Significant Risk in Auditing and Assurance

This document discusses the concept of significant risk in auditing and assurance. It explores the significant risks associated with cash and cash balances, deposits and other borrowings, and trading instruments. The document also highlights the key assertions at risk for these accounts.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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1AUDITING AND ASSURANCE
Significant risk is the assessed and identified risk owing to material misstatement that
requires special consideration of audit in accordance with the judgement of the auditors.
Risks of the material misstatement are assessed at – (i) assertion level and (ii) financial
statement level (Knechel and Salterio 2016)
Looking into the balance sheet of NAB, that provides banking solutions including
accounts, insurance, finance, credit cards personal loans and home loans for the year ended
3oth June 2018, accounts which are seemed to be at significant risk are –
1. Cash and cash balances with other bank
Cash and cash equivalents are always exposed to material misstatement due to its
liquid nature irrespective of the amounts involved with it. Cash is considered as at significant
risk as it can be embezzled, stolen or misstated if the internal control is not sufficient.
Further, the cash balance is associated with one major issue that is recording at proper
amount in the financial statement after reconciling the same with the bank account
(Capital.nab.com.au 2019). NAB records cash and liquid assets and the amounts due from
other banks that are readily convertible into cash within the period of 3 months under cash
and balances with other banks. As the cash is highly liquid, it is exposed significant risk of
changing the value (Brown-Liburd and Vasarhelyi 2015)
2. Deposits and other borrowings
Deposits and other borrowings involved the largest amount of obligation for NAB and
hence, it is at significant risk by the amount involved. While auditing debt, significant risk
can be involved regarding its classification if the covenant violations take place. Another
significant risk that can be involved with this item is that for inflating equity borrowing may
not be reported in the balance sheet or under-reported (Antipova 2016).

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3. Trading instruments
Trading instruments are considered as at significant risk as its valuation is highly
dependent on volatile market condition. NAB’s trading instruments include derivatives those
are not under the qualifying hedge relationship and securities those are classified as held for
trading. Risks involved with complex derivative instruments are higher as compared to
dealing with stable items (Capital.nab.com.au 2019)
Key assertions at risk for the above mentioned accounts are as follows –
1. Cash and cash balances with other bank
Major assertions involved with cash balance are –
 Existence that is the cash balance reported in the balance sheet actually exists on the
date of balance sheet
 Accuracy that is all the cash related transactions have been recorded and reported
correctly and appropriately
 Cut-off that all the cash related transactions are reported under correct accounting
period (Mock and Fukukawa 2015)
2. Deposits and other borrowings
Major assertions involved with deposits and other borrowings are –
 Classification and completeness that is the assertion that all the deposits and
borrowings are classified and recorded properly
 Obligation that is the assertion that the debt is actually and legally owed by the entity
and not by any other (Mock and Fukukawa 2015)

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3. Trading instruments
Major assertions involved with trading instruments are –
 Valuations that is all the trading instruments are values appropriately using proper
valuation method
 Existence that is all the trading instruments reported in the balance sheet actually
exists on the date of balance sheet(Mock and Fukukawa 2015)

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Reference
Antipova, T., 2016. Auditing for financial reporting. In Global Encyclopedia of Public
Administration, Public Policy, and Governance. Springer.
Brown-Liburd, H. and Vasarhelyi, M.A., 2015. Big Data and audit evidence. Journal of
Emerging Technologies in Accounting, 12(1), pp.1-16.
Capital.nab.com.au., 2019. [online] Available at:
https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf [Accessed 4 May
2019].
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Mock, T.J. and Fukukawa, H., 2015. Auditors' risk assessments: The effects of elicitation
approach and assertion framing. Behavioral Research in Accounting, 28(2), pp.75-84.