Auditing and Assurance: Analysis of Key Audit Matters in Australian Banking Companies

This report analyzes the key audit matters in Australian banking companies according to ASA 701. It examines the compliance with accounting standards and the transparency of financial reports.

[Type the document title]
Auditing and
Assurance

Contents
Introduction............................................................................................................................................2
Collapse of Lehman Brothers................................................................................................................2
Analysis and evaluation.........................................................................................................................3
Westpac Banking Corporation...........................................................................................................3
National Australian Bank..................................................................................................................4
Commonwealth bank of Australia.....................................................................................................6
Bank of Queensland limited..............................................................................................................8
Recommendation...................................................................................................................................9
Conclusion...........................................................................................................................................10
References............................................................................................................................................12

Introduction
This report will scrutinize certain KAMs (key audit matters) according to the newly laid down
ASA 701 communicating key audit matters, which will communicate transparency with the help
of independent report of auditors. In an succinct way, the aim of this report to identify whether
audit matters are relevant and applied to the ASX registered banking companies of Australia.
This standard has been released to determine that to what extend the companies have complied
with the ASA 701 (Omer, Shelley, and Tice, 2018). The need for this standard was felt after the
collapse of Lehman Brothers and global crisis. This report will explore the accomplishment of
ASA 701 by the banking companies such as Commonwealth bank of Australia, Westpac, ANZ,
Bank of Queensland limited, and National Australian bank. Further, it will examine importance
of materiality concept and analyze whether the auditors ensures the financial reports as
transparent. It is important to build confidence among the external stakeholders so that they can
think of investment by ensuring that auditors have passed their report after monitoring financial
reports in the light of accounting standards.
Collapse of Lehman Brothers
This disruptive collapse of Lehman Brothers was because of non-compliance of material
auditing and lack of transparency of audit matters. This has led to the development of strict
Australian Accounting standard (AAS) so that auditors can ensure that the organization have
complied to other accounting standards on the accounts and the reporting of the transactions.
The event of misrepresenting the data has led to the act of liquation and events of bankruptcy
that also has led to inclusion of great depression (Cordoş, and Fülöp, 2015). While complying

with the ASA 701, it is quite visible that the company should establish certain rules so that they
can directly communicate the key audit matters according to AASB in order to monitor high-
risk areas such as financial assets and hedging items of the statements. In case of Lehman
Brother, it is seen that there are many loopholes between the management and the customers
that does not lead to any transparency. In this regard, misconduct, inadequate, and internal
auditing has been addressed (Cohen, Krishnamoorthy, Peytcheva, and Wright, 2013). Lack of
application of transparency and non- compliance of few regulations led to Lehman Brothers
scandal. The company has allowed loans to the UUS people and during the financial crisis of
2008, it is seen that low capital market and low market rates, people could not get same level of
return at which the value of their property (Boolaky, Soobaroyen, and Quick, 2018).
Analysis and evaluation
Key audit matters (KAMs) consider the professional judgment that is directly significant to the
financial statements and its monitoring. Auditors have given their opinion for the financial
statements where the description of audit will be addressed as a guidelines for the next year`s
operations (Auditing and Assurance Standards Board, 2015).
Westpac Banking Corporation
Provisions of the impairment changes
The auditors have addressed and examined operating efficiency of main controls for the
impairment charges (Westpac banking corporation, 2018). These key controls include
governance, continuous assessment, credit risks for the company`s portfolios, inherent control
for IT system which will manage and certainly communicate the data with the help of
underlying data, approval procedure, impairment models, and economic outlays. ASA 701

communicates that expected credit loss model includes the analysis of inherent in the model in
regards to the requirement of AASB 9 (Westpac Banking Corporation, 2018). The company has
assessed, completeness of input data, evaluated to check the transparency and through
reconciliation among the source system and its relation to ECL models. The auditors have
checked whether directors and top-level management have evaluated certain transition
disclosures in the books of accounts (Westpac Banking Corporation, 2018).
Fair valuation of financial liabilities and assets
The auditors have marked this assessment as effective as it is been regulated by governance
processes, unit pricing control, external custodians, model validation, and various controls that
approve new projects (Klueber, Gold, and Pott, 2018). The auditors work includes independent
collecting prices that are valid for the valuation because the organization valued the market
prices and its market observable prices (Vik, and Walter, 2017). The extent to measure
finanorcial instrument mentioned at the fair value is material. On the other hand, inherent
complexity is included in estimating the value for the financial instruments. The auditor had
used the independent sources of the market data providers to evaluate through the valuation
methods (Auditing and Assurance Standards Board, 2015).
National Australian Bank
Credit impairment at the amortized cost
Auditors have interpreted the requirement in order to determine whether AASB 9 has applied it
or not on the basis of judgment reflected in expected credit loss model. The auditors have
analyzed that the company align with the expected credit loss model as per the AASB 9.
Company has approached to incorporate forward-looking factors of macroeconomics (National

Australian bank, 2018). The data has been used to determine the provisions of credit impairment
that further includes storage of data, credit quality analysis, and transactional information that
has been captured while originating the loans. The auditors have examined the exposed risks
associated with the mathematical accuracy, model governance and the assessment of procedures
and performance so that it will be easy to evaluate. The auditor has looked forward to the
incorporation of factors and its impact on current and future factors so that the credit model
does not capture it (National Australian bank, 2018). Assessment and its significance modeling
will led to determine the overlaps and its sensitivity regards to collection provisions so that they
can change the modeling assumptions. The auditors have assessed, identified, and managed the
climate related uncertainties that has been associated with the loan portfolio. The company has
involved Actuaries and other IT experts to specify the performance of specific expertise and
other procedures (National Australian bank, 2018).
Bank reconciliation statement
As of 30th September, it is seen that collateralized balance of cash deposit aligning with the
outstanding indemnity. It is seen that bank of England is related to demerger so that it will be
required to collateralize NAB`s obligation with the UK`s (PRA) (National Australian bank,
2018).
Contingent liabilities and assets
On 12 October, it is seen that ASIC has proclaimed that there would be a expansion of recent
activities that include industry wide reviewing and monitoring of the compliance with the
requirements for the full disclosure of fee and other renewal notices in the advising sector.
Auditors have reviewed the industry review; the authorities have requested NAB to under so

that it could monitor the compliance to insure with the review of sales by authorizing other
deposit taking authorities (Pries, and Scott, 2018).
Funding and liquidity risk
The auditors ensure that whether the liquidity position has been analyze on daily basis or not.
The company uses a combination of behavioral modeling and contracts that it align with the
balance sheet and the relevant information of cash flows. Auditors said that the company
maintains a premium quality of liquidity of asset portfolio that will further support operations
(Haji, and Anifowose, 2016).
On the other hand, it is seen that the company maintains a stable focus on deposits on the basis
of quality as well as growth perspective, which further source funds to assts. The company
maintained a average maturity of 5.2 years for the first call (National Australian bank, 2018).
Commonwealth bank of Australia
It is seen that the key audit matters have been addressed on the basis of internal and external
audit of the statements while forming the opinions. Auditors provide separate opinions as per
the ASA 701 while communicating the key audit matters. Any other commentary outcome for
the particular audit process will be relevant topics to the committee of auditor. These key audit
matters have been valued on the basis of policy holder liabilities and exception of the valuation
in regards to both company and the whole group (Commonwealth bank of Australia, 2018).
Loan provisions for impairment
From the annual reports, it is seen that auditors are using subjective judgments while
determining and recognizing the impairment provisions that are against giving the assets on the

organization’s behalf. The auditor has developed an understanding of controlling that are
relevant to the operating efficiently (Commonwealth bank of Australia, 2018). It has led to the
identification of impaired borrowings and their relative reliability in the company. The company
effectively transfers the underlying data as per the provisional models. The auditor’s report has
identified that the company examines its cash flows properly and forecast them properly that
further helps in assessing the key auditing aspects especially the timing and amount of the
recoveries as made in relation to borrowers and their detailed loans and its related counter
parties as per the information as known by the group. The auditors compares key input in
company`s estimations to the external data when it is available (Commonwealth bank of
Australia, 2018).
The auditors have identified accuracy of main data that has been transferred among the
company`s systems and its relative collection of the provisions models. To foresee the
transparency, the auditors have compared modeled calculations to company`s calculated
anticipated on the basis of sample (Auditing and Assurance Standards Board, 2015).
Evaluation of financial instruments
The company greatly holds an instrument that is measured 17 percent of total assets and 5
percent of the total liabilities of the whole group of the banks. These instruments will include
derivate liabilities and assets, life insurance liabilities and assets, bills discounted, liabilities
valued at the fair price (Agoglia, Doupnik, and Tsakumis, 2011). Auditors have said that the
company developed an clear understanding of the controls as related to audit of financial
reports. It has conducted the valuation of model governance, fair value adjustments, and it has

valued its own created models to measure the fair value (Commonwealth bank of Australia,
2018).
In order to provide whole transparency, the auditors ensures that company has included
performance reviews, director`s report, corporate governance, other information and strategic
report. In relation to the annual report, the company has identified its responsibilities properly as
per ASA 701. In response to it, the company effectively communicates other materiality
information consistent to the financial reports (Auditing and Assurance Standards Board, 2015).
Bank of Queensland limited
Key audit matters in regards to consolidated bank and entity, it considers-
Collective provisions for the loans and also the advancement of amortized cost, valuation of
computer software, fair valuation of the financial instruments, measurement of goodwill, and
information technology and its control environment (Bank of Queensland limited, 2018).
The audit procedure has signified that the company tests the sample of main credit risks
monitoring controls that further includes annual assessment of the loans, assessment of the
loans, security valuation, PD and related LGD ratios for the portfolio of significant items
(Elliott, Fanning, and Peecher, 2016). The auditor compares the security values that are used in
the formulation of provisions related to loans and advances and its associated calculation inputs
in the criteria of specific provisions. It is further compared to when consistent methods are
being applied to the collective provisions, future cash flows, and the estimated sales proceeds
(Bank of Queensland limited, 2018).

In regards to consider the sufficiency of the expected loss of credit provisions disclosure as it
includes assessment of disclosures, impact of financial instrument when measured through
AASB 9 so as it can easily pertain expected credit losses.
Assessment of intangible assets
Auditors successfully evaluate historical appropriateness for the forecast operating flow of cash
and its earnings estimates by comparing to the actual past performance against the previous
growth rates that further includes the alignment of strategic plan. The auditor has performed
sensitivity of certain assumptions in regards to the discount rates, terminal growth rate, and
forecasting of growth rates in order to identify some assumptions that led to estimation of high
risk and its inconsistency while applying it. The company ensures that it works with the experts,
industry knowledge, and the valuation of specialists so that it could compare growth rate, and
terminal growth rate to test the feasibility of several assumptions as used in this model
(Auditing and Assurance Standards Board, 2015).
Their audit procedure complying with the ASA 701 communicating the key audit matters assess
the design and the effectiveness while maintaining certain control wile relating it to the
instruments that has been measured at the fair values including the trade attestation and
monitoring of the market risks processes. For a set of using valuation model, the company uses
external data and other independent market reports to analyze the deviations used.
Recommendation
From the issue of confidence and trust of the investors, it is seen that there always remained a
great probability of cheating the investors through manipulated data and profitability.
Companies often do window dressing to show greater profits and attract the investors to invest.

In lieu of this, it is seen that the AASUB has taken serious steps to improve the suffering of the
external stakeholders. In order to treat this misrepresentation, ASA 701 has been made
compulsory for the organizations so that it would conduct fair and communicate fair statements
to the shareholders. Breakdown and collapse of Lehman brothers have been significant events in
the contribution to the formation of ASA 701.
It is the responsibility of the auditors to examine the financial reports of the company to check
whether the investors’ investment is safe or not. This examination will lead to attain a greater
understanding of legal actions as due to lack of transparency, the company will be able to
comply with the laws that further create confidence among the shareholders to make their
investment plan. It is important to consider the auditor`s report that further influence the
competency of the company and acquaint it with the weakness of the organization. The
organization should ensure that it comply with the internal control weaknesses and processes by
analyzing the reports, operating processes, and documentation at the same time. The auditors
takes into considers the checking of the balances of the assets and the liabilities so that investors
would represent correct value of assets and liabilities of the company. The banking industry are
at high risk of collapsing as it wholly operates with the help of debt. The capital structure is
heavy on the side of debt. Therefore, regular monitoring becomes necessary to prevent the
situations.
Conclusion
From the above analysis, it re is seen that the report has undertaken the analysis of ASX
registered companies such as Westpac, commonwealth bank of Australia, National Australian
bank, bank of Queensland corporation. These all the organizations are the prominent one in the

whole sector in Australia. It is observed that these companies comply with the ASA 701
communicating key audit matters in an efficient way.

References
Agoglia, C.P., Doupnik, T.S. and Tsakumis, G.T., 2011. Principles-based versus rules-based
accounting standards: The influence of standard precision and audit committee strength on
financial reporting decisions. The accounting review, 86(3), pp.747-767.
Ahmed Haji, A. and Anifowose, M., 2016. Audit committee and integrated reporting practice:
does internal assurance matter?. Managerial Auditing Journal, 31(8/9), pp.915-948.
Auditing and Assurance Standards Board, (2015) Auditing Standard ASA 701 Communicating
Key Audit Matters in the Independent Auditor’s Report. Available on:
https://www.auasb.gov.au/admin/file/content102/c3/12-
15_AI_5.31_New_Auditing_Standard_ASA_701_(mark-up)_electronic.pdf [Accessed on
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Bank of Queensland limited, (2018) Annual report. Available on:
https://www.boq.com.au/content/dam/boq/files/shareholder-centre/financial-results/2018/
FY2018_Annual_Report.pdf [Accessed on: 23/05/19]
Boolaky, P.K., Soobaroyen, T. and Quick, R., 2018. The Perceptions and Determinants of
Auditing and Reporting Quality in the Asia‐Pacific Region. Australian Accounting Review.
Cohen, J.R., Krishnamoorthy, G., Peytcheva, M. and Wright, A.M., 2013. How does the
strength of the financial regulatory regime influence auditors' judgments to constrain aggressive
reporting in a principles-based versus rules-based accounting environment?. Accounting
Horizons, 27(3), pp.579-601.

Commonwealth bank of Australia, (2018) Annual report. Available on:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed on: 23/05/19]
Cordoş, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
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Quality Beyond Estimated Fundamental Value? And, Can Better Audit Reports Unlock This
Value.
Klueber, J., Gold, A. and Pott, C., 2018. Do Key Audit Matters Impact Financial Reporting
Behavior?.
National Australian bank, (2018) Annual report. Available on:
https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf [Accessed on:
23/05/19]
Omer, T.C., Shelley, M.K. and Tice, F.M., 2018. Do director networks matter for financial
reporting quality? Evidence from audit committee connectedness and restatements. Evidence
from Audit Committee Connectedness and Restatements (September 1, 2018).
Pries, F. and Scott, S., 2018. Costs and Benefits of Key Audit Matter Reporting for Smaller
Public Entities: The Australian Experience.
Vik, C. and Walter, M.C., 2017. The reporting practices of key audit matters in the big five
audit firms in Norway (Master's thesis, BI Norwegian Business School).

Westpac banking corporation, (2018) Annual report. Available on:
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2018_Westpac_Annual_Report.pdf [Accessed on: 23/05/19]