Auditing Theory and Practice

This study evaluates the extent of conformation of Commonwealth Bank to the ASX Corporate Governance Principles and analytically evaluates diverse risks related to the company by means of different dimensions. The article also includes an analysis of financial ratios and income statement ratios of the firm.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
University Name
Student Name
Authors’ Note

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AUDITING THEORY AND PRACTICE
Table of Contents
1. Executive Summary...............................................................................................................2
2. ASX Corporate Governance Principles.................................................................................2
3. Risk Assessment.....................................................................................................................8
References................................................................................................................................11
Appendix:.................................................................................................................................14

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AUDITING THEORY AND PRACTICE
1. Executive Summary
Audit, assurance as well as compliance are necessarily formulated to add value to overall
business and make certain that the firm satisfy the compliance obligations. The primary
objective of the current study is to critically evaluate extent of conformation of the selected
firm Commonwealth Bank to the ASX Corporate Governance Principles. In essence, the
study at hand explicates whether the firm adheres to all the obligations of the ASX CGS
principles. Moving further, the study also analytically evaluates diverse risks related to the
company by means of different dimensions namely key financial ratio, analysis of trend as
well as market.
2. ASX Corporate Governance Principles
Establishment of strong foundation for particularly management as well as oversight:
The primary accountability of the board of the firm corporation Commonwealth Bank is to
oversee into the matters of business affairs, establish different financial as well as strategic
organizational aims, investigate and monitor the entire process of implementation of strategic
moves for attainment of the stated objectives. In addition to this, the board also has the need
to track the performance of the entire management and endorse the adoption of chief
corporate policies of the corporation (Knechel and Salterio 2016).
Structure and composition of the board for enhancement of value
The board of the firm intends to make sure that it can operate independently and has suitable
mix of skills and expertise along with diversity to effectually discharge all the roles and
accountabilities (Chan and Vasarhelyi 2018). As per the annual report of the firm, there are
12 members in the board of the company. Diverse skills as well as experience are possessed

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AUDITING THEORY AND PRACTICE
by the directors of the firm CBA that in turn can help in enhancement of overall value.
Collective important skills along with experience of the board are hereby mentioned in the
table below:
Table: Skills and Experience of the board
(Source: Commbank.com.au 2018)
Undertake business practices ethically as well as responsibly
CBA acts ethically as well as responsibly by focussing on its commitments, managing
conflict of interests, setting in policy of absolutely zero tolerance for specifically bribery and
acts of corruption. Also, the firm undertakes ethical and responsible practices by following
Securities Trading Policy prohibiting people of the firm to engage in security dealing,
hedging and any kind of insider trading. The firm also has a Whistleblower policy in place for
fostering the culture that inspires individuals to talk about diverse issues as well as conducts
that are a matter of concern to them (Commbank.com.au 2018). Furthermore, CBA also
publishes a Slavery and Human Trafficking Statement in conformation to the UK Modern
Slavery Act and regularly reviews and updates the Supplier Code of Conduct for the purpose
of enhancing human rights. The foundational policy of code of conduct of CBA reflects the
commitment of the firm. This sets expectations of the group, counting directors, various

5
AUDITING THEORY AND PRACTICE
senior executives along with employees at the time of engaging and balancing diverse
interests of the stakeholders of the firm. The firm has eight different commitments that are
hereby mentioned below:
Preserve integrity in particularly corporate reporting
The code of conduct policy of the firm CBA can be said to be critical to the firm attaining the
vision of particularly excelling at augmenting and securing overall financial well being of
individuals, communities as well as businesses. The management of the firm lives its values
of integrity, excellence, accountability along with collaboration (Griffiths 2016).
According to the recommendations presented in ASX listing rules as well as Corporation Act
of the year 2001, the management has formulated controls for assuring integrity of corporate
reporting (Commbank.com.au 2018). As per the viewpoints of the chief executive officer as
well as chief financial officer of the firm, the firm has maintained financial report of the firm
according to the Corporation Act. In addition to this, pecuniary reports along with various
disclosures are presented as per the accounting standards that in turn present both true as well
as fair view of financial health and performance of the firm and adhere to the accounting
standards (Messier et al. 2015). Also, there is internal control as well as risk management that
is effectually operated. In addition to this, pecuniary assertions of the firm are essentially

6
AUDITING THEORY AND PRACTICE
subject to yearly audit by specialised and at the same time independent auditors. In this way,
the firm intends to preserve the integrity of particularly corporate reporting.
Carry out well timed and at the same time balanced disclosure
The company CBA has a writ policy for conforming to the obligations of disclosure
stipulated under the Australian Corporation Act of the year 2001 and the Listing Rules of
ASX. The firm declares all the available material information at a timely manner as part of
compliance to the policy of communication between CBA and shareholders (Chou 2015).
Respect security holders’ rights
The firm CBA considers the shareholders of the firm as the owners and at the same time
values the need for carrying out communication with them clearly. The company respects the
rights of the shareholders and intends to deliver them specific information that is well timed,
of superior quality and pertinent to processes of investment (Rezaee et al. 2018). In addition
to this, management of the firm also engages in the process of keenly listening as well as
responding to the feedback of the shareholders. Also, the firm also encourages attendance of
shareholders in the annual general meeting and this is why it rotates the location of the AGM
for facilitating attendance of shareholders. In the pertinent notice of AGM, the firm delivers
the entire material information to their shareholders that are relevant to a particular decision
(Commbank.com.au 2018).
Detect and manage risk
The area of concentration of the board includes material risk assessment along with
prioritisation (Soh and Martinov-Bennie 2015). The board of the firm reviews the same on
particularly an ongoing basis and thereafter adjusts the same to replicate both the strategic as
well as operational requirements of the firm (Baylis et al. 2017). There is also a non-

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AUDITING THEORY AND PRACTICE
executive director “Chief Risk Officer (CRO)” responsible for the task of detection as well as
management of risks of the firm. In addition to this, there is also a risk committee that aids
the board of the firm in fulfilment of accountabilities as regards risks by
-Assessing the Risk Management Framework of the Group and reporting as regards
effectiveness of the same (Cheung 2014)
- Appraising Risk Appetite Statement of the firm as well as Risk Management Strategy and
tracking implementation of various policies of management
-Assessing the risk profile by tracking adherence to various policies of risk (Du Plessis et al.
2018)
-Overseeing matters related to appointment, performance, specific objectives along with
removal.
Remunerate fairly as well as responsibly
As per the obligations of the ASX CGS principles, the company CBA has the intent to
remunerate fairly as well as responsibly. Essentially, the firm has a remuneration committee
that aids the board of the firm in satisfying all the accountabilities as regards the following:
-Significant alterations in the remuneration policies of the group as well as structure of
remuneration (Christensen et al. 2015)
-remuneration arrangements along with outcomes for particularly CEO, finance personnel,
risk along with other personally whose roles might perhaps get affected by the financial
health of the company
-equity plans of employees, superannuation funds, definite termination payments along with
other important benefits (Commbank.com.au 2018)

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AUDITING THEORY AND PRACTICE
The firm CBA also presents a remuneration report that divulges information that can help in
analysing performance of CEO as well as that of other executives. In addition to this, the
remuneration report also presents summary of governance arrangements, various policies
along with practices
In the end it can be said that analysis of the assertions published by the firm reveals the fact
that the firm is strongly committed to attainment of high standards of particularly corporate
governance. The firm has a suitable corporate governance framework that essentially
supports the entire long term performance, sustainability and at the same time protects and
satisfies the interests of the shareholders (Gitman et al. 2015). In addition to this, it can also
be hereby mentioned that the bank assesses its arrangements for corporate governance plus
practices in order to make sure that they necessarily replicate developments in the area of
regulation, market exercises along with expectations of the stakeholders. In this case, it can
be observed that the firm has followed all the recommendations stated in the ASX Corporate
Governance Council’s Corporate Governance Principles.
3. Risk Assessment
Commonwealth Bank is necessarily a firm that delivers integrated financial services. This
includes retail banking, insurance services, investment along with stock broking products,
institutional as well as business banking among many others. The company is regulated by
the Australian Stock Exchange and the same is included in the Morgan Stanley Capital
Global Index, Dow Jones Sustainability World Index as well as FTSE 4 Good Index.
The company has a strategy of enhancement of domestic market shares particularly in the
areas of home loans, retail deposit section, discount share trading, various personal loans and
credit cards. Management of the company intends to successfully operate through its 1000
branches across the country.

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AUDITING THEORY AND PRACTICE
Risk score can be regarded to be a pertinent dimension for assessment of demand of stocks in
the market. Beta is necessarily a qualitative dimension of particularly volatility of stocks in
comparison to particularly volatility of the market (Uechi et al. 2015). The value of beta as
calculated for the study stands at 1.22. Thus, volatility of the firm can be said to be moderate.
Analysis of financial ratio of the firm CBA
The balance sheet ratio taken into consideration in this regard includes debt equity ratio,
receivable turnover ratio and quick ratio.
-Debt equity ratio enumerated for the firm for FY 2015 and FY 2016 reflects declining trend.
This shows that the debt equity ratio of the firm has decreased from 15.64 registered during
2015 to 14.4 in 2016. This necessarily indicates higher investor financing is utilized by the
firm than the creditor financing over the specified period of time (Omar et al. 2014). As such,
the low debt equity ratio recorded reflects greater financial stability and a desirable financial
condition.
-Receivable turnover recorded for the firm for FY 2015 and FY 2016 replicates an increasing
trend. In essence, this reveals that the receivable turnover of the firm has increased from 1.81
recorded during 2015 to 2.12 in 2016. Higher ratio can be considered to be a favourable
financial condition of the firm as it reflects greater capability of the firm to effectually collect
firm’s receivables. As such, the higher ratio replicates that CBA is efficiently collecting all
their receivable in a more frequent manner (Enekwe 2015).
-Quick Ratio calculated for the firm for FY 2015 and FY 2016 shows a declining trend during
the specified period. This reflects poor liquidity condition of the firm (Dodd 2017). Analysis
of trend reflects the fact that the decrease in quick ratio is mainly due to the fall in quick

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AUDITING THEORY AND PRACTICE
assets (cash as well as cash equivalents) by around 31.88% and at the same time increase in
liability of the firm by approximately 6.32% during the year 2016.
Analysis of risk using income statement ratio
- Operating margin calculated for the FY 2015 and FY 2016 shows a decline during the
definite period of time. The operating margin of the margin has decreased to nearly 52% in
2016 in comparison to the year ago figure of 53.28% recorded during 2015. This lower
operating margin (%) reflects an unfavourable financial condition of the firm as this shows
that the company is failing to generate enough money from particularly its ongoing
operations to disburse diverse variable costs along with fixed costs (Tricker and Tricker
2015).
-Net Profit Margin calculated for the FY 2015 and FY 2016 shows a decline during the
definite period of time. The net profit margin of the firm has decreased to nearly 37.5% in
2016 in comparison to the year ago figure of 38.29% recorded during 2015. This reflects an
unfavourable condition of the firm as lower ratio indicates that the company is making lower
net income out of the generated sales of the firm (Armstrong et al. 2015).
- Return on equity calculated for the FY 2015 and FY 2016 shows a decline during the
definite period of time. The return on equity has decreased to nearly 0.15 in 2016 in
comparison to the year ago figure of 0.17 recorded during 2015. This lower ratio replicates an
undesirable financial condition of the firm as it shows that the firm is making lower amount
of profit from equity of their shareholders (Armstrong et al. 2015).

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AUDITING THEORY AND PRACTICE
References
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate
governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1),
pp.1-17.
Baylis, R.M., Burnap, P., Clatworthy, M.A., Gad, M.A. and Pong, C.K., 2017. Private
lenders’ demand for audit. Journal of Accounting and Economics, 64(1), pp.78-97.\
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing.
In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Cheung, B., 2014. trading in treasury Bond Futures Contracts and Bonds in australia. The
RBA’s Business Liaison Program 1 Unemployment and Spare Capacity in the Labour Market
7 Foreign Investment in Australian Commercial Property 21 The Determinants of Non-
tradables Inflation 27 Measures of Inflation in India 39, p.47.
Chou, D.C., 2015. Cloud computing risk and audit issues. Computer Standards &
Interfaces, 42, pp.137-142.
Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance
recommendations improve the performance and accountability of small listed
companies?. Accounting & Finance, 55(1), pp.133-164.
Commbank.com.au. 2018. Shareholders - Corporate profile - Corporate governance -
Commonwealth Bank Group. [online] Available at: https://www.commbank.com.au/about-
us/shareholders/corporate-profile/corporate-governance.html [Accessed 25 Apr. 2018].
Dodd, E.M., 2017. For whom are corporate managers trustees?. In Corporate
Governance (pp. 29-47). Gower.

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AUDITING THEORY AND PRACTICE
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate
governance. Cambridge University Press.
Enekwe, C.I., 2015. The relationship between financial ratio analysis and corporate
profitability: a study of selected quoted oil and gas companies in Nigeria. European Journal
of Accounting, Auditing and Finance Research, 3(2), pp.17-34.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Messier, W.F., Glover, S.M. and Prawitt, D.F., 2015. Auditing & Assurance Services: A
Systematic Approach. Qing hua da xue chu ban she.
Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A., 2014. Financial statement fraud: A
case examination using Beneish Model and ratio analysis. International Journal of Trade,
Economics and Finance, 5(2), p.184.
Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing:
Building automated auditing capability. In Continuous Auditing: Theory and Application (pp.
169-190). Emerald Publishing Limited.
Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in
environmental, social and governance assurance and consulting. Managerial Auditing
Journal, 30(1), pp.80-111.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.

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AUDITING THEORY AND PRACTICE
Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., 2015. Sector dominance
ratio analysis of financial markets. Physica A: Statistical Mechanics and its
Applications, 421, pp.488-509.
-

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AUDITING THEORY AND PRACTICE
Appendix:
Ratio Calculation
Balance Sheet Ratio
Quick Ratio 2015 2016
Quick Assets 31683 21582
-
31.8815
Current Liabilities 820453 872322
6.32199
5
Ratio
0.03861
6
0.02474
1
Debt Equity Ratio
Total Liabilities 820453 872322
6.32199
5
Shareholder's Equity 52431 60206
14.8290
1
Ratio
15.6482
4
14.4889
5
Receivable Turnover
Revenue 23668 24578
3.84485
4
Accounts Reeceivable 13063 11591
-
11.2685
Ratio
1.81183
5
2.12043
8
Ratio for Income
Statement
Operating Margin
Operating Income 12612 12854
1.91880
7
Revenue 23668 24578
3.84485
4
Ratio
0.53287
1
0.52298
8
Net Profit Margin
Net Income 9063 9227
1.80955
5
Revenue 23668 24578
3.84485
4

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AUDITING THEORY AND PRACTICE
Ratio
0.38292
2
0.37541
7
Return on Equity
Net Profit 9063 9227
1.80955
5
Shareholder Equity 52431 60206
14.8290
1
0.17285
6
0.15325
7

16
AUDITING THEORY AND PRACTICE
Beta Calculation:
Beta
CBA
ASX-
200
Date
Adj
Close Returns
Adj
Close Returns Beta
03-01-
2016 69.5298 2% 5270.5 2% 1.22475
04-01-
2016
68.4184
4 1% 5184.4 1%
05-01-
2016
67.5952
2 2% 5123.1 2%
06-01-
2016
66.1957
4 1% 5010.3 0%
07-01-
2016
65.3807
3 1% 4990.8 1%
10-01-
2016
64.7386
2 -1% 4932.2 0%
11-01-
2016
65.3560
3 -2% 4925.1 -1%
12-01-
2016
66.6814
4 2% 4987.4 2%
13-01-
2016
65.3807
3 1% 4909.4 0%
14-01-
2016
64.9361
8 1% 4892.8 1%
17-01-
2016
64.5328
1 -1% 4858.7 -1%
18-01-
2016
65.1913
9 2% 4903.1 1%
19-01-
2016
63.8906
9 1% 4841.5 0%
20-01-
2016
63.2321
1 0% 4864 -1%
21-01-
2016 63.0263 -3% 4916 -2%
24-01-
2016
65.0349
8 2% 5006.6 1%
26-01-
2016
63.8824
6 0% 4946.4 -1%
27-01-
2016
64.0718
1 -1% 4976.2 -1%
28-01-
2016
64.7633
1 1% 5005.5 -1%
31-01-
2016
64.3928
6 0% 5043.6 1%
01-02- 64.2282 3% 4993.3 2%

17
AUDITING THEORY AND PRACTICE
2016 1
02-02-
2016
62.3430
2 -2% 4876.8 -2%
03-02-
2016
63.6848
9 1% 4980.4 0%
04-02-
2016
63.0592
3 0% 4976.2 0%
07-02-
2016
62.8781
1 5% 4975.4 3%
08-02-
2016
59.9886
1 -2% 4832.1 1%
09-02-
2016
61.0834
9 0% 4775.7 -1%
10-02-
2016
61.1658
1 1% 4821.1 1%
11-02-
2016
60.3672
8 -1% 4765.3 -2%
14-02-
2016
61.1658
1 -2% 4843.5 -1%
15-02-
2016
62.1316
7 0% 4910 1%
16-02-
2016
61.9006
1 -3% 4882.1 -2%
17-02-
2016
63.5694
3 1% 4992 1%
18-02-
2016
62.8419
9 -1% 4952.8 -1%
21-02-
2016
63.5351
9 1% 5001.2 0%
22-02-
2016
62.7136
3 3% 4979.6 2%
23-02-
2016
60.9848
9 0% 4875 0%
24-02-
2016
60.7623
8 0% 4881.2 0%
25-02-
2016
60.5227
5 1% 4880 0%
28-02-
2016
60.0263
8 -2% 4880.9 -1%
29-02-
2016
61.1132
7 -3% 4922.3 -2%
01-03-
2016
63.2784
6 -1% 5021.2 -1%
02-03-
2016 64.1086 -1% 5081.1 0%
03-03-
2016
64.8189
1 -1% 5090 -1%
06-03-
2016
65.8030
9 2% 5142.8 1%
07-03- 64.5707 -1% 5108 -1%

18
AUDITING THEORY AND PRACTICE
2016 2
08-03-
2016
65.3067
2 0% 5157.2 0%
09-03-
2016
65.1612
3 0% 5150.1 0%
10-03-
2016
65.3580
8 -1% 5166.4 0%
13-03-
2016
65.7774
2 2% 5185.5 1%
14-03-
2016
64.5707
2 -1% 5111.4 0%
15-03-
2016
65.0756
5 -2% 5119 -1%
16-03-
2016
66.2224
4 -1% 5168.2 0%
17-03-
2016
66.8899
8 1% 5183.1 0%
20-03-
2016
66.0170
4 0% 5166.6 0%
21-03-
2016 65.8202 0% 5166.6 0%
22-03-
2016
65.6404
9 3% 5142.3 1%
23-03-
2016
64.0315
7 2% 5084.2 2%
28-03-
2016 62.5767 0% 5004.5 0%
29-03-
2016 62.7393 -2% 5010.3 -1%
30-03-
2016
64.1171
4 3% 5082.8 2%
31-03-
2016
62.4654
4 0% 4999.4 0%
04-04-
2016
62.4055
4 2% 4995.3 1%
05-04-
2016
60.9763
3 0% 4924.4 0%
06-04-
2016
60.8907
5 0% 4945.9 0%
07-04-
2016
60.7538
2 0% 4964.1 1%
08-04-
2016
60.5569
9 0% 4937.6 0%
11-04-
2016
60.5056
3 -2% 4931.5 -1%
12-04-
2016
61.8064
7 -2% 4975.6 -2%
13-04-
2016
63.0987
3 -1% 5054.7 -1%
14-04- 63.9374 0% 5118.6 -1%

19
AUDITING THEORY AND PRACTICE
2016 3
15-04-
2016
64.1856
1 1% 5157.5 0%
18-04-
2016
63.4838
5 -1% 5137.1 -1%
19-04-
2016
63.9288
7 0% 5188.8 -1%
20-04-
2016
63.8005
1 -1% 5216 -1%
21-04-
2016
64.5964
1 1% 5272.7 1%
22-04-
2016
64.2198
5 -1% 5236.4 0%
26-04-
2016
64.7162
3 5220.6