Key Audit Matters in Auditor's Report

This essay analyzes the importance of key audit matters in independent auditor's reports, focusing on Australian Accounting Standards ASA 701 and ASA 570. It examines the Lehman Brothers case as an example of the consequences of inadequate communication of key audit matters. The essay further explores the application of these standards in the Australian banking industry, highlighting significant matters like adviser service fees, credit risk, and contractual commitments. It concludes with recommendations for auditors to ensure transparency and accountability in their reports.

Research, Critically Analyse
And Evaluate Key Audit
Matters In Independent
Auditor’s Report Auditor’s
Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Application...................................................................................................................................1
Analysis........................................................................................................................................3
Recommendations and Conclusion..................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Auditing reports refers to reports that are being prepared for the purpose of showing
amount of accuracy in the books of accounts and other business activities of a business
organisation. These reports also helps in assuring that each legislation and standards applicable
on the business have been appropriately complied by the company while performing its business
activities. Banking industry is one of the largest industry of Australia. National Australian Bank,
Commonwealth Banks, Australian and new Zealand banking Groups, Westpac (WBC) banks are
being covered under big four banking organisations of the banking industry. The present reports
shows a reflation report over the ASA 701 and ASA 570 which are new auditing standards of
Australia. It reports includes application of these standards in these standards in these banking
companies for generating better understanding of ASA 701 and ASA 570.
MAIN BODY
Application
ASA 701
As per my study, The auditing standard ASA 701 deals with clearing the several
responsibilities to Auditors in context to communicating all the essential auditing matters
presented into the auditor's reports (Sreekeshava, Kumar and Ravishankar, 2017). This auditing
standard says that an auditor needs to communicate all the positive and negative matters involved
in his report for the purpose of improving the value of reports made by the auditors for the users
of financial reports of the company.
In my opinion, the major purpose of making proper communication about key matters of
auditing reports is to improve the transparency of the auditing report among auditors, companies
and users of financial reports as well (Hatami and ET.AL., 2018). Further, I also analysed that
ASA 701 helps in providing additional information to the key users of financial reports apart
from the information included in auditing reports.
As pr auditing standards ASA 701, the essential matters to be disclosed by the auditors
while developing their auditing report along with additional information includes effect of
various legislation and applicable on the company. All those information that can affect the
interest of users of the financial reports towards business organisation, compliance of all the
accounting policies and standards over the business' books and accounts and their impact over
companies' books as well, etc.
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Lehman Brothers case
In Lehman Brothers case, Lehman Brothers was a firm that performs their business
organisations for providing financial services to range of business organisations. The company
made a large number of accounting misconducts. It showed fake accounting leverage ratio. As
per the accounting legislation the leverage ratio of a company should be less than or equal to
15:1. on the other hand, Lehman Brother's company was showing leverage ratio of 31:1. further,
the company started showing fake repurchase agreements of the business in order to cover up
higher amount of leverage in the firm.
Auditing reports of the company also failed to communicate the fact about company's
fake leverage and fake repurchase leverage agreements. In addition, the reporting of independent
auditing also failed to show the immaterial accounting entries made for the purpose of showing
higher repos of cash flows in the company (Brunelli, 2018). It resulted in creating wrong image
of the company in the eyes of users of the financial users like investors, shareholder, etc.
By reviewing all the facts of the case, I can evaluate that the auditor must communicate
all the material information to the users of financial reports (Sreekeshava, Kumar and
Ravishankar, 2017). If in the above case, auditor reports does not fail to provide a proper
information about the material misconducts made by the Lehman brothers, its investors would
not be misguided. In order to this, I can analyse that compliance of the ASA 701 is an essential
requirement for each and every business organisation as if at the time of this case ASA 701 was
in existence, the auditor would be liable to communicate all the essential information about
company's auditing which would be resulted in revealing all the facts about the misconducts
made by the company in front of the users.
The ASA 701 makes it necessary for the auditor to first analyse the core activities of the
company that are needed to be investigated in depth (Hatami and ET.AL., 2018). Further, the
auditor shall analyse all those matters carefully and investigate them as well. It would enhance
the effectiveness of the auditors reports. Further, while determining the significant measures to
be analysed by the auditor, he shall analyse all the significant users of the companies. Along with
it, he shall also analyse their the significant measures through which they are involved with
company and help them in taking appropriate decisions for the company as well.
ASA 570
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In my opinion, The focus of this accounting standard is to establishing the mandatory
requirements and also to provide the guideline in explanatory way such that auditor's
responsibility in auditing of the financial report by considering the going concern assumption
which issued at time of preparation of the financial reports also includes the management
assessment of the company's ability to continue as the gong concern entity (Brunelli, 2018).
As per my analysis, ASA 570 applies to the auditing of the financial report for the
financial year or auditing of the financial half year in accordance of wit the part of the
corporations Act, 2001 (Elshakh and et.al., 2016). basically the auditing standard representing
the Australian equivalent of the going concern and replacing the current ASA 570 which is
issued by te AUASB.
In addition, I found that the auditing standard has deference from the revise or which is
actually made to guide the Australian legislative and law suitable environment in order to
maintain the quality of the auditing so that accurate information ca be generated from the
company's financial statements in order to helps the users of the financial information so that
they can effective and efficient decision at time of making those decision (Courtney, Boniello
and Berger, 2017). Accurate and reliable information will further help the organisation in making
the more attractive investments and projects towards their firm so that they can diversify towards
the path of the growth and development.
Analysis
ASA 701
In my opinion, Compliance of ASA 701 while creating auditing reports of the companies
matters helps in making the auditor to make disclosure of overall professional judgment over the
core activities of a company (Kocoglu and et.al., 2016). It leads making the company providing
all the core information and quality assurance to the key stakeholders of it and developing
transparency in it as well.
Key features of ASA 701
As per my study, the Core features of this standards can be described as under:
 It allows auditors to determine weather the specific company of which he is perfoming
the auditing, needs to consider and show all the significant auditing matters or not.
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 The ASA 701 makes it mandatory for the auditors to provide all the mandatory
information in their auditing reports of companies that are listed on the ASX.
 It also states that auditors needs to include all the situations in which any issue was arisen
in the company along with its significant affect upon company's major business activities
and its books of accounts as well (Magnusson and et.al., 2018).
 The auditing reports will show various documents that the company is needed to attached
with its financial reports.
 The Auditing standards states that the auditor is required to analyse and identify key areas
in the business in which the significant attention is needed to be made while performing
his auditing activity. In addition he is also required to determine all the core information
that shall be provided by him in his auditing reports.
If I talk about the major purposes of the ASA 701, disclosure of all the material
information of the auditing report to key persons and key users of company's accounting reports
would come at the priority list (Lea, 2018). In addition, to it, I think, helping these users from
misguidance of companies is also another key purpose of this auditing standard.
The Australian government has made it mandatory for the auditirs of banking companies
to comply with the standards of ASA 701 (Lundgren-Nilsson and et.al., 2019). in order to this,
the individual auditors appointed bny these companies are needed to analyse all the key matters
of the company and include them into their auditing reports for the purpose of providing all the
significant information about the company and assurance of compliance of all the major aspects
of legislation and standards applicable on them in a properly.
Further, ASA 701 provides a range of key aspects that are needed to be covered by
individual auditors of various banking companies such as National Australian Bank,
Commonwealth Banks, Australian and new Zealand banking Groups, Westpac (WBC) banks,
etc.
major aspects covered by auditors of these banking companies can be analysed as under:
Payment of adviser service fee It is the significant matter to be covered by in the
auditing reports of the banking companies. This matter is needed to be involved a higher amount
of in depth investigation of the auditors. By analysing annual reports of national Australian bank,
I analysed that the independent auditor of the company all the financial transactions made by the
bank for the purpose of paying fee for the adviser's services is needed to be analysed and
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investigate properly (Annual reports 2018. 2019). In addition, the report of national bank's
auditor shall be inclusive of proper information regarding this matter of the company.
Increase in the credit risk is another major matter of the consideration banking
company's auditors. As per the annual reports of commonwealth bank, it can be analysed that it
is essential for the auditors of banking companies to analyse overall overall credit risks taken by
the bank. It would help the investors and customers and other significant users of the financial
reports of banks, to analyse and evaluate the amount of risk involved in the return that would be
gained by them from the investment made in the bank.
Contractual commitments contractual commitments are another significant elements to
be taken into consideration at the time of developing auditing reports of the banks. Contractual
commitments generally contains higher amount of contingent liabilities or assets of the company.
A major involvement in the contractual commitments can influence the view of investors and
customers towards the banks. As per the annual reports of Westpac (WBC) banks, insurance
claims is a significant matter of the contractual commitment made by the bank. The independent
auditing reports of the bank includes this matter in the list of significant matter of the bank. The
amount of invested in the insurance claims of the company enhances the uncertainty in
company's business. It can enhance the cost and profit of the company.
On the other, hand, if the bank needs to pay higher amount of insurance claims, it will
enhance the cost of the company which may result in suffering loss (Feldstein and et.al., 2017).
In order to this, the auditor needs to make an in depth analysis of the transactions related to
insurance claims. So that the key persons of the bank could analyse the major contingency in the
company's books and could analyse the future of the company as well.
ASA 570
The big four banking companies includes National Australian Bank, Commonwealth
Banks, Australian and new Zealand banking Groups, Westpac (WBC) banks are consider to be
the big banking companies which are under the obligation of the mandatory considering the
accounting standard ASA 570 under which the auditor requires to be the part of planning in
considering the event of risk occurring and also to conduct further audit procedures in identifying
the events and conditions which may carries skills.
The revision of the ASA 570 reflecting the enhancement of auditing reports by the
International auditing And Assurance standard of boards. ASA required the management in order
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to make the assessment of the company's ability to continue ass the gong concern or following
the assumption of the going concern concept (Elshakh and et.al., 2016). There should be relevant
period which means tat the period of the 12 months an is counted from the date of the auditor's
current report till the expected date of the auditor's report.
All the companies are under the mandatory obligation to follow the assumption of the
going concern under accounting standard at the time of preparation of the financial report as
their entity is viewed to be continuing business for fair and effective transactions in the company.
Recommendations and Conclusion
From the analysis of the above report on the ASA 701 and ASA 570, I can recommend to
individual auditors of all the banking companies that they must adopt these standards while
performing their auditing activities. As adoption of these standards would help the in improving
quality of their auditing reports. In addition, as per my analysis, if they consider these standards,
they would be able to analyse the significant areas of the banking companies that are needed to
be audited in order to develop an effective auditing report. Further, compliance of these
standards will also result development of transparency in the auditing reports of the company.
Further, as pr my opinion, adoption of these standards will help the auditors in improving
accountability of the auditing reports derived by them along with improving importance of these
reports for the users of financial reports in order to take their decisions regarding the companies.
In addition, by studying ASA 701 and ASA 570 and their importance and key features of
these auditing standards, I can conclude that these standards have been developed by the
Australian government in order to develop more transparency and significance in the auditing
reports of the business organisation. Application of ASA 570 helps the users of financial reports
in forecasting the future of company's financial positions. On the other hand, in my opinion, if
auditors of the banking companies adopts the ASA 701, the key persons of the companies such
as investors, customers, lender, managers, etc. would be able to analyse all the significant
matters of the company along with the results of those matters over company's matters as well.
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Online
Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report. 2018. [Online] Available through :
<https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf>
Lehman Brothers, Citigroup settle $2 billion financial crisis-era dispute. 2019. [Online]
Available through:
<https://www.livemint.com/Industry/SUL81t4jYtXH6hRCP5ezrK/Lehman-Brothers-
Citigroup-settle-2-billion-financial-crisi.html>
Annual reports 2018. 2019. [Online] Available through :
<https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf>
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