Key Audit Matters in the Banking Industry

This report discusses the key audit matters in the banking industry, focusing on four major banks in Australia. It highlights the importance of proper disclosure of audit matters in the audit report to ensure the effectiveness of financial statements and protect stakeholders' interests.

AUDITING & ASSURANCE

Auditing
Executive summary
It is one of the most important responsibilities of an auditor to make a valid opinion on the
financial statements and operations of the organizations in order to provide a proper report to the
stakeholders of the company. The auditor needs to check the ethnicity of different areas and the
management structure of the organization. In this report, various key audit matters that should be
reported by the auditor is clearly discussed. The banking industry is analyzed in order to
understand the key audit matters that are being used to analyze the statements of four major
banks of Australia.
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Auditing
Contents
Introduction.................................................................................................................................................3
Case of Lehman Brothers Limited................................................................................................................4
Banking industry..........................................................................................................................................5
 Suncorp group.....................................................................................................................................5
 National Australian Bank.....................................................................................................................6
Commonwealth Bank of Australia...............................................................................................................7
ANZ Bank.....................................................................................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Auditing
Introduction
Auditing standard ASA 701 consists of communicating key matters of the accounts of an
organization in the independent auditor's report. In accordance with this standard, the key audit
matters are the matters which are needed to be given special attention so as to highlight the
important transactions in the financial statements of the organization. In order to analyze such
transactions, the auditor should focus on the material misstatements that could have affected the
financial value of the organization in that particular accounting period (Hoffelder, 2012).
Application of the standard, the organization's auditor will be asked to mention the key audit
matters in the report so as to convey all the vulnerabilities present in the financial statements of
the organization to the management (Kaplan, 2011). The key audit matters play a very important
role in the organization because it will help them to determine their future. The financial
statements of the organization should be free from any kind of material misstatement and
vulnerabilities because they are being used by the investors and other stakeholders of the
company for determination of various decisions in relation to investment. Therefore the key audit
matters should be properly disclosed in the audit report (Lakis & Masiulevicius, 2017).
One of the most important responsibilities of auditors is to disclose all the factors of the accounts
and audit report clearly. Disclosing all the matters in relation to the audit report and the required
transactions should be done by the auditors of the firm (Lapsley, 2012). Key audit matters can be
defined as matters which require professional judgment and also are very sensitive in nature for
the profitability of the company. Each and every transaction taking place in the organization
should be properly analyzed so as to find vulnerability or any other kind of fraud so that the
performance of the business cannot be undermined. Key audit matters should be given more
importance because they determine the effectiveness of the financial reports of the organization
at the time of auditing (Livne, 2015) . All the audit procedures should be conducted in
accordance with the procedures so that the financial reports presented in front of the users can be
effective in nature. Also, proper analysis of the financial reports will help the organization to
avoid any kind of unbearable circumstances that may prevail on it in the near future (Wood,
2011).
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Auditing
This auditing standard explains the need for an auditor to make key disclosures of financial
matters in the independent auditor's report. Also, there are various features of this standard like:
• Presenting the key audit matters in the independent auditor's report is mandatory for every
company which is listed in any nation's stock exchange.
• For other companies, the auditor determines whether to use or not the principles of key audit
matters in the audit report prepared by him.
• The standard states that the auditor can determine the use of key audit matters in the audit
report. Also, this depends on the judgment day is on the mutual consent of auditor and
management of the organization so as to review the transactions that have been made by the
company. If any kind of risk or use fruits have been observed in the organization should use the
principle of key audit matters while constituting the audit report.
• The standard also helps to define the documentation that is required by the auditor in order to
analyze the key audit matters.
• If a situation arises where the auditor is not able to state the key audit matters in front of the
organization then he is liable to give a proper justification for the same. All the circumstances
that are justifiable are mentioned in this standard (Mock et. al, 2013).
Case of Lehman Brothers Limited
The organizations Lehman brothers Limited was observed to conceal various material facts that
were to be presented as key audit matters in the audit report. This wouldn't have happened if the
organization worked in accordance with the ASA 701. Hiding the financial facts led the
stakeholders and other investors of the organization to suffer from use losses and also to the
downfall of the organization.
Some of the facts that led to the downfall of the organization because of the nondisclosure in
auditor’s report were:
• A considerable decrease was observed in the leverage ratio of Lehman brothers Limited in
the year 2008 in accordance with the past years. The decrease in the leverage ratio was observed
because of the loans that were borrowed by the organization for making investments in the
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Auditing
mortgage market. The securities of the organization worked at stake because of which the
company was made vulnerable to losses (Sharp, 2010). The transactions were not disclosed in
the audit report because of which the investors and other stakeholders were unable to make
proper decisions. If the presence of ASA 701 would have been there, all these matters would
have been stated in the audit report and further would have saved Lehman brothers Limited from
the collapse.
• The organization constantly made repo 105 and other report transactions because of which
the statements were a field with errors. This was clearly noticed by the auditor but was not being
reported in the statements (Moroney & Trotman, 2016).
• The organization was to buy back the securities. This fact was also not stated in the financial
statements. Minimum rates of derivatives were being shown as the buyback amount. Therefore a
very unusual picture was depicted by the organization in its financial statement because of which
the investors were affected.
Hiding all such financial transactions from the audit report led the organization to collapse
gradually. If the organization would have implemented the use of ASA 701, proper disclosure of
all the key audit matters would have been there and hence proper risk management strategies
may have helped to stop the downfall of the Lehman Brothers Limited (Moroney & Trotman,
2016).
Banking industry
In order to make an analysis of the key audit matters that should be present in the auditor's
report, an example of the banking industry have been taken. All the necessary key audit matters
which should be present in the financial statement of the organization are being discussed in
accordance with the banking industry. 4 banks of Australia have been chosen for the analysis,
which are:
Suncorp group
Goodwill
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Auditing
It is very important for an organization to detect clear impairment values of goodwill so as to
forecast the discounted rates, cash flows and other assumptions that can affect the business of the
organization in near future. The total interest or income earned by the organization depends on
the terminal growth rate assumptions.
Various audit processes were conducted by the organization in order to understand the
transactions that were taking place in order to conduct the business. Analysis was also conducted
in order to determine the results that were initiated by the organization. The organization should
also hire an analyst in order to determine the future cash flows, growth assumptions and
discounted rates in the most appropriate way. The specialist should be hired in order to analyze
the external data and economic growth projections so that proper comparison can be made in
relation to the discounts provided to the organization.
Life insurance contract liabilities and gross policy liabilities under insurance
The Organization was trying to improve the life insurance policies so as to elevate the production
of the organization. Various arrangements and insurance facilities are being estimated in order to
determine the new contract liabilities. The strategic activities and reviews are conducted in order
to determine the conditions of the Australian market which can further help to reduce the cost
and improve the lives of business. Historical cost experiences and observable market data of the
business clearly assumed the actuarial accounting standards requirement.
National Australian Bank
Some of the most important key audit matters for the National Australian Bank are:
One of the most important functions of banks is to lend money and give safety and security
facilities to their customers. This organization is said to follow the accounting standard of AASB
9 which involves judgment assessment of various provisions and their amounts. The organization
provides various types of loan facilities to the customers on the basis of the risks and returns.
Proper investigations are made before providing loans so that every parameter can be checked
for categorization of lost provisioning. This function also helps the organization to determine the
impairment charges that are to be charged on the loans. Proper identification of risks and another
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Auditing
strategy should be made by the auditor in order to create provisions which will be useful for the
organization in the future.
The bank also has various types of contingent liabilities that are to be assessed in accordance
with the law of Australia. The management structure of the organization should identify any kind
of risk that may arise for the organization in the future. Hence, it is necessary for the order to
determine the key audit matters and suggest new methods that can help them to remove the
vulnerabilities from the system. If the management structure of the organization is not able to
fulfill the needs of the business then it may face negative downfalls that can reduce the money
and reputation earned by the organization.
Commonwealth Bank of Australia
Following audit matters were reported by the auditor:
It is very important for the organizations to create provisions for impairment of loans because it
will not only help them to make subjective judgments on the basis of time but also will help them
to create the proper amount of provisioning which is one of the most important audit matters. All
the loans should be assessed individually so as to determine the adequacy of their classification
and amounts in accordance with the business (Commonwealth Bank, 2018). This matter involves
adequate risk and hence time to time report should be presented to the organization with respect
to this.
The organizations also conduct the valuation of financial instruments regularly. It is very
important to measure the derivative value of the assets and liabilities present in the organization
in accordance to their fair values. The total derivative value of the organization consisted of 17%
of Total Assets and 5% of total liabilities. Generally, the evaluation process is conducted on the
basis of the total price is determined by the market or fair value rate. The remaining evaluation is
done according to the auditing standards of Australia. Valuation of liquid assets and other
intangible assets should also be made in order to know the actual value of the firm. Hence, it can
be stated that this requires a fair amount of judgment (Commonwealth Bank, 2018).
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Auditing
The contingent nature of liabilities should also be assessed properly because these are matters of
great importance. Hence, they should be considered as key audit matters because they can buy
the company's profit if not timely provisioned.
ANZ Bank
Credit impairment provision
It is very important for the financial organizations to clearly evaluate the accounting standards
while preparation of the financial reports of the firm. If proper use of accounting standard is
made while developing the financial reports then it will be free from any kind of material
misstatement or frauds. Following proper accounting standards also helps the organization to
disclose all the material information properly because of which the stakeholders and investors
are being able to take a decision in relation to investment easily. The method used by the
organization in order to measure values of different assets and liabilities should also be
mentioned clearly in the audit report as a key audit matter (ANZ Bank, 2018).
The auditor is also provided the task of completely evaluating the financial statements of the
organization and makes it free from any kind of vulnerability so that their credit rating can be
increased. Proper loan assessment should be made in order to identify the microeconomic factors
that can affect the business of the firm (ANZ Bank, 2018). Different type of test control system
should be used by the organization to fulfill all the regulatory requirements of the company.
Valuation of financial instruments held at fair value
It was observed that the value of financial instruments that were measured by the organization
was based on their fair value. Hence it should be clearly mentioned in the audit report that you
ordered matter because it will play a very important role in order to affect the business of the
organization and the products that are being sold by it. Accuracy of the data that is being
evaluated by the organization should also be assessed by proper processing systems so that any
kind of an inconsistency in the system can be analyzed.
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Auditing
Conclusion
After the analysis of the banking industry of Australia, it can be observed that organizations are
prone to various kinds of risks and threats that needed to be properly analyzed and treated
because they can lead to the organizations collapse. All the vulnerabilities present in the
organization's financial statements could be clearly analyzed and presented as key audit matters
in the audit report. the downfall of the organization Lehman brothers Limited clearly stated that
there was a considerable difference present between the regulations that were to be followed and
regulation that was being actually implemented. The downfall of the organization clearly states
that there was a problem existing in the supervision and auditing standard used for assessment of
the financial statement. Therefore, it will be necessary for the auditors to work according to the
auditing standards that have been accepted internationally in order to prepare the reports
ethically.
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Auditing
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 19
May 2019]
AUASB. (2018) Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report [online]. Available from: www.auasb.gov.au [Accessed 20 May
2019]
Commonwealth Bank. (2018) Commonwealth Bank Annual report & accounts. Available at
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 19 May 2019]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and practice.
The Accounting Review. 86(2), pp. 367–383. Available from
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Lakis, V. and Masiulevicius, A., (2017) Acceptable audit materiality for users of financial
statements. Journal of Management. 2(31). Available from
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in Accounting & Management. 9(3), pp. 291-292. Available from https://doi.org/10.1111/1468-
0408.00081 [Accessed 19 March 2019]
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. Available from:
http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-
possible-remedies?full [Accessed 19 May 2019]
Mock, T. J., Bédard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. (2013). The audit
reporting model: Current research synthesis and implications. Auditing: A Journal of Practice
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and Theory. 32, 323-351. Available from:
https://doi.org/10.2308/ajpt-50294 [Accessed 19 May 2019]
Moroney, R. and Trotman, K.T. (2016) Differences in Auditors' Materiality Assessments When
Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research, 33(2), pp.551-575. Available from: https://doi.org/10.1111/1911-3846.12162
[Accessed 18 May 2019]
NAB., 2018. NAB Annual report & accounts. Available at
<https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf> [Accessed 19
March 2019]
Suncorp Bank .(2018) Suncorp Bank Annual report & accounts. Available from:
https://www.suncorpgroup.com.au/investors/reports [Accessed 19 May 2019]
Wood, D A. (2011) The Effect of Using the Internal Audit Function as a Management Training
Ground on the External Auditor's Reliance Decision. The Accounting Review . 86(6), p. 39-56.
Available from: https://doi.org/10.2308/accr-10136 [Accessed 19 May 2019]
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