Auditing and Assurance

This assessment analyzes the key audit matters of a banking sector and how they are reported in the financial statements. It includes a case study of Lehman Brothers and the impact of ASA 701 on the audit process. The discussion also identifies key audit matters in the Australian banking industry, focusing on ANZ Bank, Westpac Banking Corporation, NAB Bank, Bank of Queensland limited, and Common Wealth Bank of Australia.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student:
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Author’s Note

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AUDITING AND ASSURANCE
Executive Summary
The main purpose of the assessment is to analyse the key audit matters of a banking sector and
how the same are reported in the financial statements of the business. The assessment would be
analysing the Lehman Brother case and how the same helped the AUASB for making
appropriate changes in the structure of audit. In addition to this, the discussion would include
banking businesses and identify the key audit matters which are included by the same.

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Table of Contents
Introduction......................................................................................................................................3
ASA 701: Rationale.........................................................................................................................4
Improvement in the Principle of Going Concern............................................................................5
ASA 701: Discussion.......................................................................................................................6
Key Audit Matters (KAM) of Australian Banking Industry...........................................................6
ANZ Bank....................................................................................................................................7
Westpac Banking Corporation.....................................................................................................8
NAB Bank...................................................................................................................................9
Bank of Queensland limited........................................................................................................9
Common Wealth Bank of Australia..........................................................................................10
Conclusion and Recommendation.................................................................................................11
Reference.......................................................................................................................................12

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Introduction
The role of audit in a business is considered to be very important as the same identifies
material misstatement in the financial records and also provides assurances to the shareholders
that the financial statements which is prepared by the management of the company are showing
true and fair view. It is on the basis of the audited financial statements that investors decide
whether or not to make investments in the company. In other words, the users of the financial
statement are depended on the audit opinion and thereby assumes that the same discloses every
material fact regarding the business (Ghafran and O'Sullivan 2013). The integrity of the process
of audit has declined over the years due to ineffectiveness of audit process to identify material
risks and therefore leading to corporate scandal or downfall of the business. This resulted in a
common demand for appropriate regulation in auditing field so that the users of the financial
statements can rely on the opinion of the auditor.
The quality of audit depends on appropriate audit procedures being conducted and along
with the same proper disclosures regarding the accounting treatments related to the same.
Amendments were made in the auditing standards of ASA 701 Communicating Key Audit
Matters in the Independent Auditor’s Report (ASA 701) for improving the quality of the audit
process. The standard ASA 701 was brought about in replacement of ASA 570 Going Concern
and numerous other standards (Simnett and Huggins 2014). The report would be considering the
Key audit matters which needs to be included in the financial statements of a business as per the
requirement of ASA701. The report would be considering banking sector businesses and the key
aspects which are reported by such businesses.
ASA 701: Rationale

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The amendment made to auditing framework and introduction of the new standard ASA
701 is basically to restore the confidence of the public in the profession. The new amended
standard requires appropriate and full disclosures of any item which the auditor feels can affect
the financial position of the business. to corporate failure where the auditing process lacked
proper disclosures and effectiveness. The fall of Lehman Brothers cases can be considered as a
case where the fall of the businesses giants was partly because of failure of auditing process but
the same was mainly due to mismanagement practices and improper reporting framework in the
operations of the business (Chen et al. 2016). The practice of the business was to alter the repo
rates which directly affected the assets and thereby misrepresented the financial information of
the business. This can be regarded as the fault of the auditor because the auditor knowingly
provided an unqualified report to the company. In addition to this, the global financial crisis
which had affected the country can also be regarded as one of the reasons for the downfall of the
company.
There is an argument which can be raised that if ASA 701 was operative during the time
of Lehman brother than the company would not have experienced corporate failures as the
standard would have required the auditor to make appropriate disclosures regarding the key
matters which were identified during the course of audit. The introduction of ASA 701 has
provided the auditor with ample guidance as to what aspects are to be included in the key audit
matters of the business and how the same must be represented in the financial statements of the
business. In addition to this, the new standard would also promote transparency and full
disclosure of all financial information of the business so that the users of the financial statement
can take adequate decisions regarding the same (Gul, Wu and Yang 2013). In addition to this, the
new standard requires the auditor to carefully assess certain items which are represented on the

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basis of management judgement and estimation. The auditor needs to check whether the basis of
the judgement is logical from the point of view of accounting.
Improvement in the Principle of Going Concern
The new standard replaced ASA 570 which is related to going concern principle of a
business. The principle is important and fundamental in accounting concepts because a business
can only hope to generate more profits if it continues its operations for a foreseeable future. The
case of Lehman brothers showed that the auditor did not check the going concern principle
which can be identified as a flaw in the audit program of the auditor (He et al. 2017). The auditor
should have checked the going concern principle as the market was also suffering from global
financial crisis. The new standard requires the auditor to make full disclosures regarding the
performance of the business and even smallest of the items which can result in a material
misstatement must be reported under key audit matters of the business.
ASA 701: Discussion
The new standard ASA 701 shows that AUASB is committed towards improving the
quality of auditing process so that the users of the financial statements and also the stakeholder
has appropriate information to take decisions (Auasb.gov.au. 2019). The new standard requires
the auditor to make appropriate disclosures under the head Key Audit Matters (KAM) and also
effectively communicate the same to the users of the financial statement of the business. Some of
the major improvements which can be brought about with the implementation of the new
standard are listed below:

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 The new standard ASA 701 provides clear information regarding important matters
which are associated with the business and thereby promotes transparency in the
reporting framework of the business.
 The new standard would be guiding the auditor of the business to provide for appropriate
disclosures regarding the projects which is to be undertaken by the business.
 The standard also provides criteria for the auditor to undertake the audit process so that
appropriate evidences can be collected by the auditor of the business (Bowlin, Hobson
and Piercey 2015).
 In addition to this, the standard also makes the situation known where the auditor does
not need to reveal key audit matters of a business.
Key Audit Matters (KAM) of Australian Banking Industry
The discussion which is shown below is related to reporting framework which is
followed by banks. The discussion would also show key audit matters which are associated with
the banking businesses which the auditor has reported in the financial statements of the business.
The key audit matters of the top banks are provided below:
ANZ Bank
The key audit matters which are reported by the auditor of ANZ bank shows a list of
items which are Provision for credit impairment and disclosures, Valuation of Financial
Instruments held at Fair Value, Provision for Customer Remediation and Accounting for
Divestments. The provision for credit impairment and disclosures are included in the KAM
because of significant credit risk exposure to a large number of counterparties. In addition to this,
the same involved judgement on the part of the auditor of the business along with a high degree

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of complexity. The calculation process which is applied by the company for estimating the
expected credit losses is also very complex in nature and therefore requires adequate judgements
(Shareholder.anz.com. 2019). The auditor would be testing the key controls over the
counterparty risks and also perform credit risk assessment of a sample so that impairment values
can be recognised along with the rates associated with the same. The next key audit matter which
is included by the auditor of the business is the valuation of financial instruments. The same are
considered as key audit matters because of the same are held at fair values which includes both
assets and liabilities of the business. Determining the fair value of trading securities and
derivatives involves a significant level of judgement. In addition to this, valuation of certain
derivatives held by the business is sensitive to inputs including funding rates, probabilities of
default and loss given default and therefore the same are considered to be a part of the key audit
matters of the business.
The recognition of provisions of the bank is a complex process and therefore the same
would be covered under the key audit matters of the business. The auditor would be making
enquires for any legal charges which is associated with the business. In addition to this,
disinvestments which was made by the bank during the period is included. During the year the
bank was engaged in sale of its Life Insurance business to Zurich Financial Services Australia,
and the sales of its One Path pensions and investment business and Aligned Dealer Group
business to IOOF Holdings Limited. This is a complex undertaking and therefore included in key
audit matters of the business.
Westpac Banking Corporation
The auditors of Westpac have also identified certain key audit matters in the annual
report of the business and the same includes provisions for impairments, provision for contingent

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liability, financial instruments, fair value of assets and liabilities. The business has considered
impairment charges on loan as key audit matter due to the subjective and complex nature of the
transaction. The auditor in such a case needs to identify the cash flow which is to be estimated
and different impairment models which can be followed by the business. The auditor has also
included a treatment of financial instruments which was owned by the business
(Westpac.com.au. 2019). The provisions of AASB 9 has issued expected credit losses which
would estimate all forward-looking losses for the banks. Another item which is included in the
key audit matters of the business is the policy of the business to value assets and liabilities.
Financial instruments held by the Group at fair value include derivative assets and liabilities,
trading securities, available-for-sale securities. This requires significant judgement on the part of
the auditor and therefore the same are considered to be key audit matters of the business (Toy
and Hay 2014). The group also faces the risks of failure of IT compliance which would adversely
affect the business. In addition to this, the auditor also includes legal and compliance protocols
which is faced by the business. The auditor of the business would be applying appropriate audit
steps to ensure that the activities of the business which are covered under KAM is properly
assessed.
NAB Bank
The key audit matters which can be identified for the business are measurement principle
which is followed for contingent liability, measurement at fair value of the assets and liabilities,
provisions for Impairments. The auditor of the business identifies contingent liability as key
audit matters as the same are created by the management of the bank after considering and
estimating future events which requires considerable amount of judgements (Hay 2014). In
addition to this, the management of the bank has shown impairment charges on certain assets

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which is closely related to estimation of cash flows, cash generating units and therefore, there is
a level of complexity in such transactions (Capital.nab.com.au. 2019). It is for these reasons that
the same is included in the key audit matters of the business. The auditor also recognises that
there are significant risks which is associated with the computerised system which is used by
businesses. The auditor needs to check the strengths of the system in reporting of financial
information in an appropriate manner.
Bank of Queensland limited
The auditor of Bank of Queensland has systematically identified the key audit matters
which is associated with the business and the same are provisions created for loans and advances,
valuation of goodwill, valuation of intangible software, fair value measurement of financial
instruments and information technology which is followed by the business.
Impairment provisions are considered to be a Key Audit Matter due to the significance of
loans and advances, the high degree of complexity and judgement involved in reporting the
same. The auditor needs to apply variety of tests to confirm whether appropriate basis if followed
by the bank in relation to the provision amount which is shown by the banks (Boq.com.au.
2019). The valuation of goodwill of the business is also considered to be a key audit matter due
to various judgements which is required to be made by the management and the auditor needs to
check the same in order to ensure that the value is appropriately presented.
In case of valuation of intangible assets of the business, significant estimation is required
on the part of the management such as useful life of the asset, cost capitalization and these are
the reasons that the item is included under key audit matters of the business. Fair value
measurement is considered a Key Audit Matter due to the complexity inherent in estimating the
fair value of financial instruments (Knechel and Salterio 2016). The Consolidated Entity and

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Bank uses valuation techniques to determine the fair value of financial instruments. Moreover,
the management of the company also recognises IT system as key audit matters as the operations
of the business is heavily depended on the same and any risks associated with the same will be
faced by entire business.
Common Wealth Bank of Australia
The auditor of CBA has identified the key audit matters which is associated with the
business and the same are loan impairment provisions, Judgemental valuation of financial
instruments, Provision for conduct risk and regulator action, Valuation of insurance policyholder
liabilities and information technology which is followed by the business.
The provisions for loan impairments are considered to be key audit matters because of the
subjective judgements which are involved for impairments, classification of assets, number and
amount of provisions (Commbank.com.au. 2019). The Group holds financial instruments
measured at fair value representing 17% of the total assets and 5% of the total liabilities of the
Group. The business has derivatives, investments in other securities which makes the process of
using judgements on the same difficult and therefore the same is included in Key audit matters of
the business.
The bank faces certain regulations in the market for which it is considered this a key audit
matter due to the subjective judgements required by the Group. The auditor is affected in
determining the profits associated with the business. Insurance claims are considered as key audit
matters as the same involves judgements regarding future which are bit complex in nature.
Conclusion and Recommendation

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The above analysis successfully shows that there has been improvement in the auditing
standards which is made with an intention of improving the overall quality of audit conducted by
the business. The new auditing standard was brought about due to the failure of Lehman Brothers
and also 2008 financial crisis in order to remove any ambiguity in the reporting of items of the
business. The above discussion shows key audit matters of the business needs to be adhered by
the users of the financial statements and has provided for further improvements. Some of the
improvements which needs to be provided by the auditor are:
 The internal control system of the banks is very important for maintaining the policies of
the business and formulating plans which can help the business to provide appropriate
disclosures regarding the same.
 The auditor needs to check the viability of the IT system which is used by banks for the
purpose of reporting of financial information.
 The auditor needs to comment relevant key audit matters so that users are aware of the
same while taking investment decisions of the business.

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Reference
Auasb.gov.au. 2019. Auditing Standard ASA 570 Going Concern. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 14 May
2019].
Auasb.gov.au. 2019. Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 13 May
2019].
Boq.com.au. (2019). [online] Available at:
https://www.boq.com.au/content/dam/boq/files/shareholder-centre/financial-results/2018/
FY2018_Annual_Report.pdf [Accessed 24 May 2019].
Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional
skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4),
pp.1363-1393.
Capital.nab.com.au. (2019). [online] Available at:
https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf [Accessed 24 May
2019].
Chen, P.F., He, S., Ma, Z. and Stice, D., 2016. The information role of audit opinions in debt
contracting. Journal of Accounting and Economics, 61(1), pp.121-144.

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Commbank.com.au. (2019). [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 24 May 2019].
Ghafran, C. and O'Sullivan, N., 2013. The governance role of audit committees: reviewing a
decade of evidence. International Journal of Management Reviews, 15(4), pp.381-407.
Gul, F.A., Wu, D. and Yang, Z., 2013. Do individual auditors affect audit quality? Evidence
from archival data. The Accounting Review, 88(6), pp.1993-2023.
Hay, D., 2014. Auditing, international auditing and the International Journal of
Auditing. International Journal of Auditing, 18(1), pp.1-1.
He, X., Pittman, J.A., Rui, O.M. and Wu, D., 2017. Do social ties between external auditors and
audit committee members affect audit quality?. The Accounting Review, 92(5), pp.61-87.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Shareholder.anz.com. (2019). [online] Available at:
https://shareholder.anz.com/sites/default/files/anz_2018_annual_report_final.pdf [Accessed 24
May 2019].
Simnett, R. and Huggins, A., 2014. Enhancing the auditor's report: to what extent is there support
for the IAASB's proposed changes?. Accounting Horizons, 28(4), pp.719-747.
Toy, A. and Hay, D.C., 2014. Privacy auditing standards. Auditing: A Journal of Practice &
Theory, 34(3), pp.181-199.

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Westpac.com.au. (2019). [online] Available at:
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2018_Westpac_Annual_Report.pdf [Accessed 24 May 2019].