Auditing

This study material provides insights into auditing, materiality, profits before tax, analytical procedures, and examples. It also analyzes the remuneration structure of major Australian banks. The companies evaluated include Commonwealth Bank, Westpac, ANZ Bank, National Australia Bank, and Bank of Queensland Limited.

Running Head: AUDITING 0
Auditing

AUDITING 1
Table of Contents
SA 315........................................................................................................................................2
Profits before tax is better..........................................................................................................3
Analytical Procedures................................................................................................................3
Examples....................................................................................................................................3
References..................................................................................................................................4

AUDITING 2
PART A
The companies chosen for the evaluation are Commonwealth Bank, Westpac, ANZ
Bank, National Australia Bank and the Bank of Queensland Limited. Each of the companies
is listed on the Australian Stock Exchange and belongs to the common industry that is the
banking and finance. Each of the company’s annual reports for 2018 have been analysed to
research on the executive remunerations.
The remuneration structure in the case of the Commonwealth Bank comprises of the
cash payments, in addition to the STVR (Short Term Variable Remuneration) Awards and the
LTVR (Long Term Variable Remuneration) Awards (CBA, 2018). Similarly in the case of
the company ANZ, a certain portion of the remuneration is fixed, and the rest is variable. The
variable part is further divided into cash and performance rights (ANZ, 2018). Further, the
company Westpac has also a target pay mix structure, where the fixed remuneration account
for the 34 percent, the short term variable award amounts to 34 percent too, and the long term
variable award is 32 percent (Westpac, 2018). As per the reports of the NAB, the executive
remuneration is comprised of the two parts that are the Fixed Remuneration in the form of the
effectively base salary, and the Variable Reward (VR), which is dependent on the
performance of the individual and the group as a whole (NAB, 2018). The remuneration
framework of BOQ consists of the fixed remuneration that includes the salary other benefits
including superannuation. Further this consists of the short term incentives comprised of cash
and equity and the long term incentives or the performance appreciation rights (BOQ, 2018).
The Commonwealth Group paid an amount of approximately $ 33079341 in the form
of fixed remuneration, short and long term benefits and share based payments for the year
2018. The amount of remuneration in the case of Westpac Group was $ 27022197 for fixed
remuneration and the awards for the year 2018. For the ANZ the executive remuneration

AUDITING 3
amounted to approximate of $ 49257129, which represents the fixed and the variable
remuneration. The remuneration for executives of NAB for the year 2018 was approximately
$ 27573178. For the BOQ group, the remuneration for the year 2018 was about $ 5477508.
Thus, the highest remuneration was paid to the executives of the ANZ Group.
It is significant to note that there was a drop down of about $ 60 million in the
remuneration of the executives of the Commonwealth Group, because of the issues in the
form of the poor risk and customer outcomes. Thus, it can be stated that the remuneration of
the executives of the Commonwealth are the most affected by the business performance.
Thus, each of the companies has a mixed set of remuneration. As per the research
conducted, it can further be stated that the executives are mostly paid in the form of mixed
framework of remuneration, where a portion is fixed in terms of cash and superannuation
payments and the other portion is variable in terms of the various factors. It must be further
noted that each of the companies have reported the comprehensive structure of remuneration,
in terms of figures of last year and present year for comparison. Further, the data for each of
the executive is presented separately. In addition to this, the companies have separately
reported on the changes made in the remuneration structure in the current year from the last
paid remuneration.
Part B
SA 315
Materiality is closely related to the risk management and decision making in the face
of uncertainty. Materiality is the concept in the accounting and the auditing of the financial
statements that reflects that there are certain items which can be disregarded by the firm as
the mature demands because of its trivial nature but as per the AASB standard on Materiality

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it is required that the material transactions shall be reported in the financial statements as they
can significantly impact the performance of the company. The main objective of the audit of
the financials statements is that the auditor shall provide the true and fair view on the fact that
whether the financial statements are free from all the material aspects, in conformity with the
identical financial framework such as Generally Accepted Accounting Principles. The
research also suggests that according to the KPMG formula the materiality is 1.84 times (the
greater of the assets or the revenue) (DeZoort, Holt & Stanley, 2018).
The concept of materiality is both applied by the auditor both in the planning and
performing the audit and evaluating the effects of the misstatements. There is a threshold set
by the IASB have been outlined below. ISA 320, paragraph A3 has provided certain limits to
calculate the materiality factor and some guidelines with the help of which the company can
bifurcate as to whether the transactions are material or not.
The rules are subdivided into following ranges and the same have been presented in
the table below
Profits before tax is better
The profits before tax is the figure which is arrived after deducting the operating as
well as the non-operating expenses from the sales and the gross profit value respectively. The
situation is looked from the perspective of the company before it pays tax to the government.
Therefore profit before tax exists only because of the fact that the expense of the tax changes
and eliminating it out from the calculation gives a picture to the investor of the changes
constantly happening in the company from year to year. The term is also interchangeable
with the names like earnings before tax or pre-tax profits. The profit before tax of the Cloud 9
Pty is 2999839 and the same shall be compared to the previous year the profit before tax in
the year 2014 was 3565974. The basic reason for the decrease in the profit before tax in the

AUDITING 5
year 2015 is the increased operating expenses from the operating activities (Christensen,
Eilifsen, Glover & Messier, 2018).
Analytical Procedures
Analytical procedures are the type of the evidence which is used during the audit of
the financial statements. These procedures mostly assist with the indication of the possible
problems and the solutions can be invested properly and clearly. Analytical procedures
mostly involve the operational information being compared with the sets of the financial
information. In major cases, these relationships should remain consistent over time. If not, it
can imply that the financial records are incorrect, possibly due to errors or fraudulent
reporting activity (Bagwell, Quick & Vandervelde, 2017).
Examples
 The different types of the examples of the analytical procedures are comparing the
ending balances of the compensation account for a large number of years. The amount
rises and there are chances that the fraudulent payments are taken into consideration
with the assistance of the payroll systems.
 The trend line of the bad debts shall be kept on the supervision and this amount
should vary in relation to the sales and if there is no variation than it can be
understood that the company is going wrong somewhere.
 The total annual compensation can be identified by the multiplication of number of
employees and the average pay and then same shall be compared by the actual annual
compensation. The material transactions hidden at this stage are can be the payment
of the bonus amount or the employee leave without pay (Van Wychen, Ramirez &
Laurens, 2016).

AUDITING 6
 Compare the sales days outstanding to the amount prior to the years. The major
criteria between the relationships over the sales shall be in the increased manner when
compared to the previous year. This technique is also known as the ratio analysis
technique and it is helpful in analysing the financial performance of the company. The
current ratio and the quick ratio are also required to assess the liquid position of the
company.
If the results of all the above examples are different than the actual amount than the same
shall be communicated to the management. Management responses shall also be documented
as it could become a valuable proof for the future scenarios. It is the duty of the auditor to
carry the audit with the help of the analytical procedures to make sure the financial
statements are free from the material misstatements.

AUDITING 7
References
ANZ. (2018). 2018 Annual Report. Retrieved from:
https://shareholder.anz.com/sites/default/files/anz_2018_annual_report_final.pdf
Bagwell, C., Quick, L. A., & Vandervelde, S. D. (2017). Analytical Procedures: An In-Class
Exercise. In Advances in Accounting Education: Teaching and Curriculum
Innovations(pp. 51-78). Emerald Publishing Limited.
Bank of Queensland Limited. (2018). 2018 Annual Report. Retrieved from:
https://www.boq.com.au/content/dam/boq/files/shareholder-centre/financial-results/
2018/FY2018_Annual_Report.pdf
Christensen, B. E., Eilifsen, A., Glover, S. M., & Messier, W. F. (2018). The Effect of
Materiality Disclosures on Investors’ Decision Making.
Commonwealth Bank Australia. (2018). CBA- Annual Report- 2018. Retrieved from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
results/fy18/cba-annual-report-2018.pdf
DeZoort, F. T., Holt, T., & Stanley, J. D. (2018). A Comparative Analysis of Investor and
Auditor Materiality Judgments. Auditing: A Journal of Practice and Theory.
National Australia Bank. (2018). Annual Financial Report 2018. Retrieved from:
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2018-
annual-financial-report.pdf
Van Wychen, S., Ramirez, K., & Laurens, L. M. (2016). Determination of total lipids as fatty
acid methyl esters (FAME) by in situ transesterification: Laboratory Analytical
Procedure (LAP) (No. NREL/TP-5100-60958). National Renewable Energy Lab.
(NREL), Golden, CO (United States).
Westpac. (2018). 2018 Annual Report. Retrieved from:
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2018_Westpac_Annual_Report.pdf