CQUniversity ACCT20075 Audit and Ethics Report: NAB Analysis

This report, prepared for CQUniversity's ACCT20075 Auditing and Ethics course, analyzes the financial statements of National Australia Bank (NAB). It begins by determining materiality levels based on NAB's 2018 financial data, calculating planning materiality using a 2% threshold applied to total ass...Read More

Running head: AUDIT AND ETHICS
Audit and Ethics
Name of the Student:
Name of the University:
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1AUDIT AND ETHICS
Table of Contents
Section 1..........................................................................................................................................2
Materiality Level.........................................................................................................................2
Section 2..........................................................................................................................................3
Preliminary Analytical Review....................................................................................................3
Section 3..........................................................................................................................................6
Cash Flow Statement Analysis....................................................................................................6
Auditor Report.............................................................................................................................8
References......................................................................................................................................10

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Section 1
Materiality Level
The auditing process involves effective investigation of the financial statements of the
business in order to estimate whether the financial statements are showing true and fair view of
the financial position of the business (Eilifsen & Messier Jr, 2014). It is on the basis of the audit
report which is issued by the auditor of the business, that investors make decisions whether the
financial statements are appropriate or not and whether they are worth making investments or
not. The auditor has the responsibility of checking each element which is covered in the financial
statement and check whether the same are appropriate or misrepresented. One of the components
which is considered while estimating whether the item is fairly represented in the books of
accounts is the materiality of the item. The determination of the materiality estimate depends on
the judgement of the auditor and the nature of the business which is being audited (Ruhnke &
Schmidt, 2014). The assessment would be considering the materiality estimates for the business
of National Australian Bank (NAB) and also ensure that the financial statements are showing
appropriate view of the financial position of the business or not.
In simple terms, materiality may be defined as the significance which the item has in the
annual report and how the misrepresentation of the same can impact the financial position of the
business. In case to recognise an item as material, various parameters may be considered and
some of the same are complex nature of the items, repetitiveness of the item, numerical size of
the item. The planning materiality of the business and the percentage which is considered to
compute the same are considered at the planning stage of the audit (Legoria, Melendrez &
Reynolds, 2013). In order to estimate the planning materiality of a business a percentage is

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considered which would be applied to a base to compute the planning materiality of the business.
In order to consider the base for the computation process, the total asset figure is considered for
estimating the planning materiality of the business (Vîlsănoiu & Buzenche, 2014). The total asset
figure which is represented in the financial statement of the company for the year 2018 is shown
to be $ 806,510 million. The percentage which is considered for ascertaining the planning
materiality of the business is considered to be 2%. It is to be noted that on the basis of the
planning materiality of the business, the performance materiality of different items would be
estimated. The performance materiality is the benchmark showing whether the item is material or
not. The computation of materiality for the business is shown below in details:
Planning Materiality=Total Assets of the Company × Percentage estimated
¿ $ 806,510 million ×2 %
¿ $ 16,130.2million
Therefore, the above figure shows the planning materiality of the business which is
estimated by the auditor and the same would be considered by the auditor of the business for
estimating the performance materiality of the business.
Section 2
Preliminary Analytical Review
The Preliminary Article Review can be well done in order to assess the changes observed
in the financial performance of the company. Ratio analysis will be sued as the primary tool for
the purpose of evaluating the key changes observed in the financials of the company. The key
ratio that has been evaluated for the company includes the Liquidity Ratio, Profitability Ratio

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and Leverage and Coverage Ratio’s that are well carried out for the purpose of evaluating the
trend shown by the company in the trend period. The trend period that has been selected for the
purpose of analysis is between the period of 2015-2018 (Carraher and Van Auken 2013).
Liquidity Ratios: The liquidity ratio of the company can be well computed with the help of the
current and quick ratio for the company where the liquidity position of the company will be well
assessed with the help of liquid assets presents in the business. The liquidity ratio for the
company has been continuously for the company in the trend period evaluated for the company
which well reflects that the bank is maintain enough amount of liquid assets such as cash and
cash equivalents in respond to the current liabilities that it has in the financial statements of the
company (Annual Report NAB, 2015). It is adequately important that the companies have an
adequate and increasing liquidity ratio for the company so that the banks operations can go on
for a sustainable basis. It is well equally important that the Auditor well assesses the
appropriateness of the current assets and current liabilities of the banks for assessing the
classification done and there relevance with the current Australian Accounting Standards and
Corporations Act 2001.
Profitability Ratios: The profitability ratio is a key ratio that is computed for assessing the
financial performance and the net wealth created by the companies for the equity shareholders
and for the company as a whole (Williams & Dobelman, 2017). On an overall basis it was found
that the net profitability of the company is consistently falling for the company and the Auditors
of the company should be carefully reviewing the various aspects of the income statement where
changes in the value especially in relation to the Impairment Charges and Operating Expenses
for the company that was found to be quite volatile for the trend period analysed for the
company.

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Return on Assets: The return on assets for the company shows the amount of return generated
by the banks with the help of given set of total assets deployed in the due course of business. The
return on total assets for the Bank has fallen in the trend period and the same can be well
attributed to the falling profitability of the company for the reinstated period (Robinson et al.,
2015).
Return on Equity: The return on equity for the company shows the amount of return generated
by the company for the equity shareholders of the company for the time period analysed wherein
the net profit will be compared with the amount of equity invested by the shareholders of the
company (Uechi et al., 2015). The return on equity for the bank has fallen in the trend period due
to the fall in the profitability of the company and the overall rise in the equity value of the
company making the return to fall for the banks over the time period analysed.
Net Profit Margin: The net profit margin for the company shows the amount of net income
generated by the banks after taking in all the interest income and other income generated by the
banks and the expenses that are well in association with the operations of the banks. The net
profit margin for the company has been falling for the company in the trend period whereby
changes in the operating expenses have significantly impacted the net profitability of bank.
Leverage and Coverage Ratios: The leverage ratio that is debt to equity ratio for the banks has
been increasing consistently for the bank due to the high proportion to debt weightage in the
financials of the company which is currently greater than 9 times of the equity value. The auditor
of the company should be carefully reviewing the various aspects of debt account by carefully
analysing the terms and classification under which the debt stands in the books of banks. The
coverage ratio that is the debt to total assets for the company has been around 90%, however it si

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well recommended that the same remains above 100% whereby the assets of the company well
covers all the debt associated with banks.
Section 3
Cash Flow Statement Analysis
The cash flow statement of the company for the National Australia Bank will be well
analysed with the help of the various operating, investing and financial activities that were well
carried out by the banks during the financial year 2018. The cash flow statement is an important
statement reflecting the liquidity position and the classification of the various business activities
that were carried out by the bank during the financial year 2018 (Annual Report NAB, 2018).
The maximum cash was generated from the financing activities of the banks whereby the
Bank has shown an overall cash inflow of around $4,926 million for the year 2018 and the same
can be well contributed to the proceeds from issue of bonds and repayments of bonds that was
well carried out by the company (Annual Report NAB, 2017). On the other the net cash flow
from operating activities for the company has been negative balance of -$9,196. The negative
balance has been primary after taking into account all of the changes in association with the
Operating Assets and Liabilities of the Company. The primary cash receipt for the company has
been from the interest received that has been reported in the operating activities of the company
which was around $28,340. On the other hand, proceeds from issue of bonds, notes and
subordinated debt amounted to around $32,139 for the year 2018 (Annual Review NAB, 2016).
The primary cash payment for the year 2018 was around $14,778 in the form of interest paid by
the Bank.

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The main items that were included in the investing activities of the company were
primarily in the field of movement in debt instruments which are held at fair value by the
company amounted to $22,018 and proceeds received from disposal and maturity of debt
instruments valued at inflow of 22,228. The financing activities included key items of the
company including the repayment of bonds, proceeds from issue of bonds and other dividend
that were paid by the bank for the financial year 2018. The total cash inflow from the financing
activities of the company for the year 2018 was around $4,926 and the same has provided the
maximum amount of cash flows for the company.
The principle of going concern plays a very important and vital role in the overall
operations continuation basis that has been applied by the bank. The going concern principle
well states that the business carried on by the bank is going on well whereby the bank do not
have any intention to cease any operations in the near term future. The principle applied by the
management of the company has been based on the fundamental principles of accounting where
relevant judgement and assumption has been made and the auditor of the company needs to
analyse the materiality of the principle applied.
The extract of the consolidated Cash Flow Statement is shown below:

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Auditor Report
As per the Audit Report presented by the Auditor of the company it shows that
the financial statement prepared by the company reflects a true and a fair value in regard to the
various information that has been applied for the preparation of the financial statements of the
company. The annual report of the company has well complied with all the relevant accounting
standards and principles such as AASB and Corporation Act 2001. This signifies that the auditor
has issued an unqualified audit report to the financial institution thereby showing that everything
is all right with the annual reports of the business (Annual Reports, 2018).

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The key Audit matters that were taken into account by the Auditors of the company
included the Provision for Credit Impairment on Loans at Amortised Cost, Conducting Risks and
analysing various provisions measures that are made by the bank which included the
restructuring provisions. The above matter has been considered significant by the Auditor of the
company and they have taken several steps in order to check the materiality of the same with the
accounting principles applied for recording and valuation of the same.

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References
Annual Report NAB (2015). Nab.com.au. Retrieved 29 August 2019, from
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/annual-
financial-report-2015.pdf
Annual Report NAB (2017). Capital.nab.com.au. Retrieved 29 August 2019, from
https://capital.nab.com.au/docs/NAB-2017-annual-financial-report.pdf
Annual Report NAB (2018). Capital.nab.com.au. Retrieved 29 August 2019, from
https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf
Annual Reports. (2018). Nab.com.au. Retrieved 29 August 2019, from
https://www.nab.com.au/about-us/shareholder-centre/financial-disclosuresandreporting/
annual-reports-and-presentations
Annual Review NAB (2016). Nab.com.au. Retrieved 29 August 2019, from
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2016-annual-
review.pdf
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by
small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Eilifsen, A., & Messier Jr, W. F. (2014). Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), 3-26.
Legoria, J., Melendrez, K. D., & Reynolds, J. K. (2013). Qualitative audit materiality and
earnings management. Review of Accounting Studies, 18(2), 414-442.

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Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Ruhnke, K., & Schmidt, M. (2014). Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of
Practice & Theory, 33(4), 247-269.
Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance
ratio analysis of financial markets. Physica A: Statistical Mechanics and its
Applications, 421, 488-509.
Vîlsănoiu, D., & Buzenche, S. (2014). Determining Audit Materiality in the Banking Industry–a
Knowledge Based Approach. Procedia Economics and Finance, 15, 935-942.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
Chapters, 109-169.
Zainudin, E. F., & Hashim, H. A. (2016). Detecting fraudulent financial reporting using financial
ratio. Journal of Financial Reporting and Accounting, 14(2), 266-278.