ASA 701: Key Audit Matters in Banking Sector Annual Reports Analysis

This report provides an analysis of ASA 701, which addresses the communication of Key Audit Matters (KAMs) in auditor's reports, particularly focusing on the banking industry. The study examines the annual reports of several ASX-listed banks, including ANZ, Commonwealth Bank, Westpac, and National Australia Bank, and Auswide Bank Ltd. and Medibank Private Ltd. The report identifies and discusses the KAMs disclosed by these entities, such as expected credit losses, valuation of financial instruments, provisions for customer remediation, and IT system controls. The analysis aims to provide insights into how banks are implementing ASA 701 and communicating significant audit matters to stakeholders, thereby enhancing transparency and investor confidence. The report highlights the importance of these disclosures in providing users of financial statements with a better understanding of the entities' financial positions and performance.

Running head: AUDITING AND ASSURANCE
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Executive summary
As the demand for transparency regarding the performance of any entity has been increased in
recent times the entities also undergoing changes in context of the audit report and presentation
of key matters in the annual report. ASA 701 has been established in this direction that will
disclose the key audit matters under the annual report of the organizations. The report will
highlight the comprehensive insight regarding components of the new standard. Annual reports
of different entities from banking industry those are listed under ASX will be analysed for
gaining better insights regarding the manner in which the KAMs are disclosed by the entities.

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Table of Contents
Introduction......................................................................................................................................3
ASA 701 – communicating key audit matter (KAM).....................................................................3
Banking industry..............................................................................................................................4
ANZ bank....................................................................................................................................4
Commonwealth bank...................................................................................................................5
Westpac Banking Corporation.....................................................................................................5
National Australian Bank............................................................................................................6
Auswide Bank Ltd.......................................................................................................................7
Medibank Private Ltd..................................................................................................................7
Conclusion.......................................................................................................................................8
Reference.........................................................................................................................................9

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Introduction
New auditing standard ASA 701 for communicating the KAM under auditor’s report
those are independent is established in wake of global financial crisis. The development was on
account of shareholder’s calls to become informed regarding the entities in which they are
intended to invest their money. In addition, it has also been requested by the investors regarding
signs of potential issues those are likely to exist on account of capability of the organisation
continuing as going concern that led to revision of ASA 570 on going concern (Accaglobal.com,
2020)
ASA 701 – communicating key audit matter (KAM)
AUASB defined KAM under ASA 701 as those matters which are of notable importance
in accordance with the auditor’s personal judgement during the process of auditing the
organization’s financial report for concerned period. KAM are generally selected from those who
are in the management of the governance. The new standard is issued for making the directors of
the entities more attentive regarding the KAM and discussing crucial matters with auditors that
will in turn bring consistency regarding the annual reports. New standard involves number of
features including –
 Determining the manner in which the auditors are required to determine KAM such as
determining matters those need immediate response from auditors. In addition they are
required to take into account the risk areas that require auditor’s attention on urgent basis.
Auditor’s judgment those involves impacts of notable events, judgement from
management are considered as crucial matters those shall be included as part of auditor’s
report (Auasb.gov.au, 2020).
 Obligating communication of KAM in listed entity’s auditor’s report
 Allowing auditors from different entities in making decision in context of including
KAM in auditor’s report.
 It defines the manner in which the auditors are required to depict KAM
 Circumstances under which matters associated with KAM have not been stated by the
management under annual report
 Number of other documentation those associated with KAM must be stated
(Auasb.gov.au, 2020).
Major objective of ASA 701 is to enhance confidence that public has on financial
statement of the organisations as well as in the process of audit. It is done with the intention of
offering the investors with –
 Higher level of transparency in context of auditor’s responsibilities
 Providing insights regarding the crucial audit matters and the manner in which the same
has been dealt by the auditors.
Major purpose behind the above is to provide the users of financial statements with better
disclosures made by the entities which in turn will assist those making decisions in informed
manner. Further the new standard has made to conform the auditing standards to ISA 701
(Auasb.gov.au, 2020).

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Banking industry
For this report, banking industry has been selected and annual reports of ASX listed
banking entities will be analysed for gaining an insight regarding the manner in which the KAM
has been reported by them in their annual reports. These analyses will be made based on the
entity’s annual report for the financial year ended 2019.
ANZ bank
KAM identified are as follows –
 Allowance for the expected losses for credit – the entity adopted AASB 9 – financial
instruments since 1st October 2018. This is considered as KAM owing to the significance
of balances on account of loans and advances reported in annual report as well as the
inherent complexity regarding the expected loss on credit that is used for measuring ECL
allowance. As per the requirement of AASB 9 the entity shall measure ECLs based on
forward looking that reflects wide range of future economic scenarios that includes
assumptions associated with forward looking events like GDP as well as level of
unemployment (Anz.com, 2020)
 Valuation of the financial instrument those are held at the fair values – financial
instrument those are held at the fair values under the annual report of the entity are
trading securities, investment securities, derivative liabilities and assets, specific debt
securities and other assets as well as liabilities those are designated to be measured at fair
values under the income statement or at fair values though the other comprehensive
income. Instruments mainly involve products related to risk management those are sold
to the customers and are utilised by the entity for managing its interest rate as well as risk
associated with foreign exchange.
 Provisions for the customer remediation – the entity analysed requirement for recognising
provision associated with certain customers remediation activities on account of both
external as well as internal reviews and investigations. It involves provision for the likely
refunds to the customers; costs associated with remedial projects and associated
customers, litigation outcomes, penalties and regulatory claims (Anz.com, 2020)
 Accounting for the divestment – divestments are accounted as KAM owing to – (i)
significance of the entity’s divestment business (ii) judgments approached by the entity in
measuring divestment business through requirements of accounting standards and
conditions and terms associated with divestments (iii) judgments approached by the
entity for analysing events taken place after date of reporting but before audit of financial
statements for issuance (iv) judgments approached by the entity while analysing
probability of divestment against requirements of AAS dated 30th September 2019.
 Controls on IT systems – as the major Australian bank business of the entity uses large
number of complex and independent IT systems for processing as well as recording high
volume of transactions. Controls over changes accesses to the IT systems are crucial for
recording financial information and preparation of financial report that offers true and fair
view of the entity’s financial position and performance. Control and IT systems as they
have the impact on financial reporting as well as recording of the transactions is the
KAM and the audit approach may differ significantly on the basis of effective operation
of the entity’s control over IT system (Anz.com, 2020).

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Commonwealth bank
KAM identified are as follows –
 Provision for loan impairment – the entity adopted AASB 9 – financial instruments since
1st July 2018. This matter has been accounted as KAM owing to subjective judgments
made by the entity in context of determination of while impairment provisions required to
be recognised including – (i) models used for computing ECLs as inherent complexity
regarding the expected loss on credit that is used for measuring ECL allowance (ii)
various assumptions made by the entity regarding input values to ECL models and the
manner in which the inputs correlated with each other.
 Judgmental valuation for financial instruments – the entity holds the financial instruments
those are measured at the fair values that represent 14% of total assets, 4% total liabilities
of bank and 15% of total assets and 4% of total liabilities of entire group. Financial
instruments those are held at the fair values are – (i) derivative liabilities and assets (ii)
investment securities at the fair values through other comprehensive income (iii)
discounted bills and other assets as well as liabilities those are designated at the fair
values (Commbank.com.au, 2020)
 Provisions for project costs and customer remediation – the bank and entire group have
analysed requirement for raising provision associated with legal proceedings, costs of
projects associated with compliance matters as well as investigation and reviews from the
regulators such as enforceable undertakings of APRA, payments related to customer
remedian and legal proceedings
 Valuation of liabilities associated with insurance policyholder – this matter has been
accounted as KAM owing to the valuation process of the entity regarding the provisions
for settlement of the future claims in context of insurance are complex. Further, it
involves subjective judgments regarding future events those are external as well as
internal to the business and for which the small alterations in assumption may lead to
material impact in liability valuation. Liabilities related to the insurance policyholder are
associated with the business of life insurance.
 Operation for IT financial reporting – this has been accounted as KAM as the operation
of bank as well as entire group’s as well as process for financial reporting are greatly
dependent on the IT systems for recording as well as processing notable
(Commbank.com.au, 2020).
Westpac Banking Corporation
KAM identified are as follows –
 Provision for the credit losses expected – provision on account of ECL on the loans
amounted to $3.913 million for the entire group and $3.378 million for parent dated 30th
September 2019. ECL is the weighted probability estimation for the shortfalls of cash
resulted on account of defaults for the relevant timeframe that is determined through
evaluation of wide range of likely outcomes as well as considering time value of money,
current scenario, past events along with forecasting of future economic scenario. This has
been accounted as KAM owing to the (i) models used for computing ECLs as inherent
complexity regarding the expected loss on credit that is used for measuring ECL
allowance (ii) various judgments made by the entity regarding input values to ECL
models and the manner in which the inputs correlated with each other (iii) effort of audit

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involved in usage of the professionals with specialised knowledge and skill (iv) extent
and nature of the testing carried out under audit for evaluating the audit evidence
associated with critical data applied under the model (Westpac.com.au, 2020)
 Valuation of the financial instrument at Level 2 those are held at the fair values – KAM
related to this are – (i) significant judgements made by the parent as well as the group for
determining the fair values of financial instruments under Level 2 using the model
developed internally and various other assumptions and estimations (ii) audit effort and
significant judgements are there for analysing the evidence those are generated for the
valuation models, assumptions and inputs along with audit effort involved in usage of the
professionals with specialised knowledge and skill (iii) extent and nature, controls over
changes accesses to the IT systems are crucial for recording financial information and
preparation of financial report that offers true and fair view of the entity’s financial
position and performance (Westpac.com.au, 2020).
 Regulation, compliance and contingent liabilities and remedian provisions – this has been
accounted as KAM as the regulation, remedian and compliance associated with matters
of the potential misconduct while offering services to the customers recognised on
account of internal reviews and regulatory action. Analysis of expected costs of related
matters for these matters is made based on individual cases as well as specific provisions
or the disclosures made where the parent as well as the group consider the same
appropriate. Large volumes of the data are there from IT systems those are conducted in
the assessment (Westpac.com.au, 2020).
National Australian Bank
KAM identified are as follows –
 Provision for the credit impairment – it has been accounted as KAM owing to timing and
size of recognition for provision and level of judgement as well as uncertainty of
estimation related to computation. Major areas for judgements are – (i) application of
impairment requirements as per AASB 9 under the expected methodology for credit loss
(ii) recognition of the exposures with the notable deterioration under credit quality (iii)
assumption associated with likely credit loss model and (iv) incorporation of the
information related to forward – looking that reflects future or present external factors
such as rate of unemployment, rates of interest, growth rates for GDP and indices for
property-price (Nab.com.au, 2020)
 Remediation provisions associated to customers – it is considered as KAM owing to (i)
decision for recognising the provision involving whether adequate information is there
that can assist in measuring the provisions reliably (ii) assumptions used for estimating
remedian payments associated with customers (iii) costs required for completing
remedian programs
 IT systems and controls fort financial reporting – significant part of groups process for
financial reporting is generally reliant on the IT systems with the automated procedures
as well as controls associated to capture, extraction and storage of information.
Fundamental component for IT control is assuring that the risks associated with
inappropriate access of the users for changes in the unauthorised program as well as
addressing the protocols for IT operation (Nab.com.au, 2020).

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Auswide Bank Ltd
KAM identified are as follows –
 Adoption of AASB 9 on financial instruments – this has been considered as KAM as
notable judgments are involved for determining provision for the impairment of credit
including – (i) application of requirement for analysing impairment under the AASB 9
application that is reflected in bank as well as the group’s ECL model (ii) recognition of
the exposures with significant movements in the credit quality for determining whether
lifetime ECL or 12-month ECL shall be identified (iii) estimations used under ECL
model including financial scenario of counterparty, capacity of repayment and
macroeconomic factors related to forward looking (Auswidebankltd.com.au, 2020)
 Impairment of the non-current assets – as on 30th June 2019 assets of the group are
subjected to the annual impairment tests include goodwill amounting to $46.6 million,
fixed assets as well as intangible assets. Impairment tests needs significant judgement
owing to assumptions needed for determining the recoverable amount those includes – (i)
recognition of appropriate CGU to which the goodwill is assigned for impairment testing
(ii) selection of the methodology for appropriate valuation (iii) determining appropriate
inputs in valuation methodology like multiplies of price-earnings as well as forecasts of
earnings (Auswidebankltd.com.au, 2020).
Medibank Private Ltd
KAM identified are as follows –
 Projection of outstanding liability claims – liability associated with outstanding claims
suffered during financial year or during prior periods but has not been received or
assessed by group at the closing of the year. Liability associated with outstanding claims
is projected by group as central forecast. However, as case with the accounting estimates,
risks are there that ultimate claims that will be paid will vary from initial estimates.
Hence, the risk margin that is approached by the group for revealing uncertainty
associated with forecasts. Central estimates as well as combination of risk margin that are
forecasted on the basis of actuarial expertise and judgements are proposed to gain
actuarially that is defined the adequacy probability. Primarily judgements are required for
forecasting the – (i) amount and type of claims suffered during past 2 months of financial
year however not processed or received till the close of year (ii) cost inflation of claims
as well as medical trends that has impacts on usage of benefits by the members (iii) speed
with which the claims are processed by the providers those issue claims on part of the
policy holders (Medibank, 2020)
 Reliance on the automated control and processes – the entity uses various interdependent
and complex IT systems for capturing, reporting and processing large volumes of the
transactions. This has been considered as KAM owing to – (i) procedures for financial
reporting as well as operations are largely dependent on the IT systems (ii) fundamental
controls on IT over the business procedures are noteworthy for the process of financial
reporting (Medibank, 2020).
Conclusion
The above presented report highlights ASA 701 regarding communication of KAM those
have been developed on account of global financial crisis. It discusses major reason behind

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development of new standards and the manner in which the new standards is protecting the
investor’s interest through making them aware regarding the KAM. Definitely this step has
enhanced auditor’s responsibilities and will develop higher level of faith for the audited reports
as the users will be able to take better decisions with clearly presented annual reports.

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Reference
Accaglobal.com. 2020. [online] Available at:
https://www.accaglobal.com/content/dam/ACCA_Global/professional-insights/Key-audit-
matters/pi-key-audit-matters.pdf [Accessed 19 Jan. 2020].
Anz.com. 2020. [online] Available at:
https://www.anz.com/content/dam/anzcom/shareholder/ANZ-2019-Annual-Report.pdf
[Accessed 19 Jan. 2020].
Auasb.gov.au. 2020. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 19 Jan.
2020].
Auswidebankltd.com.au. 2020. Annual Reports - Shareholders - Auswide Bank Ltd . [online]
Available at: https://www.auswidebankltd.com.au/shareholders/annual-reports/ [Accessed 19
Jan. 2020].
Commbank.com.au. 2020. [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/CBA-2019-Annual-Report.pdf [Accessed 19 Jan. 2020].
Medibank. 2020. Annual reports | Medibank. [online] Available at:
https://www.medibank.com.au/about/investor-centre/results-reports/annual-reports/ [Accessed
19 Jan. 2020].
Nab.com.au. 2020. Annual reports. [online] Available at:
https://www.nab.com.au/about-us/shareholder-centre/financial-disclosuresandreporting/annual-
reports-and-presentations [Accessed 19 Jan. 2020].
Westpac.com.au. 2020. [online] Available at:
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2019_Westpac_Group_Annual_Report.pdf [Accessed 19 Jan. 2020].

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