Key Audit Matters

This report analyzes the key audit matters in the annual reports of major banks in Australia, including Commonwealth Bank, Westpac Banking Corp, National Aust. Bank, and ANZ Banking Group Limited. The report discusses the implementation of ASA 701 and ASA 570 accounting principles and the identification of key audit matters for each company.

Key Audit Matters

Contents
Introduction......................................................................................................................................3
ASA 701..........................................................................................................................................4
ASA- 570.........................................................................................................................................4
Key audit matter and Going concern principal discussed in Annual reports..................................5
Common wealth bank-.................................................................................................................5
Westpac Banking Corp................................................................................................................7
ANZ Banking Group Limited......................................................................................................8
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

Introduction
In the report a few companies from various industry segments have been analyzed. On this basis
of the analysis the key audit matters have been found. The identification of the key audit matter
i.e. which topic required most audit analysis focus for each company has been made. It has been
investigated that every company basis its nature of business and working style has a separate key
audit matter which has been mentioned and basis that the communication between the
management and auditing committee also undergoes changes. A high level of prudent judgment
via critical evaluation has been employed and small variations in business environments like that
of uncertainty in doing business have been monitored to suggest why that specific matter was
considered key to the auditing process. The report is structured cohesively and captures all these
sensitive details in a lucid way. Not just the key area for analysis has been shared but also what
steps were undertaken to carry out the analysis have been mentioned with integrity and sincerity
thereby justifying the capturing of this most sensitive information required. Recommendation on
improvisations have been provided. Though ASA701 consumes more time and cost it has its
intangible benefits and the report stands in humble testimony.

ASA 701
The job of a financial report is to communicate the general financial health of the company and
whether it is adhering to financial and legal protocols. It needs to be clear, concise, crisp and
appropriate. The format needs to be widely followed and understood by all parties. Its key
purpose is communication. When there is a gap in communication interpretation comes and the
message that is intended to be delivered gets distorted which is what happened in older reporting
formats. Public confidence in the process of auditing and company’s financial statements was
reducing over the years and people begun seeing reporting as deception. To reinstall the lost
confidence the enhanced reporting of ASA701 came up with tools and methods which ensure
greater transparency. Some information was easy to be hidden and in lieu of the partial
disclosure key decision making was also suffering. The loopholes had to be filled and the
enhanced disclosure of ASA 701 would enable that. The audit process of ASA701 is certainly
lengthier and costlier but more meaningful information is being provided to the users of the
financial statements. The assessment didn’t change much from older standards but what
information is disclosed has changed. The location of the paragraphs has also changed and the
opinion of the auditor will now be presented in the beginning of the report. The information is
being captured more sharply.
ASA- 570
This standard issues by Australian Accounting Standard Board is concerned with following
going concern concept. This concept dictates that business is running on the assumption that it
will continue its operation in its foreseeable future. If it is not the case then company has to
prepare their accounts on liquidation basis. There are certain events that can affect going concern
of business that should be assessed by the company.

Key audit matter and Going concern principal discussed in Annual reports
Here Audit report, director’s report and financial statements of four major banks in Australia are
discussed. Main focus of analyzing annual reports of these companies would be to evaluate
whether these companies has complied with accounting principles of ASA 701 and ASA 570 and
whether they have given related disclosure in annual report or not. Four banks selected for this
evaluation are-
1. Commonwealth Bank
2. Westpac Banking Corp
3. National Aust. Bank
4. ANZ Banking Group Limited
Common wealth bank-
It is largest bank in Australia in term of market capital as it acquire around 8.16% of market
capital acquired by ASX 100 companies in aggregate.
ASA 570- Going concern principal
In audit report ending 2017, auditor of the company has stated that it is primary responsibility of
directors of the company to identify and such even or occasion of the continuance of business in
future, This provision is properly followed by the company and they have not identified any such
event that would suggest that their future business and existence might be in danger (Christensen
et.al, 2014).
ASA 701- Key audit matters
Key audit matters reported by auditor of company are as follows with the manner in which
auditor of the company has dealt with these matters-
1. Provision for impairment of lending assets-
This particular of financial statement is included in key audit matter by the audit as provision
made by management is based on their subjective assessment. Management included the
provision in the balance sheet is the impairment on a particular lending asset increases a

particular threshold limit set by management. These assessments are based on future expected
cash flows from these lending assets which is totally subjective and can vary from person to
person who is making such estimation. There is also grouping of lending assets it an individual
asset is not impaired or the amount of impairment is low. All these estimation of cash flows are
based on the experience of management in case of these lending assets.
Auditor of the company has taken into account the assumptions and estimation process used by
the management to assess the provision made by management of the company. Models prepared
for estimation of future expected cash flows are also analyzed by auditor to get a detailed
understanding of estimation process.
2. Fair value of financial instruments
Financial instruments are required to be valued at their fair market price and there are not
specific method through which this value can be estimated. Due to subjectivity in estimation of
fair value, this item is also included in key audit matters of auditor’s report (Kachelmeier et.al,
2017). The process of estimation of fair value of financial instrument by management of the bank
is based on its prices and rates prevailing in market. Company has three types of financial
instruments that are identified under ASA as Level 1, Level 2 and Level 3.
For getting to know the process of determining fair value of financial instruments, auditor of the
company has taken appropriate steps to understand their valuation model. In addition to that
auditor has also evaluated the accuracy and relevance of the data that is put by management in
this model to arrive at final result.
3. Provisions relating to conduct risk, litigation and regulatory action, including related
disclosures
As per assessment of auditor this particular is exposed to legal risk and compliance risk in
different jurisdiction. In year 2017, there are pending civil proceedings against company under
Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Here management has to
estimate the outcome of the proceeding and form a provision for penalty is they are of the
opinion that final result might not be in favor of company (Fellnäs, 2012).

Auditor of the company has discussed the case with the experts to ascertain the possible outcome
of the case. In addition to that they have also read minutes of every BOD meeting conducted
regarding this case.
4. Valuation of retirement benefit obligations
Due to financial important of retirement benefit obligations, this is considered as key audit
matter by the auditor. There are various estimation that are taken by management in estimating
the retirement benefit obligations such as rate of inflation, increase in salary etc. auditor of the
company has examined the underlying data on which this estimation is formed to examine it in
detail (Commonwealth bank , 2017).
Westpac Banking Corp
ASA 570- Management of the company has followed the concept of going concern while
preparing financial statement of the company and followed all rules ASA 570 to determine that it
will remain in business for coming financial years (Sirois et.al, 2018).
ASA 701
1. Provision for impairment charge on loan
Being a banking company, impairment of loans and advances provided to customers is an
important from financial perspective. Creating provision for impairment creates subjectivity on
part of management of the company. This subjectivity is the reason why it has been included in
key audit matters. There are various assumption and estimation that were done by management
of the company that increases the level of subjectivity.
Auditor has assessed all the key controls that were put by management of the company in this
process. Some of the key factors that are assessed by auditor are-
- Evaluating credit quality of loans
- Review of approval process of loan granted to customers.
- Controls on errors that are made by IT systems of the bank.
- Latest development known to customers in relation to credit worthiness of customers.
2. Operations of IT system and controls

A banking company rely heavily on Information technology for their day to day operation and
that makes the IT structure a vital part of an organization (Carson et.al, 2012). With advancement
in technology threats to such structure also increased which is the reason that auditors of the
company has considered the operations of IT systems and its controls as an Key audit matter.
The authorization of transactions is a very important process for any business organization
specially a banking company.
Audit has addressed this matter in following manner-
1. Auditor has analyzed all security and other controls applied on IT operations.
2. Specific consideration is given to controls that are applied for maintaining security of
customers.
3. Change management process of the company has also been analyzed in detail.
4. Communication has been done with the auditor of the software development company that has
implemented IT framework for the company.
5. Internal control and design are tested (Westpac Banking Corp, 2017).
3. Provisions, customer refunds and contingent liabilities relating to operational and
reputational matters, litigation and regulatory actions including related disclosures
A banking company is always exposed to a risk of litigation, rule and regulation in relation to
customer and other parties involved in business. Provision on this type of risk is based on
estimations and assumption of management of the company. Hence this is also included in key
audit matter by the auditor. Disclosures are also provided by management of the company in
relation to these liabilities in notes to accounts of the company (Albu and Albu, 2012).
Audit has addressed this matter in following manner-
1. Auditor of the company has checked the controls that are implemented by management of the
company that are covering operational matters in relation to estimation of litigation and customer
refunds.
2. Accounting estimated and policies used to make provision for contingent liabilities is also
assessed by the company.
3. Data processed over IT Structure in relation to this matter is also evaluated by the company.

ANZ Banking Group Limited
It is also one of the biggest banking corporation in Australia in terms of market capital it is
considered to be fourth largest banking company with as aggregate market capital of around
AUD 77,802,700,000 (Around 5.02% of total market capital of AUX 100 companies).
ASA 570- Auditor of the company has stated that it is primary responsibility of management of
the company to prepare financial statements of the company on going concern concept. Directors
of the company has stated that they have followed the concept of going concern.
ASA 701- there are three key audit matters that are identified by auditor of the company that are-
 Provision for Credit Impairment;
 Valuation of Financial Instruments held at Fair Value; and
 IT Systems and Controls
1. Provision for credit impairment
Company has taken various judgments and estimations to arrive at the value of credit impairment
provision and hence it is included in the key audit matters of the bank. According to the auditor
of the company credit impairment is exposed to a high credit risk which can affect business
organization in significant manner. Some amount of loans and advances is very high and
complexity of process of estimation of credit impairment can have huge financial impact on
banking company.
Specific points considered in audit process-
1. Counterparty risk is tested in detail by auditor (Deegan, 2013).
2. Evaluation of credit asset process that has been adopted by the management and compare this
process with process used by auditor in audit of other banking companies.
3. Models used by management of an organization to estimate provisions for credit impairment is
assessed by the auditor.
4. Various factors such as discounting factors, nature of business environment is reassessed by
auditor.
2. Valuation of Financial Instruments held at Fair Value
There are various method that are used to value financial instruments as it is essential to value
these instruments at fair value in accordance with the accounting standard issues by Australian

accounting standard board. These valuation method involves a lot of estimations and
assumptions. Hence it becomes an essential for a banking company (Rahman, 2013). The
number of transactions that involves foreign currency is very high in a bank that of size of ANZ
banking corporation. Any wrong estimation on part of management of the company can have
vital impact on financial performance of the company. Due to these reasons Valuation of
Financial Instruments held at Fair Value become a key audit matter of financial performance of
the company.
Specific points considered in audit process-
1. Auditor of the bank has analyzed the financial model of the management of the company that
is used to value financial instruments. This model is also compared with the model prepared by
auditor to check accuracy of final results of making provision for financial instrument.
2. Auditor has also checked all the calculation made by management of the company to arrive at
provision for financial instruments.
3. Auditor of the company has also analyses the financial instruments on which company has not
made any provision in this financial year to check whether provision is required to made or not.
3. IT Systems and Controls
ANZ Banking Group Corporation has many operation that are being conducted with the help of
information technology that has made them somehow dependent on IT infrastructure. IT has
become integral part of business operation of the bank. Hence it is essential for auditor to include
this as part of key audit matters. It is essential for management to implement internal controls to
protect their IT infrastructure (Deegan, 2012).
Specific points considered in audit process
1. Auditor of the company has checked in detail all the internal compliances and controls
implemented by company on IT of the company.
2. Auditor of the company has also analyzed the master file of the company to analyze any
recurring error that could be harmful for the company (ANZ Banking Corporation, 2017).

Conclusion
Report prepared by auditor of the company is very important for both shareholders and
management of the company. There are certain matters that are very complicated and auditor
cannot present clear view on such matters. Hence it is very important to give special importance
to these matters and present them in separate section of audit report. This will helps in giving
true and fair representation of the company. This will also help management to give special
consideration to such matters and make future policies of such matters.

References
Albu, N. and Albu, C.N., 2012. International Financial Reporting Standards in an emerging
economy: lessons from Romania. Australian Accounting Review, 22(4), pp.341-352.
ANZ Banking Corporation, 2017. ANZ Corporation. Retrievable at:
http://shareholder.anz.com/sites/default/files/2017_anz_annual_report.pdf
Carson, E., Fargher, N.L., Geiger, M.A., Lennox, C.S., Raghunandan, K. and Willekens, M.,
2012. Audit reporting for going-concern uncertainty: A research synthesis. Auditing: A Journal
of Practice & Theory, 32(sp1), pp.353-384.
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in the
audit report change nonprofessional investors' decision to invest?. Auditing: A Journal of
Practice & Theory, 33(4), pp.71-93.
Commonwealth bank , 2017. Commonwealth bank. Retrievable at:
https://www.commbank.co.id/upublic/mod_home/default_content.aspx?code=annualreport.
Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Fellnäs, V., Strömbäck, J. and Anell, A., KEY AUDIT MATTERS.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2017. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.
Rahman, A.R., 2013. The Australian Accounting Standards Review Board (RLE Accounting):
The Establishment of Its Participative Review Process. Routledge.
Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the
auditor's report: evidence from an Eye-tracking study. Accounting Horizons.
Westpac Banking Corp, 2017. Westpac Banking Corp. Retrievable at:
https://www.westpac.com.au/about-westpac/investor-centre/financial-information/annual-
reports/