstacles in
effective conduct of
audit procedures in
the presence of this
types of framework
In this context, one
major
recommendation is to
upgrade the capability
and authority of the
risk management
framework of the
bank (apra.gov.au,
2018)
The presence of
effective risk
management
framework will help
CAB in managing the
business as well as
financial risks of the
bank
The remuneration
framework of CAB
consists of some
Ineffective executive
remuneration
framework leads to
In this context, it is
recommended that
CAB needs to
This strategy will lead
to the reduction in
financial as well as

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major issues that has
made the
remuneration
framework ineffective
the development of
audit as well as
financial risks in the
process of financial
reporting
consider the
implementation of an
effective executive
remuneration
framework that will
comply with all the
required regulations
and policies (Guénin-
Paracini, Malsch &
Paillé, 2014)
audit risks

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Answer to Question 2
American Accounting Association Model Decision making process
1. Determine the facts According to the given scenario, David is aware
of the fact that John was in the new restaurant of
the town with his girlfriend. However, he made
the excuse of sickness for not attending the
office. These can be considered as the main facts
of the case
2. Define the ethical issues The above facts involve a major ethical issue. It
can be seen that John makes an excuse of
sickness for missing the office while his other
team members were working hard for the
completion of the task. It implies that John was
involved in the negligence of professional duties
that is against the business ethical principles
(Gul, Wu & Yang, 2013)
3. Identify the major principles, rules and
values
The involvement of some ethical values, rules
and principles can be seen in this case.
According to the auditing standards, the main
responsibility of the auditors can be found in
maintaining the integrity as well as
professionalism while being honest and
straightforward (apesb.org.au, 2018). This will not
involve any process that leads to the compromise
of professional and responsibilities.
Additionally, their responsibility is to make
compliance with all the needed rules, regulations
and standards for avoiding unprofessional
activities (apesb.org.au, 2018)
4. Specify the alternatives Two alternative actions can be seen in this case.

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According to the first alternative, in order not to
provide the sale amount of appreciation like
others, David needs to confront the unethical
action of John to other team members. As per
the second alternative, in order to maintain the
good relation with John, David will avoid telling
the fact to the other team members about his
unethical activity of missing office
5. Compare values and alternatives In this situation, the compliance of first
alternative can be seen with all the principles,
norms and values of the profession. In this
process, David needs to involve in confronting
the members with the unprofessional activity of
John that John did not comply with the
professionalism and regulations on intentionally
(Blay & Geiger, 2013)
6. Assess the consequences As per the consequence of the first alternative,
John will be barred from getting the same
amount of appreciation like the other team
members as he has missed the office in an
unethical and unprofessional manner. This
aspect will provide John with the required lesson
that he must be professional in the workplace by
complying with the principles of integrity and
honesty.
As per the consequence of the second
alternative, John will get the same amount of
appreciation for the work in spite of missing the
work intentionally by providing a fake reason.
Thus, John may repeat the same incident in
future due to not receiving any kind of lessons

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(Pizzini, Lin & Ziegenfuss, 2014)
7. Make your decision Based on the above discussion, the appropriate
ethical decision will be the adoption of the first
alternative that is related to confront the
unethical action of John to the other team
members of the group
Answer to Question 3
It needs to be mentioned that the incorporation of the statutory cap of the auditors has
major impact on the process to limit the liability of the auditors. According to this statutory cap,
there are some alternative liability arrangements for the auditors. According to the first
agreement, at the time of the filing of claim by an injured party against specific tortfeasors, they
are given with the authority to collect all the damages from the remaining tortfeasors
(Samsonova-Taddei & Humphrey, 2015). As per this particular arrangement, it is the authority
for the injured parties in claiming all the damages from the auditors when there is presence of
misinterpretation in the company financial statements. However, the injured parties will be able
to avail this option in case of the presence of responsibility related to damages by the additional
tortfeasors. This arrangement puts the obligation on the auditors in providing full compensation
or a greater share of the compensation as per his/her level of fault. Hence, the injured party has
not right to increase the amount of the compensation. However, as per this regulation, it is not
the obligation on the auditors for the payment of compensation that is not appropriate with the
auditors’ level of fault (Philipsen, 2014). The applicability of this arrangement can be seen when
the remaining tortfeasors are unable to pay their part of damage. According to these regulations,
the injured party bears the greatest proportion of risk as compared to the auditors and the

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tortfeasors. Thus, the whole discussion indicates towards the reduced amount of liability for the
auditors.
The third arrangement involves in the establishment of a compensation cap. According to
this arrangement, the presence of a maximum amount of cap can be seen for the amount of
compensation. As per the regulation of this arrangement, when the auditors’ share in the
compensation equals or exceeds the equivalent cap, one does not have the authority in charging
more compensation that the set cap to the auditors (Eyal, 2013). The applicability of this rule can
also be seen at the time of the inability of other tortfeasors to pay their part of compensation. For
this reason, the authority lies with the injured party to collect the compensation when it does not
cross the previously set cap. Thus, it can be seen from the above discussion that the specific
arrangements under cap system play an integral part in order to reduce the auditors’ liability at
the time to conduct the audit operations.

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References
APES 110 Code of Ethics for Professional Accountants. (2018). Retrieved from
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
APRA releases CBA Prudential Inquiry Final Report and accepts Enforceable Undertaking from
CBA | APRA. (2018). Apra.gov.au. Retrieved 17 August 2018, from
https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-
inquiry-final-report-accepts-eu
Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment. (2018). Retrieved from
http://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
Beck, M. J., & Mauldin, E. G. (2014). Who's really in charge? Audit committee versus CFO
power and audit fees. The Accounting Review, 89(6), 2057-2085.
Blay, A. D., & Geiger, M. A. (2013). Auditor fees and auditor independence: Evidence from
going concern reporting decisions. Contemporary Accounting Research, 30(2), 579-606.
Eyal, N. K. (2013). Setting a Statutory Cap on Auditors' Liability: What Method Should Be
Used. Rutgers Bus. LJ, 10, 56.
Guénin-Paracini, H., Malsch, B., & Paillé, A. M. (2014). Fear and risk in the audit
process. Accounting, Organizations and Society, 39(4), 264-288.
Gul, F. A., Wu, D., & Yang, Z. (2013). Do individual auditors affect audit quality? Evidence
from archival data. The Accounting Review, 88(6), 1993-2023.

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Latif, R., Abbas, H., Assar, S., & Ali, Q. (2014). Cloud computing risk assessment: a systematic
literature review. In Future information technology (pp. 285-295). Springer, Berlin,
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Margret, J., & Hoque, Z. (2016). Business Continuity in the Face of Fraud and Organisational
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597.
Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2014). The impact of internal audit function quality and
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Managed Superannuation Funds Adviser, 377.
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global financial crisis. Accounting & Finance, 53(1), 301-338.