Auditing and Assurance Assignment

This article discusses the new auditing standard ASA 701 and its implications in the case of Lehman Brothers collapse. It explores key audit matters in the banking industry, focusing on Commonwealth Bank, Westpac Bank, Bank of Queensland, and ANZ Bank. The article also highlights the importance of adequate disclosure in annual reports.

AUDITING and ASSURANCE ASSIGNMENT

ASA 701
Executive Summary
The new auditing standard came into operation that is ASA 701 came into operation after the
financial collapses that shook the corporate world. The main goal of the standard is to ensure that
the annual report provides adequate disclosure and help in informing the investors about the
particular entry. With the help of this report, the auditing standard ASA 701 and the case of
Lehman Brothers collapse is studied in an in-depth manner. The report starts with the
introduction followed by the study of ASA 701. Further the disclosure of key audit matter is
discussed in the banking industry and top four banking company listed on the ASX is selected
for the report.
2

ASA 701
Contents
Introduction.................................................................................................................................................3
ASA 701, a powerful statutory requirement................................................................................................4
COMMONWEALTH BANK............................................................................................................................5
Westpac Bank..............................................................................................................................................6
Bank of Queensland....................................................................................................................................7
ANZ bank.....................................................................................................................................................8
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
3

ASA 701
Introduction
Lehman Brothers ranked fourth in its banking domain in the US. It was declared bankrupt after
the year 2008. This financial institution operated by means of providing international financing
services to its consumers until the same was not disintegrated that is up till 2008. Lehman
Brothers failed to owe to not just one or two but multiple reasons. The most significant reason
behind the failure of the company could be attributed to its management’s casual attitude towards
assessing the existing and potential risks (Moroney & Trotman, 2016). Even the auditors’ of the
company were seen unprofessional enough to not inform the managers of the impacts pertaining
to ignorance of such material risks. The company would not have failed this miserably if the
auditors of the same were diligent enough in performing their responsibilities (Goodstein, 2011).
There are still possibilities for the rectifications to be made by means of installing internal
control mechanisms and implementation of better strategies.
• Facts to be considered while preparing the financial statements
The housing economy exploded from the year 2001 to 2008. This encouraged Lehman Brothers
to make huge investments in the housing economy and for this very purpose the company
borrowed a huge amount of debts. This impromptu decision flopped terribly as it didn’t work in
the favor of the company and it bought about a lot of consequences for the same to suffer. This
signifies the fact that how the management of the company is ignorant enough to leap without
faith that is ill-bothered enough to assess the outcomes and consequences of their decisions
pertaining to the engagement of huge investments in a dicey portfolio (Connelley, 2012). The
organization also faced severe consequences as a result of investing in private financing and real
estate business.
• Instruments took into use
Lehman Brothers took Repo 105 transactions into its use which seemingly was a not good choice
to make. Lehman Brothers chose Repo 105 transactions so as to falsely enhance its financial
statements which would ultimately make the company look desirable from the viewpoint of the
users of these financials (Ghandhar & Tsahuridu, 2013). The investors of the financial statements
4

ASA 701
upon gaining trust in the company would invest their hard earned money so as to purchase the
securities of the same.
The management of the company might take certain decisions so as to enhance its capital which
might ultimately allow the same to suffer huge losses not only in terms of revenues but
reputation as well. Therefore, the company must always represent its financials in a manner so as
to portray a genuine view of the state of affairs (Edward & Alexander, 2013). The ultimate
reason behind the company’s failure can be attributed to these Repo 105 transactions which only
impacted the securities of the same by means of portraying transactions as inventory sale for
securities. The auditors too had a dominant role in supporting such practices of an organization
and they took every possible measure that was required to be taken so as to hide the presence of
such securities by not reflecting the same in the company’s balance sheet. The borrowed loans
too were labeled as proceeds from the sale of an investment (Elder, JBeasley & Arens, 2010).
The key audit matters are nothing but significant matters pertaining to the audit. These are the
matters that hold an utmost significance in the well being of an organization. There are various
matters identified in the course of audit function but only certain matters are labeled as material
depending on the stress the same can put a company into. A new standard ASA 701 is introduced
which makes it mandatory for the management of an organization to highlight its key audit
matters in the financials of the same (Nicolaescu, 2013). This will facilitate the auditors and
management of the company to put more emphasis on the key audit matters of the same by
means of disclosing them in the company’s financials.
ASA 701, a powerful statutory requirement.
ASA 701 has various new features. It allows the auditors of different organizations to construe
necessary decisions pertaining to the inclusion of KAM in the auditors’ reports. It has also
provided the way in which an auditor should describe key audit matters. It has also made it
mandatory for the auditors’ reports of the listed companies to have key audit matters
communication (English, Guthrie, Broadbent & Laughlin, 2010). ASA 701 has also explained
various scenarios in which matters pertaining to key audit matters are not reflected in the
company’s annual reports. The new standard also explains the ways through which an auditor
can assess the matters that need immediate attention and can also trace such areas of risks that
5

ASA 701
require which needs to be prioritized over others (Rezaee & Kedia, 2012). The new standard also
helps in recognizing the need for all other documents pertaining to key audit matters.
KAM are significant matters traced by an auditor during his audit function. Upon tracing of such
key matters, the auditor must discuss the same with the management of the company so that they
can take necessary measures by means of construing effective strategies and applying internal
control mechanisms (Geoffrey, Joleen & David, 2016). Doing this, the risks arising out of such
key audit matters will either be minimized or eliminated completely. Here the entire focus is on
the banking industry
COMMONWEALTH BANK
 Loan impairment provisions
Loan impairment provisions were deemed as a significant audit matter on account of various
reasons (Wright & Charles, 2012). The company made some unaccepted judgments pertaining to
the identification of its provisions of impairment against lending assets and determining the size
of the same. The organization prefers to assess impairment provisions against lending assets on
one by one basis. The total amount of the collateral available with the organization against these
loans construes the basis on which the provisions related to expected future cash repayments and
estimated proceeds are determined (Commonwealth bank, 2018). The company had the majority
of loans assigned in the form of corporate and business loans as of June 30, 2018. When the
impairment of an individually assessed loan is missed out then the same is paired with a group of
loans that have born the same amount of risks.
Depending on the information reflected in the company’s mechanisms, detection of loans that are
not impaired, evaluation of the rightness and genuineness of the company’s mechanisms and
transferring data impairment provisioning models from the underlying source systems were the
areas that were drilled so as to ensure that the internal control systems were properly designed
and were functioning efficiently at the same time (Commonwealth bank, 2018).
 AASB 9 expected credit loss
6

ASA 701
The company is keen on formulating AASB 9 Financial Instruments from July 1, 2018. AAS
mandates the disclosure of necessary information for periods prior to the adoption of new
accounting standards regarding the impact that AASB 9 Financial Instruments shall have on the
financial statements of the company (Commonwealth bank, 2018).
The analysts along with PwC modeling and eminent economists performed various audit
mechanisms so as to ascertain the genuineness of the new accounting standards installed by the
company along with the appropriateness of the models that were formulated especially for the
evaluation of ECL, inputs, and assumptions required in these models (Commonwealth bank,
2018). The requirements of the new accounting standard were assessed in contrast with the
methods present in the ECL models.
Westpac Bank
 Impairment charges provision
Various types of impairment charges provisions on loans was observed on both subjective and
complex judgment that working made by the organization after analyzing the necessity, size and
other impairment provisions for the loans. The estimations of the provisions that were being
made for impairment charges on loans were estimated using future cash repayments and other
proceeds from collaterals (Westpac Bank, 2018). Sometimes, it is also observed that individual
loans are not impaired but are added to a group of loans which are having same risk features and
are collectively addressed on a portfolio by the help of internal models developed by the
organization.
The auditor designed and tested the impact of various key controls over the provisions for
charges pertaining to impairment on the loans. The various key controls that were being analyzed
by the auditor for governance including the continuous reassessment of the impairment model
which was designed by the group for estimation of impairment charges against the loans. The
auditor also exercises control over the identification of a decline in the credit quality of
individual loans that were being provided to the organizations and individuals (Westpac Bank,
2018). The information technology system opted by the organization also consisted of various
underlying systems and impairment models that were needed to be reviewed and also adjustment
7

ASA 701
were be suggested by the auditor in relation to the impairment models and other economic
overlays so that maximum output can be achieved.
 Financial assets and financial liabilities fair value
The financial instruments of the organization were observed to be at fair value which was
including various kinds of derivative assets and liabilities, available-for-sale securities, trading
securities, various debt instruments and other assets or liabilities which were provided FV. The
financial instruments of the organization used market and other observation prices for valuing
the assets and liabilities. Various assets or liabilities which required a lot of attention for
determination of their value were kept similar to the prior year. Two major factors were
important for analyzing this area which constituted of the magnitude of the financial instruments
that were used for assessment of the FV of the material and also the complex judgment that was
being made for estimating the FV using the financial instruments (Westpac Bank, 2018).
The auditor assessed the design of various key controls and also tested their usefulness for
determination of their values. Some of the key controls included governance of mechanism and
monitoring evaluation processes. Also, valuation models and other unit pricing controls were
confirmed with external custodians. The information technology systems used by the
organization for management and transfer of data was also evaluated.
Bank of Queensland
Software
It is important for the organization to assess the value of the intangible computer software that is
used by it. Assumptions were being made on the consolidated entity and bank for estimation of
the value of the computer software that is generated internally. Capitalization of costs was made
in order to estimate the value of the computer software used by the organization to analyze the
actual costs that were incurred by the external developers and the internal staff salary costs
(Bank of Queensland, 2018). This assessment was subjective in nature and a focus on the
allocation of the cost was involved in order to define the methods that were used to record and
capitalize on staff salaries.
8

ASA 701
The auditors conducted a process of evaluating the consolidated entities and banks capitalization
policy so as to guide the relevant AS. A sample of internal regenerated computer software
project was also being analyzed in order to develop and challenge the bank's application of the
capitalization policy (Bank of Queensland, 2018).
Control
Control is a very important KAM because it involves the complexity of estimation of the fair
values of various financial instruments. The organization tries to use evaluation techniques for
determination of the financial instruments and also the judgment level and complexity increased
because of the new models that were used for determination of these values on the basis of their
quoted market prices (Bank of Queensland, 2018). The judgmental nature of this process created
the necessity of audit focus and suitability and consistency in relation to the valuation principles.
The auditors also carried out the task of analyzing and designing the effectiveness in control
structure of the financial instruments. All the transactions are monitored by them in order to
estimate the fair value by using proper trade attestations. Analysis of the external data,
independent market to market analysis and assessment of threshold were being used in order to
ascertain the FV of the financial instruments.
ANZ bank
 Credit impairment provision
Preparation of the financial reports of the organization various accounting standard should be
taken into account. The use of the AS for the development of the financial report will increase
the complexity of the task but will also improvise the statements of the organization. There are
various disclosures made by the organization for determining the loans and advances that
working exercised by the group. The methods and models used by the organization to evaluate
the transactions and because of their complex nature made the evaluation of judgment hard
(ANZ Bank, 2018). There are also a number of key assumptions that working made by the
organization in relation to the standard that was to be followed by the models while conducting
the accounting process.
9

ASA 701
It is important for the auditor to determine the risks that are present in the financial statements of
the organization. Various tests and approvals should be e conducted in order to determine the
performance of the annual loan assessments and control over the credit quality of the
counterparties. Various test control systems and identification of exposure in the internal and
microeconomic factors were to be observed for analysis of the accuracy that was present in the
financial statements of the organization after fulfilling all the policies and regulatory
requirements.
 Valuation of financial instruments held at fair value:
The financial instruments of the organization were available for sale of assets, derivative assets
and liabilities which can be measured at FV with the help of profit or loss. financial instruments
assessment at FV is considered as a KAM because they are of significant value which can affect
the organizations business and also show the volume and range of products can affect the
management processes that can lead to inaccurate valuations (ANZ Bank, 2018).
The audit procedures included testing of rights and management controls, assessment of the
accuracy of data transfer between the transaction processing systems and also risk management
or assessment for financial inconsistency present in the evaluation processes across the products.
10

ASA 701
Conclusion
The auditor needs to consider KAM and reflect them while preparing the audit reports of the
organization. The method used by the organization to prepare the financial statement should also
be determined by the investors so as to estimate the reliability and financial statement accuracy.
The auditor should try to remove any kind of doubt that is present in the reports of the
organization so that it can reflect the transparent or true and fair view of all the transactions. The
global financial crisis was observed after the application of a new standard ASA 701. This new
standard initiated ways to safeguard the interest of the investors and also the KAM of the
financial statements of the organization. Appropriate investment related decisions should be
taken by the investors after analysis of the financial statements that has been prepared after
considering the ASA 701 implication.
11

ASA 701
References
ANZ Bank. (2018) ANZ Bank 2018 Annual report & accounts. Available from:
https://shareholder.anz.com/sites/default/files/anz_2018_annual_report_final.pdf [Accessed 17
May 2019]
Bank of Queensland. (2018) Bank of Queensland Annual report & accounts. Available from:
https://www.boq.com.au/microsites/annual-reports/2018 [Accessed 17 May 2019]
Commonwealth bank. (2018) Commonwealth bank Annual report & accounts. Available from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 17 May 2019]
Connelley, T. (2012) Aspects of leadership, Ethics, law and Spirituality, Marines Corps
University Press
Edward,F & Alexander, M. (2013): Stakeholder management and CSR: questions and answers.
Oxford Press
Elder, J. R, Beasley S. M.& Arens A. A. (2010) Auditing and Assurance Services, Person
English, L., Guthrie, J., Broadbent, J. and Laughlin, R. (2010) Performance audit of the
operational stage of long term partnerships for the private sector provision of public services.
Australian Accounting Review. 20(1), pp. 64-75. DOI: 10.1111/j.1835-2561.2010.00075.x
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House
and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons..
30(1), p.143-156. DOI: https://doi.org/10.2308/acch-51309
Ghandar, A & Tsahuridu, E. (2013) The Auditing Handbook 2013. Australia: Pearson.
Goodstein, E. (2011) Ethics and Economics, Economics and the Environment. Wiley
Moroney, R., and Trotman, K.T. (2016) Differences in Auditors' Materiality Assessments When
Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research.
12

ASA 701
33(2), p.551-575. Available from: https://doi.org/10.1111/1911-3846.12162 [Accessed 17 May
2019]
Nicolaescu, E. (2013) Understanding Risk Factors for Weaknesses in Internal Controls over
Financial Reporting’, Psychosociological Issues in Human Resource Management, vol. 1, no. 3,
pp.38-44. Available from: http://web.nacva.com/JFIA/Issues/JFIA-2013-2_3.pdf [Accessed 17
May 2019]
Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing and
Detecting Financial Statement Fraud. Journal of Forensic & Investigative Accounting. 4(2), pp.
176-205. Available from:
http://www.scirp.org/(S(351jmbntvnsjt1aadkposzje))/reference/ReferencesPapers.aspx?
ReferenceID=779185 [Accessed 17 May 2019]
Westpac Bank . (2018) Westpac Bank Annual report & accounts. Available from:
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
ASX_2018_Full_Year_Profit_Announcement.pdf [Accessed 17 May 2019]
Wright, M.K. & Charles, J. (2012) Auditor independence and internal information systems audit
quality. Business Studies Journal 4(2), 63-84. Available from:
http://scitecresearch.com/journals/index.php/jrbem/article/viewFile/284/230 [Accessed 17 May
2019]
13