Role and Significance of Key Audit Matters in Independent Auditor's Report

This study summarises role and significance of Key Audit Matters(KAMs) in report issued by Independent Auditor. It covers auditing standard like ASA701 issued in relation to better communication of KAM in audit report.

Auditing Case study

EXECUTIVE SUMMARY
This study summarises role and significance of Key Audit Matters(KAMs) in report
issued by Independent Auditor. It covers auditing standard like ASA701 issued in relation to
better communication of KAM in audit report. Further this study describes role of Auditors in
context of highlighting issues and findings obtained under auditing process through KAM in
audit report.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................5
TASK...............................................................................................................................................5
CONCLUSION.............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Auditing is systematic process of reviewing the fiscal accounts of a corporation (or
entity) to determine whether they are precise and consistent with any relevant regulations,
accounting standards), legislation and statutes. This is help to develop and enhance confidence of
all interested parties and stakeholders as it determines the accuracy of financial statement of a
corporation. All publicly listed companies need to get appoint independent auditor to review
their reports before they report their performance for specific period i.e. generally yearly or
quarterly (Carson, Fargher and Zhang, 2016). This study evaluates the major aspects of audit by
covering detailed analysis of new auditing standard ASA-701 in context of Australian banking
sector. The core rationale for ASA 701 has been analysed to derive a specific
recommendations/conclusions.
TASK
Key Audit Matters in Independent Auditor's Report:
The International-Auditing and Assurance-Standards Board (IAASB) has formed key
audit matters (KAM) to respond to stakeholders' challenges of increasing the accuracy and
quality standards related to audit reports. Formally, in December 2016, an updated set of
auditor's reporting standards was released. Key Audit Matters (KAM) are described as certain
matters that are of greatest importance in audit-process of current period's related to financial
statements, in professional judgement of company's auditor. Key audit matters are extracted
from matters which are primarily discussed with management and TCWG. In drafting KAM,
consideration of core users of audit report is essential as relevancy of matter specified in report
under para of key audit-matter. It involves the reader's awareness and interpretation of the
terminology of auditing and accounting, and the aim of communicating KAM is communicating
about audit-process with report users (Xu, Carson, Fargher and Jiang, 2013). These meant to be
important and descriptive yet informative. Timely interaction and communication with
management/TCWG is essential for the KAM identification process, and KAM drafting
mechanism. It helps those entrusted with governance TCWG to examine how the KAM can be
discussed in the reports in the financial reporting, or somewhere else in annual report (e.g. a
review by TCWG in their study-report, irrespective of whether that is required by the authority).
New Auditing Standard ASA 701:

ASA 701 is significant auditing standard which closely linked to expression of opinion
through KAM by auditor in auditing process. This standard came into effect with respect to
reporting periods ended on-or after 15th Dec,2016. This Auditing Standard corresponds to the
duty of auditor to communicate effectively in auditor's report about certain audit key matters. It
is formulated to address both judgement of auditor as to what should be communicated in report
and, nature and substance of that communication. The aim of communicating the key auditing
matters is to improve the audit report's expressive quality by providing enhanced clarity on the
audit being conducted (Lento, Bujaki and Yeung, 2018). Communicating key-audit matters
offers additional guidance to targeted financial reports users (called intended users) to help them
grasp the issues which, in professional judgement of corporation's auditor, are of the greatest
importance in audit of current period's financial statement.
Applicability of ASA 701:
This standard mainly applies to auditing of financial reports with respect to any financial
period, or auditing of half-year's financial report, as compliance with Corporations Act,2001,
and auditing for any other purpose of financial report or whole financial statement. This standard
also applies with respect to auditing of any other historical financial data/information
(Smieliauskas, Bewley and Robertson, 2013).
Key Requirements of ASA 701:
1. Determining Key Audit Matters: This is the very first and foremost requirement of ASA
701 which states that auditor should first determine, out of the matters initially communicated
with management/TCWG, only those specific matters which require special attention of users
and auditors throughout the audit process. While determining KAM, independent auditors should
take into consideration areas relates to high assessed risks of material-misstatement(ROMM), or
any other significant amount of risks assessed in compliance with ASA 315, which is deals with
recognising and assessing risks of material misstatement by understanding the organisation and
Its around environment. Also auditor should consider major auditor decisions related to parts of
financial reports involving significant managerial judgements, including accounting forecasts
which have been recognized as making high forecast uncertainty. KAM also includes significant
events and transactions that affects audit procedure (Zadek, Evans and Pruzan, 2013).
2. Communicating Key Audit Matters: The auditor should describe every key audit matter in a
distinct portion in auditor's report under the head "Key Audit Matters," use a suitable head,

unless circumstances set out in para 14/15 of this SA apply. In this portion of auditor's report
introductory para shall state that:
 KAMs are those significant matters which in consideration of entity's auditor and his
professional judgement is valuable in entire auditing process during current period, and
 Stated matters are addressed in auditing process and also act as base in expression of
audit opinion.
Here a notable thing is that KAMs stated in audit report is not act as substitute for
modified opinion in audit report. Here auditor should not disclose an issue under Key Audit
Matters portion of auditor's report unless, as a consequence of this matter, company's auditor will
be needed to modify opinion according to ASA-705 (Yang and Jia, 2012).
Cases where Matter Ascertained to as KAM is not included in Auditor’s Report:
It is primary responsibility of auditors to report any significance matter which require
additional attention in auditing-process, however there are some circumstances where reporting
of KAM is not required, as stated below:
 If any law or regulation require not to disclose any significant matter under KAM.
 In exceptionally rare cases, auditor concludes that matters should not be reported in
report since the negative effects of such would reasonably expect to outweigh benefits of
such disclosure to public interest. It shall not occur where the agency has released
information on matter previously (Gehani and Tariq, 2012).
Banking Industry:
Four key banks occupy Australia's banking industry: 1. Commonwealth Bank of
Australia, 2. Australia and New Zealand Banking Group, 3. AMP Limited and 4. National
Australia Bank. There are also several small banks with presence across the nation and a huge
number of many other financial organizations like local banks, mortgage lenders and mutual
financial institutions that provide constrained banking services as well as are defined as licensed
deposit organizations. Most large foreign banking instantiations are in competition, but very few
have presence in Australia's retail banking (Groomer and Murthy, 2018). Here following is
analysis of key auditor matters in big four banks' independent report, as follows:
Commonwealth Bank of Australia: In company's annual report, auditor has stated some key
issues in KAM paragraph separately. Here auditor has drawn attention of users of financial
statements towards these following matters as listed below:

 Company has reported Loan Impairment Provision under AASB:9 Financial
Instruments and applied an expected credit-loss (ECL) impairment model. This
model consider a forward-looking data by reflecting possible coming economical
events. This matter is stated in KAM since subjective judgemental approach used by
Banking group in ascertaining when to recognize impairment's provisions. Also
models applied to asses ECL model is quite complex and here lot of assumptions are
used under this provision (Annual report of Commonwealth Bank of Australia. 2019).
 Judgemental valuation done with respect to financial instrument is another matter
specified under KAM. Bank has reported financial-instruments assessed at fair-value
which represents 14percent of entire assets and 4percnet of aggregate liabilities of
Bank while 15percnet of entire assets and 4percnet of aggregate liabilities of whole
group. This matter is included here as financial instruments recorded at fair value
which involves Investment securities(at fair-value), bills discounted, derivative assets
& liabilities, Life-insurance assets & liabilities and other items reported at fair value.
These all Provisions for customer remediation and project costs associated with
regulatory compliance
 Auditor also stated in KAMs about provisions made by bank for customer
remediation as well as project costs linked with regulatory compliances matters.
Auditor considered this as KAM since subjective judgements needed by bank. Also
judgement is made regarding estimating customer-remediation payment amounts and
project costs connected with remediation operations, regulative proceedings, and
reviews.
 Valuation made by bank regarding insurance policyholder's liabilities are regarded as
KAM by auditors as it involves some estimations and assumptions. Such amount
reported by company is purely based on assumptions made by actuarial experts. In
this matter auditors have also obtained written representation by management.
 Operations of financial-reporting IT controls and systems: As Bank and entire
Group's processes and financial reporting procedures are highly reliant on IT
infrastructure for managing and reporting a large transaction volume, auditors found
this a KAM. In general, as with all banks, admin privileges to technologies are
essential since they are designed to ensure sufficient authorization of changes to

programs and information. Ensuring that employees have adequate admin rights to IT
structures, and that access is controlled, are key safeguards in alleviating the risk of
frauds or inaccuracy resulting from a shift in an app or inherent information. Thus
Auditors of company have obtained written representation and considered them as
KAM.
Australia and New Zealand Banking Group: This is another major banking group operating in
Australia and top most player in Australian banking sector. Here is analysis of several key audit
matters stated in banking group's latest annual report:
 Allowances for expected credit losses: bank and group has reported provision and
allowance for ECL may be generated under Financial-instruments. This current and
complicated accounting standard necessitates the Group to recognize ECLs on their loans
and advances and off-balance sheet stances; the Group has introduced new data-based
models and no. of estimates including effect of numerous economic situations and other
presumptions like identifying a substantial credit risk rise (SICR). It involves
considerable judgement and estimates thus auditors have reported it under KAM (Annual
report of ANZ. 2019).
 Further, auditor has reported about judgement involved in financial instrument at fair
value. This judgement involves some assumptions and estimations so auditors have taken
written assurance on this matter but also attention on this topic is required as there
chances of losses are high due to reporting at fair value.
 Accounting for Divestments: On 17 October 2017, the Company announced sale to IOOF
Holding Ltd (IOOF), of all its OnePath Pension schemes and Investments (OnePath P&I)
business and Aligned Dealer-Groups (ADGs). On 1 October 2018, the sale of the ADGs
company ended. The group declared on 17 October 2019 that it had reworked its terms of
the contract with IOOF, and the Group wants the payment to be completed in the first
quarter of calendar year 2020, subject to APRA approval. This is included in KAM as
this is one of the big decision of bank which can affect corporation significantly.
National Australia Bank: In recent annual report of this bank auditors have mentioned some
matters which require additional attraction of different users. Here below is comprehensive
analysis of KAM, specified in report, as discussed below:

 Provision for credit impairment: This is key audit concern due to size and nature of the
requirement identification, and the level of ambiguity in judgement and assessment
involved with the estimates. Here major areas involved in such judgement is Execution of
AASB:9 impairment criteria within group's expected credit-loss or credit impairment
method (Annual report of National Australia Bank. 2019).
 Customer-related remediation provisions: The auditor analyzed and checked key
assumptions that were used to quantify customer-related remediation transactions,
including market analysis and historical patterns. But due to significant amount and
higher judgement auditor has included this area as KAM.
 (IT) systems and controls over financial reporting: A significant portion of entire
financial reporting mechanism for bank relies primarily on IT frameworks with
standardized procedures and controls related to information collection, processing and
collection. Auditors has conducted testing for validating reliability and subjectivity of IT
processes but here are several doubtful areas due to which auditors are unable to assess it
completely, hence auditor has reported it under KAM.
AMP Limited: This another major financial services providing institution in Australia. In the
annual report of AMP limited, company's auditors have listed some issues under KMP
separately. Following is critical analysis of KAM described in bank's annual report, as follows:
 Sale of AMP Life-Wealth Protection and Mature Portfolios: During this year, the
Company announced the finalization of all its portfolio analysis, culminating in sale of
wealth protection including mature portfolios to Resolution Life as well as the planned
listing on New-Zealand's SE of left New Zealand service. This is reported here due to
complexity of transactions and extent (Annual report of AMP Ltd. 2019).
 Customer-remediation provisions: AMP reported provisions for customer's remediation
programs amounting around 656million. The assessment of consumer remediation issues
and the identification of a satisfactory calculation of the service required considerable
judgements. Thus, auditors have regarded it as key audit matter as there is no exact audit
approach to assess the accuracy of judgement involved in making provision.
 Impairment of advice-related assets: The Group has Purchaser of Last Resort
Arrangements (BOLR) in effect as stated which may allow them to purchase planner
records. Such assets are reported as stock and intangibles upon purchase, based on their

planned use. There are concerns as to implications of final Royal Commission study and
potential legislative changes which may have an effect on the basic assumptions which
underpin valuation of assets relevant to planner registers. The company has practice
financing loans which involve provisions scheduled in compliance with Australian
Accounting Standards in which credits are impaired or anticipated required to impaired in
long term.
CONCLUSION
From above study it has been concluded that reporting of Key Audit-Matters is
significant aspect of entire auditing process, as this contains crucial findings and issues which
are part of audit process. Main aim of describing some key matters separately in KAM paragraph
is to derive the attention of main readers/users of annual report towards concerns which may
impact whole audit process significantly. Auditors should report all matters under this head
which are of significant amount and also auditor has doubtful opinion on such matter.

REFERENCES
Books and Journals:
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a
synthesis and opportunities for research. Australian Accounting Review. 26(3). pp. 226-
242.
Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the
global financial crisis. Accounting & Finance, 53(1), pp.301-338.
Lento, C., Bujaki, M. and Yeung, W.H., 2018. Auditing Estimates in Financial Statements: A
Case Study of a Fish Farm's Biological Asset. Accounting Perspectives. 17(3). pp. 453-
462.
Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice
in social and ethical accounting and auditing. Routledge.
Yang, K. and Jia, X., 2012. An efficient and secure dynamic auditing protocol for data storage in
cloud computing. IEEE transactions on parallel and distributed systems. 24(9). pp.
1717-1726.
Groomer, S.M. and Murthy, U.S., 2018. Continuous auditing of database applications: An
embedded audit module approach. In Continuous Auditing: Theory and Application (pp.
105-124). Emerald Publishing Limited.
Smieliauskas, W.J., Bewley, K. and Robertson, J.C., 2013. Auditing: An international approach.
W. Ross MacDonald School Resource Services Library.
Gehani, A. and Tariq, D., 2012, December. SPADE: support for provenance auditing in
distributed environments. In Proceedings of the 13th International Middleware
Conference (pp. 101-120). Springer-Verlag New York, Inc..
Online:
Annual report of Commonwealth Bank of Australia. 2019. [Online]. Available through:
<https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
annual-reports/CBA-2019-Annual-Report.pdf>
Annual report of ANZ. 2019. [Online]. Available through:
<https://www.anz.com/content/dam/anzcom/shareholder/ANZ-2019-Annual-
Report.pdf>
Annual report of National Australia Bank. 2019. [Online]. Available through:
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2019-
annual-financial-report-pdf.pdf
Annual report of AMP Ltd. 2019. [Online]. Available through:
https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/asx-
announcements/2019/AMP_2018_AR.pdf