Critical Evaluation of Key Audit Matters in Independent Auditor's Report

Running head: CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN
THE INDEPENDENT AUDITORS REPORT
Critical evaluation and analysis of key audit matters in the independent auditors report
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CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Executive summary:
The paper evaluates the importance of identification of audit matters of the banking
organization. Such explanation has been done in light of introduction of the new auditing
standard that is “ASA 701 communicating key audit matters in the independent auditor
report”. In this regard, the failure of large investment bank has been discussed by reviewing
relevant journal articles. The objective and rationale of ASA 701 has been addressed along
with evaluating the revision of ASA 570. The banking organization that have been evaluated
for its key audit matters include ANZ bank, Commonwealth bank of Australia, Pendal group
limited, Bank of Queensland, Macquarie group limited and QBE Insurance group.

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Table of Contents
Introduction:...............................................................................................................................4
Discussion:.................................................................................................................................4
Purpose of key audit matters:.....................................................................................................4
Determination and application of key audit matter:...................................................................5
Identifying issues of Lehman brother case:...............................................................................5
How key audit matters address the issues:.................................................................................6
Revision of ASA 570:................................................................................................................6
Importance of going concern issue in the auditor’s report:........................................................7
Analyzing the key audit matters in the independent auditor’s report of the chosen banks:.......7
Do key audit matters serve the purpose in the industry?...........................................................9
Conclusion:................................................................................................................................9
References list:.........................................................................................................................10
Appendix:.................................................................................................................................12

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Introduction:
The study is undertaken to evaluate the key audit matters of the organizations selected
from the banking industry listed on the Australian stock exchange. Such analysis has been
conducted in respect of the introduction of new auditing standard “ASA 701 communicating
the key audit matters in the independent auditor report”. The introduction of the new
auditing standard was in the aftermath of financial crisis and was intended to fulfill the
lacking requirements of the old auditing standard which was cited to be the reason for the
failure of some of the organization (Czerney et al. 2019). In this regard, the case of Lehman
brother is explained by emphasizing on the failure of auditors to detect the defective
accounting policy that resulted in the downfall of organization.
Key audit matters are the matters that are considered to be essential by way of their
professional judgment in the auditing process of annual report of entities. The new standard
pertaining to the disclosure of key audit matters is applicable to the financial statements
verification and in the circumstances when it is decided by the auditors to communicate such
matters in the auditor’s report (Czerney et al. 2019). The organizations for which the
evaluation of key audit matters are done in the paper includes are chosen from the banking
industry and they include ANZ bank, Commonwealth bank of Australia, Pendal group
limited, Bank of Queensland, Macquarie group limited and QBE Insurance group.
Discussion:
Purpose of key audit matters:
The principle of incorporating the key audit matters for improving the communicative
value of report by making precision of the information using the key audit matters. Such
matters intend to provide the users of financial statements with additional information that
assist them in understanding the professional judgment of the auditors in preparation of the
auditor’s report. In addition to this, key audit matters also assist uses in gaining an
understanding of the noteworthy judgment along with the nature of entity. Moreover, a basis
is provided to the users with the help of disclosure of key audit matters for further engaging
with the governance people and management in relation to certain matters required in the
preparation of annual report. Communication of key audit matter is in the context of forming
an opinion by auditors on the financial statements as a whole and providing an insight into
the work of audit (auasb.gov.au 2019).
Determination and application of key audit matter:
Determination of key audit matters is done by the auditor by assessing the areas of
significant risks areas that has probability of being misstated materially. Significant judgment
is exercised by the auditors in relation to the areas of significant judgment made by the
management including the assumptions and estimates resulting in areas of high uncertainty.
Furthermore, for the identification of key audit matters, it is essential to engage with the
people entrusted with governance because the matters which are identified by such personnel
are considered as the matters of potential key audit matters. Users will be able to well

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
understand the audit with the help of announcement of key audit matters irrespective of the
auditors expressing adverse or qualified opinion on the financial statements of company
(auasb.gov.au 2019).
Identifying issues of Lehman brother case:
The case of Lehman brothers is discussed with respect to the auditing issues faced by
the organization and their failure of disclose the defective accounting policy of excess
borrowing and misrepresentation of earning capacity of organization. The unforeseen
collapse of large investment bank is partially attributable to the ineffective and weak auditing
practices adopted by the company under the guideline of the old auditing standard that did
not mandated the revealing of the identified key audit matters. The audit report issued did not
make accurate projections of the long term sustainability of the business in light of
uncertainties and risks (Dodo 2017). Moreover, the transactions relating to the repurchase
agreements under the Repo 105 was failed to be disclosed by the auditor. The financing of
daily operations of the firm with the help of Repo markets and the ability of the company to
settle down its Repo positions should have been investigated. The firm would have been
placed in a opposition to manage its accounts and balance sheet that responded to the
fluctuations of market had the external auditing been effective (Cordoş and Fülöp 2015).
Therefore, it can be inferred that the issue surrounding the collapse of the investment bank
was that the risk associated with excess borrowing was not anticipated and accounted for by
auditors and an unqualified audit report was issued by the auditors regarding its financial
position.
How key audit matters address the issues:
From the analysis of the case of Lehman brothers, it is quite evident that there exist a
relationship between the development of new auditing standard and collapse of the large
investment banking firm. The development of ASA 701 was due to the failure of such some
corporate organizations and subsequently the financial crisis. Issues faced by the bank that
was not accounted for previously could have been addressed with the introduction of ASA
701. The high repo transactions which the firm was involved into could be revealed along
with concealing of high financial leverage of bank indicating that the company has borrowed
in excess of its capacity and would have adequately anticipated its downfall. Some of the key
audit matters of the Lehman brothers such as subprime borrowings, Repo 105 and earning
capacity could be communicated to the people charged with governance and management and
accordingly a qualified audit opinion would be issued that provides investors with relevant
view of the financial report (Bédard et al. 2016). Therefore, the shareholders would have
made strategic investment decision under the new auditing standard.
Revision of ASA 570:
Under the ASA 570 revision, it is required by the auditors to evaluate the
appropriateness of the assumptions and accounting of going concern of company the financial
statements compilation. Auditors are accountable for accounting for the issues associated
with going concern and its impact on the financial report. The reporting entity ability to
continue as going concern should be assessed by the auditors as per the auditing standard of
Australia. It is the responsibility of the auditors to obtain sufficient and appropriate audit

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
evidence for ascertaining whether there any uncertainty prevails about the ability of entity to
continue as going concern. However, there are some inherent limitations the liability of the
auditors for predicting the future conditions or events. Therefore, if the reference to the
material uncertainty about the liability of entity to continue as going concern is not present,
the auditor report in such case cannot provide guarantee on the ability of the entity to
continue as going concern (Brunelli 2018).
Importance of going concern issue in the auditor’s report:
The entity’s ability to prolong as going concern is considered to be important for the
auditors. This is because of the fact that existence any material uncertainty that create a
uncertainty on the company’s ability to continue as going concern would be treated as key
audit matters. Therefore, as per the revised ASA 570, such material uncertainty should be
reported by the auditor in their audit report as key audit matter. In the absence of any
appropriate and sufficient audit evidence regarding the accounting policy for evaluating the
position of entity as going concern, it is not necessary that the auditors will issue an
unqualified and adverse audit opinion on the financial position of the company. However, it
is important for the auditors to conduct an assessment about the going concern issue by
obtaining appropriate and sufficient audit evidence regarding the same (Tsay and Chen
2015). Therefore, auditors are supposed to make conclusion on the going concern ability of
the firm by addressing the matter is the section of key audit report.
Analyzing the key audit matters in the independent auditor’s report of the chosen
banks:
The analysis of the companies in the banking sector is done in this sector by
evaluating their key audit matters in the audit report. The quality of audit is vital for the users
and quality of audit is supported by the recent requirement of communicating key audit
matters and thereby responding to growing demand of stakeholders and investors by gaining
an insight into the auditing process (Zang 2019). The banking companies that have been
chosen for analysis of the key audit matter include ANZ bank, Commonwealth bank of
Australia, Pendal group limited, Bank of Queensland, Macquarie group limited and QBE
Insurance group.
Analyzing the financial report of Macquarie group limited, it is deduced that the audit
opinion on the financial statements of company is formed by auditors by accounting for the
matters that are of significant important in the auditing of financial statements. The audit
matters that are identified by the auditors are related to account such as valuation of financial
liabilities and assets, IT control and system, provision for loss and deferred tax liabilities and
assets. Moreover, all the identified key audit matters have been adequately addressed by
auditors using the appropriate technique and adopting the analytical procedures and sampling
plan as per the suitability of account (Static.macquarie.com 2019).
The auditor of Bank of Queensland has obtained appropriate and sufficient audit
evidence on the basis of which formation of opinion on financial information is done.
Identification of key audit matters for the consolidated entity are done for the bank in relation
to the account such as valuation of goodwill, collective and specific impairment provisions
for advances and loans, fair value measurements for financial instruments, intangible
computer software valuation and system and control of IT. All the key audit matters have
been addressed by adopting the appropriate sampling plan and according to the requirement
of the auditing standard. Auditing procedures also involved assessing the effectiveness of the