Auditing Theory and Practice

This article discusses the key events that can affect the financial statements of AMP Ltd, including foreign exchange fluctuations, valuation of goodwill and intangible assets, investment in companies in China and Japan, and contingent liability. It also provides evidence mix and AAR for each event.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
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AUDITING THEORY AND PRACTICE
Table of Contents
Answer to Question 1......................................................................................................................2
Foreign Exchange Fluctuations and Hedge Contracts.................................................................2
Valuation of Goodwill and other Intangible Assets....................................................................3
Investment in Companies in China and Japan.............................................................................4
Contingent Liability.....................................................................................................................6
Answer to Question 2......................................................................................................................7
Reference.......................................................................................................................................11

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AUDITING THEORY AND PRACTICE
Answer to Question 1
In an audit process, the auditor is responsible for identifying the material misstatement
which affect the viability of the financial statements which is prepared by the management of the
company. The auditing process is conducted to mainly certify that the financial statement which
is prepared by the business are showing true and fair view. In many cases, the audit process of
the business is affected by certain key events which are material in nature and have the ability to
affect the financial statements of the business. In this case, AMP ltd is considered for the purpose
of identifying any key events which can affect the financial statements of the business and some
of these events are listed below in details:
Foreign Exchange Fluctuations and Hedge Contracts
As per the annual reports which is prepared by the management of AMP ltd for the year
2017, the business has investments in foreign exchange hedge contracts which is undertaken by
the business in order to avoid the risks associated with fluctuation of foreign exchanges. The
annual report also shows that the business is engaged in foreign transaction and therefore the
management needs to convert the foreign currency of the business into domestic currency
(Corporate.amp.com.au. 2018). The annual report shows that the management has invested
significant amount in hedge contracts after anticipating the receipts and payments and the timing
of the transactions.
The accounting standard AASB 121 covers provisions relating to foreign exchanges and
para 23 of the standard states that foreign exchanges for monetary items for cash and cash
equivalents must be converted on the basis of the exchange rate on the reporting date of the
business (Chen, Lee and Shrestha 2013). The potential area of misstatement would be in the

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AUDITING THEORY AND PRACTICE
reporting of foreign exchange adjustment which would affect the income statement directly and
therefore the same can be considered as a material misstatement. The rate which is considered
for translation of foreign currency where also misconduct can be committed. The auditor needs
to check whether the auditor has converted the same as per the criteria which is provided by the
standard and appropriate disclosures for the same is provided into the notes to account section of
the financial statement.
The annual report of the business shows that the foreign exchange adjustment which is
made by the business is of $ 205 million as shown in the notes to account section of the annual
report. The same is shown to be in negative which shows that the business has incurred a loss of
the same amount. Furthermore, the auditor of the business also needs to confirm whether the
provisions and disclosure requirements of AASB 121 are fully satisfied with the treatments
which is provided by the management of the business. In addition to this, the balances which are
portrayed must be showing true and fair view from the auditing point of view. The disclosures
are provided in the
Valuation of Goodwill and other Intangible Assets
As per the annual report of AMP ltd for the year 207, the management has shown
significant amount of goodwill and intangible assets in the balance sheet. As per the value which
is shown for goodwill and other intangible assets of the business is shown to be $ 3,218 million
which is 2% of the total assets which is shown by the company. Therefore, the intangible assets
of the business form a material part of the financial statements and misstatement of the same
would definitely affect the viability of the annual reports of the business for the year. The
goodwill of the business is valued on the basis of historical acquisition and the excess of

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Purchase consideration over the fair value of the asset. The annual report also specifies that the
goodwill of the business is allocated to respective Cash Generating Units (CGU).
The potential misstatement which can take place in case of intangible assets is related to
the in correct valuation of the intangible assets of the business and also appropriate identification
for the same. The provisions for valuing the intangible assets of the business are done on the
basis of AASB 138. As per Para 21 of AASB 138, an intangible asset of the business shall be
recognized if it is probable that the expected future benefits that are attributable from the assets
will flow in the entity and the costs of the asset can be measured reliably. The standard also
specifies that the intangible assets of the business should be recognized on the basis of
revaluation model and cost model of the business. The impairment and amortization of intangible
assets is also an important consideration which needs to be taken into account by the auditor as
the same might be understated in order to show more asset value for the business.
The disclosures should be provided by the management of AMP ltd should confirm with
the provisions which are stated in AASB 138. Therefore, the auditor needs to ensure that all the
provisions of AASB 138 needs to be followed and appropriate disclosures are provided by the
management of the business in this respect. There is a significant risk that the valuation of the
intangible assets of the business are not done properly and the balances of intangible assets are
not showing true and fair view.
Investment in Companies in China and Japan
The half year reports which is prepared by the management of the business for the year
2018, shows that the management of the business is looking to expand the business in China and
Japan. The company has invested significant amount of capital in national companies which are

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AUDITING THEORY AND PRACTICE
operating in China and Japan. The management of the company is intended to make investment
in China Life Asset Management Company Limited (CLAMP) which will be further strengthen
the relationship with China. The investment which is made by the business in CLAMP is
anticipate to enhance the revenue generating abilities of the business and thereby also improve
the overall business structure of the organization.
The accounting standard of AASB 128 covers all the provisions which are regarding
investments which are made by businesses in an organization. ASSB 10 also specifies provisions
regarding investments which can be made in a business. Both the standards state various
disclosures and treatments which must be followed by the business in preparing the financial
statement of the business (Hu, Percy and Yao 2015). In any investment property, the treatment
and appropriate consolidation of the financial statement is always an important aspect which
should ne considered and free from material misstatement. The auditor needs to check whether
the balances which are shown in the annual reports are appropriate and showing true and fair.
The auditor also needs to ensure that the disclosures which are required by the accounting
standard should be followed by the business. There are significant risks that the financial
statement might be representing in appropriate figures which is relating to investments which are
made by the business in the financial statement for the year.
The disclosures which are provided by the management of AMP ltd for the investments
in businesses in China and Japan is shown to be inappropriate and therefore the auditor needs to
consider the same and form an opinion accordingly.

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AUDITING THEORY AND PRACTICE
Contingent Liability
The contingent liability of the business in most of the cases affect the financial statements
and can also lead to material misstatement if the same are not covered and shown in the annual
reports of the business. The contingent liabilities which arises in a business is shown in notes to
account section as there is uncertainty whether the contingent liability will convert into actual
liability of the business. As per the information which can be accumulated from the annual report
and quarterly reports prepared by the business of AMP ltd, the business has contingent liability
which is related to the fine which would be imposed on the business of AMP ltd for the
misconduct which was revealed by the Royal Commission. The company was engaged in a
misconduct for which evidence was provided in April 2018 which was related to Misconduct in
the Banking, Superannuation and Financial Services sector which can definitely impact the
financial statement which is prepared by the business. The management of the company had
charged significant amount of fees for advisory services for which no such service was provided
by the business. This resulted in the business showing revenues for which the management of the
company had not provided any services to the clients (Jessica 2018). In addition to this, the
management of the company had also misguided the regulators regarding the misconduct which
is committed by the management of the company (Bova 2016).
Therefore, there is significant risks relating to contingent liability of the business and the
auditor needs to asses the item effectively and ensure that all disclosure requirement for the same
is made appropriately by the management of the company. The provisions of AASB 137 more
specifically para 37 states that any law suits against the company would impact the reputation of
the business and thereby also affect the confidence of the business and also states that the

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management of the business is required to follow the disclosure requirements in accordance with
para 86 of AASB 137.
The anticipated amount of liability needs to be disclosed on the basis of the fine which is
to be charged as fines for the misconduct of the management of AMP ltd. The contingent
liability of the business is to be disclosed in the notes to account section of the annual reports.
Answer to Question 2
Foreign Exchange Fluctuations and Hedge Contracts
As the fluctuation in foreign exchange rate increases so does the inherent risks and
control risks of the business also increases as the business of AMP ltd is engaged in foreign
transactions which involvements investments and lending as well. The annual reports of the
business specify that the business considers the exchange rate on the reporting date and therefore
the same is subjected to fluctuations (Abdel-Khalik 2013). The foreign exchange transactions
and revenue which is generated by the business during the period needs to be converted and
similarly shown in the annual reports which is prepared by the business considering appropriate
accounting standard.
Evidence Mix
Effective internal control setting over the transactions which involves foreign currency
would reduce the control risks of the business and also help in managing the numerous
transactions which are taken by the management of the company (Louwers et al. 2015).
However, the Inherent risks of the business would be high due to the fluctuations in foreign
exchange rates applicable in the market.

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AUDITING THEORY AND PRACTICE
AAR = CR x IR x PDR
Medium to extensive Low High High
Understanding
of internal
control
Test of
Control
Substantive Tests of
Transactions
Analytical
Process
Test of Details of
balances
Medium to
Extensive Extensive Extensive Low
Medium to
Extensive
Valuation of Goodwill and other Intangible Assets
The annual report shows that the business has significant amount of intangible assets and
form significant part of the assets section which is reported by the business. There is a high level
of detection risks which suggest that material misstatement might be there which might not be
identified by the auditor of the business (Griffiths 2016). The goodwill of the business needs to
be valued appropriately and appropriate disclosures are also required to be produced by the
business.
Evidence Mix
The control risks in this scenario is also high as appropriate valuation of the intangible
assets of the business might not be done by the management of the company. The inherent risks
is also high due to fact that the valuation of goodwill is a complex process and therefore can be
missed out by the auditor of the business.
AAR = CR x IR x PDR
Medium to extensive High High Low
Understanding Test of Substantive Tests of Analytical Test of Details of

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AUDITING THEORY AND PRACTICE
of internal
control Control Transactions Process balances
Medium to
Extensive Extensive Extensive Low Extensive
Investment in Companies in China and Japan
The management of AMP ltd has undertaken significant investments in the other
companies in order to further revenue generating capacity of the business. The detection risks in
this case is not very high as the item is considered to be material and therefore the auditor would
definitely consider the item. The inherent risks in this case is high due to investments are made in
foreign companies such as companies in China and Japan.
Evidence Mix
The management needs to keep a track of its investments and also ensure that the
investment is made as per the plans of the management. The inherent risks of the business would
be high due to uncertain nature of the companies which are operating in foreign countries.
AAR = CR x IR x PDR
Medium to extensive Low High Low
Understanding
of internal
control
Test of
Control
Substantive Tests of
Transactions
Analytical
Process
Test of Details of
balances
Medium to
Extensive Low Extensive Extensive Extensive
Contingent Liability

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AUDITING THEORY AND PRACTICE
The misconduct which is committed by the business can lead to legal liability in the form
of fines and therefore the inherent risks of the business would be high. Due to the misconduct it
is anticipated that the fine would be charged and significant amount would be incurred in such
legal proceedings (Arslanalp 2015). The control of the business is ineffective and therefore the
control risks of the business is high.
Evidence Mix
The contingent liability of the business is valued appropriately and the assumptions and
estimation is clearly shown in the notes to account section of the annual report. The misconduct
committed by the business would result in higher risks for the business.
AAR = CR x IR x PDR
Medium to extensive Low High High
Understan
ding of
internal
control Test of Control
Substantive Tests of
Transactions
Analytical
Process
Test of Details of
balances
Extensive
Medium to
Extensive Extensive Extensive Medium

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Reference
Abdel-Khalik, A.R., 2013. Accounting for risk, hedging and complex contracts. Routledge.
Arslanalp, M.S., 2015. Contingent Liabilities from Banks. International Monetary Fund.
Bova, M.E., 2016. The Fiscal Costs of Contingent Liabilities. International Monetary Fund.
Chen, S.S., Lee, C.F. and Shrestha, K., 2013. Futures hedge ratios: a review. In Encyclopedia of
Finance (pp. 871-890). Springer, Boston, MA.
Corporate.amp.com.au. (2018). Reports. [online] Available at:
https://corporate.amp.com.au/shareholder-centre/results-reporting/reports [Accessed 21 Oct.
2018].
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Jessica Irvine, C. (2018). 'Just appalling': AMP misconduct and lies exposed. [online] The
Sydney Morning Herald. Available at:
https://www.smh.com.au/business/banking-and-finance/just-appalling-amp-misconduct-and-lies-
exposed-20180417-p4za67.html [Accessed 21 Oct. 2018].
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing
& assurance services. McGraw-Hill Education.

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