Analytical Procedures and Inherent Risk in Audit Planning - Bank of Queensland

This report discusses the application of analytical procedures on the financial statements of Bank of Queensland and the inherent risks involved in audit planning. It analyzes the results of ratio analysis and identifies risk areas in the financial statements. The report also examines the risk of material misstatement at the financial report level and the assertion level. The inherent risks related to the integrity of management, management experience, unusual pressure on management, nature of the entity's business, and factors affecting the industry are discussed.

MASTERS OF PROFESSIONAL ACCOUNTING
MA611- Auditing
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Contents
Executive Summary...................................................................................................................3
1- Results of Analytical Procedures...........................................................................................4
Analytical Procedures............................................................................................................4
Influence of analytical procedures on audit planning decisions............................................7
2- Risk of Material Misstatement (Inherent Risk) at the Financial Report Level......................8
3- Risk of Material Misstatement (Inherent Risk) at the Assertion Level...............................11
References................................................................................................................................15
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Executive Summary
This report is based on various aspects of audit planning Bank of Queensland. Auditing is the
process of investigating financial, operations, statutory and other relational requirements. In
this report, the application of analytical procedures on financial statements of the Bank of
Queensland has been undertaken. Net profit, operating cash flows, current assets and total
assets are risk factors of Bank of Queensland on the basis of an analytical procedure for the
last 3 years. Management has been considered as the inherent risk factor that needs to be
considered while planning audit. Nature of business, the volume of transactions and industry
factors are important considerations and on these bases inherent risk is identified for planning
audit procedures. At last, the risk of material misstatement at the assertion level has been
discussed. Net profit, operating cash flows and impairment on loans and advances are three
accounts at risk of material misstatement at the assertion level.
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1- Results of Analytical Procedures
Analytical Procedures
The analytical procedure uses financial statement analysis of the business entity in order to
develop some base of the auditing process. Under the analytical procedure, figures of
financial statements are analysed by using different analysis techniques and then the trend is
developed and risk areas are identified. In the case of Bank of Queensland, ratios analysis has
been conducted and horizontal analysis of important accounts has been undertaken to identify
risk areas or risk in accounts. Following is the result of ratio analysis of Bank of Queensland:
Particular 2018 ($M) 2017 ($M) 2016 ($M)
Net profit ratio 16.24 % 17.20 % 15.67 %
Return on total assets 0.64 % 0.68 % 0.66 %
Return on equity 8.71 % 9.29 % 9.42 %
Current ratio 1.33 times 1.22 times 1.32 times
Debt to equity ratio 12.74 times 12.64 times 13.18 times
Debt Ratio 0.93 times 0.93 times 0.93 times
Operating cash flow growth (%) 204.97 % -71.85 % 51.13 %
(Robinson, et. al., 2105)
Analysis
Ratio analysis of Bank of Queensland has been conducted and it has been observed that
management has been able to maintain a net margin level in all the years. On the other hand,
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total assets have not been utilised to the fullest by the Bank of Queensland during last year’s,
therefore, this increases operational risk in the business. Another operational risk that can be
identified from the ratio analysis is related to operating cash flow growth (Brigham,
Ehrhardt, Nason & Gessaroli, 2016). Following the trend, operating cash flows of the Bank of
Queensland has been declined at a significant rate in the past 3 years. In 2016, it was 51.13
%. In 2018, cash flow from operating activities has again increased to 204.97 %. Therefore
this huge fluctuation in the area of operational risk that should be considered while auditing.
Particular 2016
($M)
2017
($M) Change %
Change
2018
($M) Change %
Change
Sales 2157 2046 -111 -5.15% 2069 23 1.12%
Net profit 338 352 14 4.14% 336 -16 -4.55%
Total equity 3587 3788 201 5.60% 3856 68 1.80%
Total assets 50853 51658 805 1.58% 52890 1232 2.38%
Current assets 49702 46508 -3194 -6.43% 51762 5254 11.30%
Current
liabilities 37796 38161 365 0.97% 38991 830 2.17%
Total Liabilities 47266 47870 604 1.28% 49124 1254 2.62%
Total cash flow
from operations -1073 -302 771
-
71.85% 317 619
-
204.97%
(Cao, Chychyla & Stewart, 2015)
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Analysis:
From the above analysis of financial figures of the past 3 years, it can be observed that total
assets and specifically current assets as well have shown high fluctuation in all 3 years. On
the 0ther hand, total cash flow from business operations have also shown fluctuating results
and are fluctuations are peculiar (Plumlee, Rixom & Rosman, 2014). Therefore detailed
investigation of operating expenses and incomes should be undertaken while auditing of
Bank of Queensland.
Liquidity Coverage Ratio (LCR)
Net Stable Funding Ratio (NSFR) APRA’s objective in implementing the NSFR
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Since Bank of Queensland is a banking corporation, therefore, various banking rules related
to maintaining cash and cash equivalents need to be investigating while auditing. Cash
reserve ratio and statutory liquidity ratios are to be maintained by banks and the same will be
analysed while auditing.
Influence of analytical procedures on audit planning decisions
Analytical procedures conducted on the financial statements of the business entity always
influences various decisions that auditor needs to undertake in the audit planning stage. The
analytical procedure presents a clear picture of past financial performance and highlights
different accounts that are to be considered important or material while verifying figures or
accounts (Eilifsen, Messier, Glover & Prawitt, 2013). In the case of Bank of Queensland,
apart from inherent risks involved in business operations, there are many other factors are to
be taken into account.
Conclusion: While performing analysis and horizontal analysis of financial statements many
accounts comes into picture which requires detailed investigation. Therefore because of
analytical procedures, the auditor is able to plan risk areas in the financial statements of the
business entities. It can be said that the results of analytical procedures becomes base for
planning and performing audit in every business organisation.
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2- Risk of Material Misstatement (Inherent Risk) at the Financial
Report Level
Inherent risk is the risk that every business organisation possesses and these are an
uncontrollable risk. Inherent risk has been classified under various categories and varies from
business to business. Operational risk, legal risk, credit risk, market risk, etc. are some
inherent risk related to business entities.
Table showing different aspects of directors of Bank of Queensland during 2017-2018:
Name Position Educational
Background
Experience
ROGER DAVIS  Chairman
 Non-Executive
 Independent Director
B.Econ. (Hons) and
Master of Philosophy
Over 33 years
JON SUTTON Managing Director &
CEO Executive Director
Over 20 years
BRUCE
CARTER
 Non-Executive
 Independent Director
B Econ, MBA, FAICD,
FICA
Over 14 years
RICHARD
HAIRE
 Non-Executive
 Independent Director
B.Ec, FAICD Over 29 years
JOHN LORIMER  Non-Executive
 Independent Director
B Com Over 30 years
WARWICK
NEGUS
 Non-Executive
 Independent Director
B Bus, M Com, SF Fin Over 30 years
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KAREN
PENROSE
 Non-Executive
 Independent Director
B Com, CPA, FAICD Over 20 years
MICHELLE
TREDENICK
 Non-Executive
 Independent Director
B Sc., FAICD, F Fin Over 30 years
DAVID WILLIS  Non-Executive
 Independent Director
B Com, ACA, ICA Over 35 years
MARGARET
(MARGIE)
SEALE
 Non-Executive
 Independent Director
BA, FAICD Over 25 years
In the case of Bank of Queensland, the following are major factors or area of inherent risk:
a. The integrity of management (i.e., the directors): Integrity of management can be
assessed by identifying no of independent and dependent directors in overall management. In
case of Bank of Queensland, there are 9 independent directors out of 10. On the other hand,
the Federal government in Australia has also mandated all the banking companies to establish
a Royal Commission that will take care of financial and superannuation system of banking
companies. Apart from the Royal Commission, there are various other committees and
groups that undertake the integrity of directors. Therefore it can be concluded that the
inherent risk of the integrity of management will at the lower side.
b. Management (i.e., Director) experience, knowledge and changes during the period:
From the above table of directors, it can be observed that majority of directors of Bank of
Queensland is well educated, has adequate experience to manage business affairs of banking
corporation and reliance can be placed on them on the basis of educational background (Pike,
Curtis & Chui, 2013). On the basis of the above-mentioned point, Bank of Queensland has
very fewer changes in their directors in the last reporting period i.e. 2017-2018. From the
annual report of the Bank of Queensland, it can be analysed that there are fewer changes in
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directors, the majority of directors are well experienced and educated. Therefore this inherent
risk is at a controlled level during 2017-2018.
c. Unusual pressure on management (i.e., the directors): Under this inherent risk,
management or directors of business entity is tends to pressurised because of their duties,
responsibilities and because of statutory requirements. Since the Bank of Queensland is a
banking corporation, therefore, there are many statutory requirements that management needs
to take care of. These requirements include maintaining liquidity Coverage Ratio (LCR) and
Net Stable Funding Ratio (NSFR) APRA’s objective in implementing the NSFR. Apart from
these requirements, there are other requirements as well from the Federal Government and
states government as well (Palepu, Healy & Peek, 2013). Therefore, it can be observed that
inherent risk related to unusual pressure on management is at higher side.
d. Nature of the entity’s business: Nature of business also plays an important role in
analysing the inherent risk of the business entity. Bank of Queensland is engaged in the
banking business, therefore, there are various operational transactions, financial transactions
and many statutory requirements to be fulfilled. Nature of business of Bank of Queensland
leads to any inherent risks like operational risk, legal risk and credit risk.
e. Factors affecting the industry in which the entity operates: Risk Factors like market
risk, credit risk, liquidity risk, reputation risk, business risk and operational risk are some
examples that affect business operations of Bank of Queensland. Therefore, it can be
observed that inherent risk because of these factors is at a higher level (Pike, Curtis & Chui,
2013).
Conclusion: It can be concluded that overall inherent risk of Bank of Queensland is at the
higher side because of their nature of the business, the volume of transactions, pressure on
management and other uncontrollable risks related to banking business.
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3- Risk of Material Misstatement (Inherent Risk) at the Assertion
Level
Net profit
Net profit Profit 2017- $336.0 Million
Profit 2018- $352.0 Million
Why this account balance
is at significant risk of
material misstatement?
Risk of profitability is very significant from a perspective of
investor because one of the primary factors that are evaluated
by the investor before making an investment in the
organisation is a profit generated over the period of time.
Overall profitability of the organisation has decreased in 2018
as compared to 2017 in respect of the fact that overall revenue
generated by the organisation has slightly increased. On the
basis of this analysis, it can be said that profit generated by the
business organisation are very material unit taking decisions by
investors.
Key assertions Completeness- Management should evaluate whether the
company has recorded financial profits effectively and
efficiently or not (Titera, 2013).
Audit procedure to
address the risk
Auditor of the organisation should suggest to management to
make sure that indirect expenses are within the control of
management. Any kind of non-value addition expenses should
be decreased significantly in order to increase net profitability
(Cohen & Simnett¸2014).
Internal control that
would mitigate the risk
Quality control and implementation of policies and procedures
for controlling cost would be one of the most effective internal
controls to make sure that management is able to maintain net
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profitability over the period of time (Johnstone, Gramling &
Rittenberg, 2013).
Cash flow from operations
Cash flow from
operations
2016- -$1073 million
2017- -$302.0 million
2018- $317.0 million
Why this account balance
is at significant risk of
material misstatement?
Cash management is one of the most fraud-prone areas in
business organisation and it requires effective and efficient
audit procedure for evaluating its accuracy and relevance. In
the last four financial years management of the company has
generated negative cash inflow from business operations.
Negative cash inflows from business operations are one of the
major signs of mismanagement in the organisation (William
Jr., Glover & Prawitt, 2016). It is important that the business
organisation is able to generate positive cash inflow from
business operations as management should be able to generate
cash from its primary business.
Key assertions Accuracy- Auditor should evaluate whether all the transactions
in relation to collection and payment of cash has been recorded
or not.
Audit procedure to
address the risk
Auditor of the organisation should analyse and compare the
transactions recorded in cash with a bank statement of the
company. Reconciliation statement should be prepared by the
auditor and compare it with the reconciliation statement
prepared by management (Coetzee & Lubbe, 2014).
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Internal control that
would mitigate the risk
Auditory should you suggest the management of the company
to implement internal control strategies to avoid
mismanagement of cash? For example, management should
establish a rule in the organisation that deposit or retrieval of
cash from the business account will be done by specific
managers (Messier, 2016). In addition to that segregation of
duties should also be applied as an internal control strategy.
Impairment on loans and advances
Impairment on loans
and advances
2017- $48.0 Million
2018- $41.0 Million
Why this account balance
is at significant risk of
material misstatement?
Impairment on loans and advances is recorded as an expense in
profit and loss account, therefore inaccuracy in calculation of
impairment on loans and advances will definitely impact
overall profit distributed to equity shareholders and other
stakeholders.
Key assertions Accuracy- Auditor should evaluate whether the policies and
procedures used by business organisation for calculation of
impairment on loans and advances are accurate or not (Reding,
et. al., 2013)).
Audit procedure to
address the risk
Auditor of the organisation should evaluate the financial model
used by the organisation to calculate impairment loss on loans
and advances (Knechel & Salterio, 2016).
Internal control that
would mitigate the risk
The auditor should suggest the management to make sure that
proper credit check has been conducted on the client before
providing loans and advances.
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Conclusion
On an overall evaluation, it can be concluded that there are some material misstatements that
can affect the financial position of the company in a negative manner. This section of the
report has identified all the material misstatement along with their importance from the
perspective of an investor. In addition to that internal control, the strategy is also suggested
that can help in mitigating the negative impact of these factors on business organisation.
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References
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internal audit engagements. International Journal of Auditing, 18(2), 115-125.
Cohen, J. R., & Simnett, R. (2014). CSR and assurance services: A research
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services. McGraw-Hill.
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conducting a quality audit. Cengage learning.
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Pike, B. J., Curtis, M. B., & Chui, L. (2013). How does an initial expectation bias influence
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Plumlee, R. D., Rixom, B. A., & Rosman, A. J. (2014). Training auditors to perform
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