Auditing and Assurance

This study material provides an in-depth analysis of auditing and assurance. It discusses the rationale for introducing ASA 701, the importance of recognizing and reporting key audit matters, and examines the key audit matters of Australian banks in the banking industry. The material also includes recommendations based on the analysis.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
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Table of Contents
Introduction:...............................................................................................................................2
Rationale for ASA 701:..............................................................................................................2
Explanation on ASA 701...........................................................................................................3
KAMs of the Companies under Australian Banking Industry...................................................3
Industry Selection...................................................................................................................3
KAMs of the Australian Banks..............................................................................................3
Bank of Queensland...............................................................................................................3
ANZ Banking Group Limited................................................................................................3
Commonwealth Bank.............................................................................................................4
National Australian Bank.......................................................................................................4
Medibank Private Limited......................................................................................................4
Westpac Banking Group........................................................................................................5
Conclusion and recommendations:............................................................................................5
References:.................................................................................................................................6

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Introduction:
Recently there has been a major engagement of auditors is noticed in the collapse of
bigger company. This happened when the auditors failed to take into the account the fraud
acts or events in financial report that contributed to collapse of the company. To avoid further
frauds, some important changes is introduced in the audit procedure. The introduction of
ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report (ASA
701) can be regarded as one such changes that has increased accountabilities of the auditors
relating to the recognition and reporting of key audit matters as well as issues for the benefit
of audit clients and financial report users (Kumar and Sharma 2015). The purpose of this
report is to assess the primary rationale for introducing the new auditing standards where
focus is placed on the main reason that contributed to the decline of Lehman Brothers.
Following this, the report would assess the auditor’s efficiency in recognizing and reporting
the Key Audit Matters of the ASX to top 100 listed banks in Australian banking industry
(Auasb.gov.au 2019). The report would be providing the recommendation relating to the
ASA 701 based on the analysis made.
Rationale for ASA 701:
In order to locate the material misstatement, the auditors are under obligation of
testing the financial reports. In the recent years it is noticed that there has been a decline in
auditor’s responsibility and this decline is evidently noticed in the biggest downfall of
companies all across the world (Murdock 2016). The decline of Lehman Bros is an important
example where its auditors Earnest & Young were mainly accountable for the failure of the
corporation. The management of Lehman brothers used the Repos illegally to manipulate the
business leverage position so that they can report their financial reports in an enhanced way
to present it to the investors and stakeholders. The management increased the company’s
balance sheet by $50 million by using Repos (Edwards 2016). Though the management were
aware of the manipulation in the financial statement, the auditors of the Lehman Bros issued
the management with the unqualified audit opinion by overlooking these aspects. This
ultimately resulted in the failure of the company and ultimately contributed to global
financial crisis.
The primary reason for introducing the new auditing standard ASA 701 is the decline
of Lehman Bros and the simultaneous outbreak of financial crisis across the world in 2008.
The primary motive of the controllers developing the ASA 701 is to make sure that the
problems of auditing is addressed unlike the Lehman Bros that was overlooked. It became
necessary to consider the audit gaps in the audit of Lehman Bros due to the incorrect auditing
and this resulted in the introduction of new audit standard namely ASA 701 (William, Glover
and Prawitt 2016). According to the new auditing standard requirement given under the ASA
701 it is of utmost importance for auditors to make sure that the appropriate disclosure is
made for areas that has high audit risk. According to 701, it requires the auditors to assess the
management’s judgements and they are under obligation of considering the effect of
important transactions and events on the financial reports of organizations (Jones 2017).
Furthermore, the ASA 701 requires the disclosure of audit issues based on the key audit
matters in the audit report. The Lehman Bros would have been saved from collapse given the
new auditing standard of 701 was available during that time.
Another important concern from the failure of Lehman Bros is the company’s ability
to continue as the going concern (Agerberg et al. 2018). The financial crisis of 2008
represents how rapidly changes in financial markets can result in the decline of large
companies such as Lehman Bros. Unfriendly market situation can impact the company’s

3AUDITING AND ASSURANCE
ability of continuing as the going concern. The auditors of the brothers failed to take into
account the important events that may affect the ability of the company to function as the
going concern and this formed the important reason for downfall of the company (Sirois,
Bédard and Bera 2018). The failure of Lehman Bros resulted in the revision of ASA 570 as
going concern which now requires the auditors to gather necessary audit evidence to examine
the management use of going concern basis of accounting to recognize the material
misstatement relating to the company’s ability of continuing as going concern.
Explanation on ASA 701
ASA 701 is a viewed as new auditing standard that are aimed at auditing and
communication of important audit matters in the report of the auditors. The existence of
positive features is witnessed under ASA 701 (Kotb et al. 2018). They are regarded
compulsory in the communication of key audit matter in audit report. This includes the
specific procedure involved in ascertaining the KAM such as matters communicated with
employees that are charged with governance, considering the areas that has higher risks and
ascertaining the important issue in the report. It also includes the method used in describing
the key audit matters in audit report, considering the situations when the key audit matters is
not reported in the auditor’s report and necessary audit documentation for KAMs. The ASA
701 requires the auditors to consider the KAMs while taking account of essential aspects,
secondly, the auditors should assure that effective communication of KAMs is included under
the appropriate heads of auditor’s report (Adelopo 2016). The person that is charged with
governance should communicate the KAM and finally the auditors must ensure that adequate
documentation of KAMs is made.
KAMs of the Companies under Australian Banking Industry:
Industry Selection
The present report takes into the consideration the Australian banking industry. The
report focuses on the top 100 banks that are listed on the ASX for assessing the KAMs
(Boolaky and Quick 2016). The report would show how the auditors have efficiently assessed
the key audit matters of the banks. The differences and similarities between the key audit
matters for the banking industry is the different size of the entities in the banking industry.
KAMs of the Australian Banks
Bank of Queensland
The auditors have stated five key audit matters for Bank of Queensland (Boq.com.au
2019). This include the specific and collective provision relating to the impairment of loan
and advances for amortization cost, valuation of goodwill, valuation of intangible computer
software, measurement of value of financial instruments, IT systems and control
environment. For ascertaining the aforementioned key audit matters the auditors took into
consideration the examination of detailed provision of impairment and have collectively
assessed the provision. The auditors have also assessed the important forward looking
assumption that is applied in the value – in use model that includes the assessment of
forecasted operating cash flow and discount rate, assessment of important assumption for
estimating the capitalization of costs and anticipated useful lives (Antipova 2016). The
auditors have tested the existence of complexities that are inherent in the assessment of fair
value process and testing the IT system along with the banks controlled environment. On the
basis of these audit arrangement, the auditors have developed the audit process that includes
the sample testing of specific and collective provision, examining the CGU procedure of bank
and assessment of capitalizing policies of bank.

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ANZ Banking Group Limited
For ANZ Banking Group Ltd the auditors have recognized the four KAM, this
includes the provision for credit impairment and disclosure of anticipated effect on the AASB
9, financial instrument divestment and IT systems and controls (Shareholder.anz.com 2019).
The auditors have also tested vital controls, conducted credit assessment and tested the banks
process for validation of first KAM. For second KAM, they have tested the access right,
governance, internal and approval control. For third KAM, the auditors collected the
understanding of bank KAM to recognize and assess the customer remediation activities and
have also tested completeness assertions and other relevant key audit matters. For four KAM,
auditors have examined and perform a test on the internal control of the bank industry for the
purpose of divestments (Hoque and Pearson 2018). For the final KAM, the auditors have
performed the governance control, tested the protective controls, access rights and tested the
operative effectiveness. In addition to this, the auditors have also provided the reasons or
rationale for taking into the account the matters as the KAM for banking operations. The
KAM that is identified above for Bank of Queensland is different from the ANZ bank
because it is mainly associated to the impairment and disclosure impact on the financial
instrument and divestment.
Commonwealth Bank
The KAM that is identified by the auditors are the impairment of loan provision,
judgemental valuation of financial instruments, provision for conducting risks and regulatory
action, valuation of insurance policy holder liabilities and operations of financial reporting IT
systems and controls (Commbank.com.au 2019). The auditors have ascertained the KAM in
the banking industry is with the help of certain actions in the form of valuation of assumption
and calculations that is used by banks relating to loan impairment provision, testing the
judgements of management in ascertaining the values of compound derivatives, examining
the judgements that are involved in ascertaining the likelihood financial outcome of provision
for risk and regulatory actions for the available information, performing test of the
assumption in anticipated timing, claims and duration involved in insurance policy liabilities
and testing of outline of governance along with the other aspects of the IT system and control
(Ey.com 2019). The auditors in banking industry have considered substantive audit process to
assess the KAM of the bank. In addition to this, they have also disclosed the substantive audit
procedure in the KAM section of the audit report.
National Australian Bank
The auditors of the NAB have recognized the four KAM in the bank and this includes
the provision for credit impairment on loans at amortized costs, conducting the risks and
provisions, IT systems and the reconstruction provisions to promote the control over the
financial reporting. The auditors have recognized the firstly the KAM because of the
existence of requirements to ascertain the impairment, exposure identification and
incorporation of forward looking information (Nab.com.au 2019). Unlike the other industry
the auditors have evaluated the important area of judgement associated to the risk and
provisions, tested judgements associated to the restructuring the provision and assessing the
degree of dependence of bank on IT system and control (Becker, Stead and Stead 2016). The
auditor’s procedure that has been undertaken comprises of the examination of the banks
anticipated credit loss model, testing of relevant controls associated to the data that is used in
the determination of provision, considering the process of bank to recognize and perform the
assessment of key audit matters, assessing the restructuring plans of bank relating to the
provision and assessment of effectiveness applied on the IT system through sample testing of
the transactions.

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Medibank Private Limited
The auditors of Medibank Private Ltd have recognized two KAM in the bank which
includes the estimation of outstanding claims liability that worth $379.8 million and
dependence on automated procedure and controls (Medibank.com.au 2019). For the first
KAM, the auditors have tested the judgements that is applied for determining the type and
value of claims, quickness involved in process the claims and inflation cost and trends in
medical that have affected the business. The adopted auditing procedure for the KAM is
testing the control design along with the operating effectiveness and claims that is received
following the year end and bank’s actual use of expertise. In the second KAM, the auditors
have considered it as the KAM due to the heavy dependence on the bank functional and
reporting process associated to the IT system and modifications made in the system along
with the underlying business procedure (Heenetigala and Armstrong 2017). The audit process
that has been undertaken is the assessment of operational effectiveness of the IT system,
performing the test of samples that involves the automated computations and testing of
aspects of developmental program and changes.
Westpac Banking Group
The auditors of the Westpac banking group have recognized five key audit matters.
The matters include the provision for performing impairment charges, AASB 9 financial
instruments, fair values of the financial assets and financial liabilities, functions of IT
systems, control and provisions and contingent liabilities (Westpac.com.au 2019). The first
key audit matters that has been recognized is because of the existence of higher degree of
subjectivity in the estimation of impairment of loan provisions. The second key audit matters
that has been identified is the existence of higher level of judgement that is applied for the
ascertainment of the exposure that results in increased amount of risk. The primary reason
behind the third key audit matter is the magnitude of financial instrument that is held under
the fair value and involves the judgement and inherent complexities (Oprisor 2015). The four
key audit matter is identified because of the heavy reliance of the bank on the IT system and
control. While the final key audit matter that is recognized is the existence of compliance,
regulations and provision relating to remediation and contingent liabilities. The auditors have
framed the needed the audit process based on the nature of the key audit matter recognized.
As per the discussion, the auditors of the above stated companies of the banking
industry have efficiently segregated their responsibilities in two parts (Whittington and Pany
2013). In first portion they have recognized the logical rationales regarding the selection of
KAMs where the auditors have efficiently evaluated the aspects of key judgments,
estimations, assumptions and others. Following that, in the second portion, the auditors have
taken appropriate audit process based on the nature of KAM and the result obtained from first
section (Knechel and Salterio 2016). Undertaking this aspect has created an even balance in
this part. It is worth mentioning that the disclosure of the KAMs in the audit report acts as the
main source of information for both the investors and the users of financial report because
they obtain the better understanding of the financial report with noteworthy audit issues. This
helps the users in decision making procedure.
Comparison of the Key audit matters:
The key audit matter needs diligent application of the professional judgement by
auditors. comparatively the significant risk areas is where the auditors assesses the higher risk
of audit during the planning stage. Additionally, the matters that challenges the auditor is the
formation of the opinion of the statement. Comparatively the key audit matters are takes into
the account the areas that comprises of the related party transactions and other difficult
transactions.

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Conclusion and recommendations:
According to the ASA 701, the auditors are under obligation of taking into account
the KAM in audit process. As a result, the companies are recommended to apply the efficient
audit risk management strategies along with the policies so that the occurrence of significant
events and transaction can be circumvented. In the meantime, a recommendation can be
provided to the auditors that they should efficiently communicate the important audit matters
that comprises of the risky transactions and events that can lead to significant material
misstatements in the financial reports. In the meantime, recommendations can be provided to
the auditors they should be highly professional and ethical as well to deal with the key audit
matters by ensuring compliance with the policies ASA 701 standard. The auditors are
required to be well aware at the time of conducting audit of the financial statements of clients
in order to efficiently recognize the transactions and events which may result in the material
misstatements. In addition to this, it is recommended that the auditors should treat the key
audit matters with respect to the policies and guidelines that is provided in the ASA 701. This
is because it will result in efficient handling of the key audit matters. At the same time, it
would be possible to communicate with the treatment of key audit matters with associated
parties in the effective way. Overall, the auditors are under obligation of complying with the
new audit matters standards ASA 701 for efficient treatment of the key audit matters.

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