Auditing Report: ASA 701 and Key Audit Matters in Australian Banks

This report examines the auditing standards ASA 701 and ASA 570, focusing on Key Audit Matters (KAMs) and their significance in enhancing audit quality and transparency. It explores the reasons behind the development of these standards, particularly in response to the 2008 financial crisis and the collapse of Lehman Brothers. The report provides a detailed analysis of KAMs for six major Australian banks: ANZ Banking Group, Bank of Queensland, Commonwealth Bank, National Australia Bank, and Westpac Banking Corp. The analysis includes a comparison of KAMs across these banks, highlighting similarities and differences in their annual reports. The report also discusses the requirements of ASA 701 and offers recommendations for auditors. The report concludes by emphasizing the importance of KAMs in improving communication between auditors and those responsible for governance, ultimately leading to more informed investment decisions and enhanced financial reporting.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The introduction of ASA 701 that ensures the disclosure of KAMs in the audit report makes
audit more transparent while increasing the overall audit quality. After the collapse of
Lehman Brothers and the occurrence of financial crisis, investors and other users of financial
statements have been criticizing that audit reports contain very little information for them and
ASA 701 has been developed to cater to this demand of the investors. With ASA 701, the
accountability of the auditors is to disclose those matters in the audit report that are of key
significance to them for the audit of the company.

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Table of Contents
Introduction................................................................................................................................3
Auditing Standards of ASA 701 and ASA 570..........................................................................3
ASA 701.................................................................................................................................3
ASA 570.................................................................................................................................4
Reasons for the Development of these Standards..................................................................4
KAMs and Its importance......................................................................................................5
Analysis of KAM.......................................................................................................................5
ANZ Banking Group Limited................................................................................................5
Bank of Queensland...............................................................................................................5
Commonwealth Bank.............................................................................................................5
National Aust. Bank...............................................................................................................6
Westpac Banking Corp..........................................................................................................6
Similarities and Differences in Annual Reports.....................................................................6
Requirements of ASA 701.....................................................................................................6
Recommendations......................................................................................................................7
References..................................................................................................................................8

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Introduction
Investors and other users examine and analyse the financial statements of the large
corporations for acquiring the required information on their overall financial standing and
position (Dombret, 2013). This information assists these investors and users to gauge whether
there is any internal issue within these organizations that can restrict them to operate as a
going concern in future. This was one major reason for the collapse of Lehman Brothers as
the auditors of this company did not communicate the crucial issues of the company that
could majorly influence the investment decisions (Dombret, 2013). Several corrective
measures in the audit profession have been take after the fall of Lehman Brothers in order to
restore the trust of investors and common people on the audit reports. Out of these reforms,
development of the accounting standards such as ASA 701 and ASA 570 is a key step
towards disclosing the crucial information through the audit report. The report is divided into
two crucial part. The first portion provides discussion on ASA 701 and ASA 570 along with
the key reasons for the development of these standards. The second portion provides analysis
of the key audit matter (KAM) of six large banks listed in ASX top 100 having operations in
Australian banking industry.
Auditing Standards of ASA 701 and ASA 570
ASA 701
The auditing standard of “ASA 701 Communicating Key Audit Matters” takes care of
how the auditors are accountable for the communication KAM in the audit report because this
is helpful in bring improvement in the communicative value of the audit reports through
making the performed audit more transparent. From this, the intended users may get the basis
for additional engagement with the management regarding certain issues associated with the
audit performed. In addition, the auditors become largely help in the formation of opinion
from the determination of KAM (auasb.gov.au, 2020). ASA 701 requires the auditor to
follow certain of its requirement which are outlined below:
Determination of KAMs – The auditors are accountable for recognizing the KAMs from the
crucial matters communicated with those responsible for governance. While determining
this, segments in the financial reports with higher material misstatement risk need to be taken
into account along with the areas where the auditors are needed to make key judgement
because of the presence of uncertainties in the managements’ use of accounting estimates and
judgments. Moreover, this makes the auditors accountable to consider the influence of key
transactions or events at the time (Xu, et al., 2013).
Communication of KAMs – The auditors have the accountability of describing each KAM
with the use of correct judgments under the section named “Key Audit Matters” in the audit
report. This part also includes the details of the situations that do not demand the
communication of KAM in audit report (Sánchez-Medina, Blázquez-Santana and Alonso,
2019).
Communication of KAMs with those Responsible for Governance – The auditors also have
the accountability to ensure communicating the KAMs with those who are accountable for
maintaining the governance mechanism within the organizations (auasb.gov.au, 2020).
Documentation – ASA 701 also requires the auditors to undertake documentation that must
include matters demanding key attention of the auditors and the rationales from the auditors
for determining no significant matters are there to be communicated (auasb.gov.au, 2020).

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On the overall basis, ASA 701 makes the responsibilities of the auditors more
transparent through appropriate audit reports by providing crucial insight into crucial matters
of audit along with the adopted procedures by the auditors to handle them.
ASA 570
This audit standard of “ASA 570 Going Concern” discusses on how the auditors are
accountable for the going concern implications of the audit client (auasb.gov.au, 2020). ASA
570 also requires the auditors to follow certain requirements that are outlined below:
Processes to Assess Risk – This makes the auditors accountable in assessing whether there is
existence of any major event or condition that leads to material doubts on going concern
position of the clients (auasb.gov.au, 2020).
Evaluation of Managements’ Assessment – It is the accountability of the auditors to
undertake evaluation of the managements’ assessment on whether it is capable enough to
operate as a going concern (Goodwin and Wu, 2016).
Period over the Managements’ Assessment – This makes the auditors accountable to
assessing the presence of any material events or uncertainty beyond the assessment of the
management that can threaten the going concern position (auasb.gov.au, 2020).
Further Audit Procedures in case Events are identified – The auditors are accountable to
acquire the required audit evidence in the presence of any material event or circumstance.
Conclusion of the Auditors – The suitability of the assessment of the management needs to
be evaluated by the auditors after acquiring the required evidences (Carson, Zhang and
Fargher, 2014).
Audit Report Implications – This requires the auditors in expressing the appropriate audit
opinion based on the overall going concern assessment (auasb.gov.au, 2020).
Communication – This makes the auditors accountable in communicating all the required
assessment and evaluation outcome on the company’s going concern status (auasb.gov.au,
2020).
Delay in Approving Financial Report – This is the accountability of the auditors in enquiring
why there has been major delay in approving the financial reports by the management, if any
(Sanderson, 2014).
Reasons for the Development of these Standards
Business failure of Lehman Brothers and the occurrence of 2008 financial crisis
largely influenced the development of the above-discussed accounting standards. Lehman
Brothers was largely involved in the operations of subprime mortgage despite of several
warnings; moreover, repurchase agreement or repo was largely used by the company in an
unsuitable manner to raise huge amount of funds that increased the overall business risk of
the company (Mawutor, 2014). Even in the presence of all these material events and
circumstances, the auditors of Lehman Brothers neither major emphasis on these key areas
not communicated them to the management so that appropriate steps could be taken.
Moreover, the auditors failed to reckon the impact of world financial crisis on long-term
existence of Lehman Brothers. The large business of Lehman Brothers collapsed largely
because of these reasons (Wiggins and Metrick, 2014). However, ASA 701 and ASA 570
were developed so that this type of business failure does not happen; and these standards
cover the loopholes that can be seen in case of Lehman Brothers. ASA 701 makes the
auditors accountable to identify and communicate the risk areas and events in the clients that

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can materially misstate the financial reports. ASA 570 makes the auditors accountable in
assessing whether there is any material uncertainty in the going concern position of the
clients.
KAMs and Its importance
As defined in ASA 701, KAMs are the most important matters considered by the
auditors in the audit of the clients as per their professional judgments. The auditors select
these matters from the matters communicated with the personal accountable for governance.
This is considered as crucial because of certain benefits of it (Cordoş and Fülöp 2015).
Effective governance within the organizations is possible to be developed since KAMs
ensures the communication of key matters between the auditors and those accountable for
governance. There are certain areas in audit that requires crucial judgments and the adoption
of the concept of KAM helps the auditor in putting more focus on these areas. This makes the
managements motivated in the analysis of the risky areas in the financial statements. All
these aspects together play a crucial role in enhancing the overall audit quality. This is why
KAMs are of great significance in auditing (Sirois, Bédard and Bera, 2018).
Analysis of KAM
ANZ Banking Group Limited
Expected credit loss allowance has been considered as a KAM because it involves critical
judgements and accounting assumptions in the presence of complex accounting standards.
Financial instrument valuation held at fair value is a KAM because this involve major
judgment that increase the risk of errors (anz.com, 2020). Customer remediation provision is
a KAM as this involves many investigations, large amount involved and major accounting
judgement. Divestment of Wealth Australia is a KAM because of large significance of this
transaction that apply key judgment and accounting assumptions. Since the bank operates in a
huge number of complex and independent information technology system for processing high
volume of transactions, the chances of errors increase; this is why it is a KAM (anz.com,
2020).
Bank of Queensland
Expected credit loss for loans and advances at amortized costs is a KAM because of
the incorporation of forward-looking assumptions that increase the chances of uncertainty.
Goodwill valuation is a KAM because of the application of forward-looking assumptions in
forecasting cash flows, growth rate and terminal growth rate along with the use of accounting
judgments in discount rate (boq.com.au, 2020). The reason for considering intangible
computer software valuation as a KAM is the involvement of large amount and application of
judgment to determine capitalised costs and expected useful lives. Financial instrument at fair
value valuation is a KAM because of the involvement of key extent of judgment to ascertain
the fair value. IT system is a KAM because of the bank’s large reliance on complex IT
system for large banking operations (boq.com.au, 2020).
Commonwealth Bank
Provision for loan impairment is a KAM due to the use of subjective judgement for
the recognition of provision for impairment along with the development of number of key
assumptions that are full of uncertainty. Judgemental valuation of financial instruments is a
KAM because the bank has used key judgments in ascertaining their values
(commbank.com.au, 2020). Provision for customer remediation and project is considered as a
KAM because of the utilization of subjective judgments for determining this provision.
Insurance policyholder liabilities valuation is a KAM because the bank has made key
actuarial judgements in determining this. IT system and control is a KAM because the

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banking operations of this bank are largely dependent on these systems (commbank.com.au,
2020).
National Aust. Bank
The main reason for considering provision for credit impairment a KAM is the
involvement of accounting judgements in the area of application of requirement of
impairment as per AASB 9, exposure identification, determination of expected credit loss and
use of forward-looking assumptions (nab.com.au, 2020). Customer-related remediation
provision is a KAM because of the involvement of significant judgments for determining
reliable estimations in recognizing the provision, assuming the estimations and others.
Primary reliance of the financial reporting of the bank on IT systems make IT systems as a
KAM due to the increased chance of errors. NAB wealth classification and carrying value is a
KAM because of the incorporation of a range of assumptions in calculating the value in use
that include future cash flows, discount rates and terminal growth rate (nab.com.au, 2020).
Westpac Banking Corp
Provision for extended credit losses is a KAM because of the use of major judgements
that can contribute to high degree of auditor subjectivity to perform procedure for ECL model
along with the involvement of judgment in the evaluation of acquired audit evidence
(westpac.com.au, 2020). Valuation of Level 2 financial instrument at fair value is a KAM as
the bank has used significant judgments for the determination of the value of Level 2
financial instruments, evaluation of the acquired evidence and the nature and extent of audit
testing related to relevant IT system. Compliance, regulation and remediation provisions and
contingent liabilities is a KAM because of the utilization of major judgments for identifying
the presence of probable losses (westpac.com.au, 2020).
Similarities and Differences in Annual Reports
Analysis of the KAMs of the selected five banks demonstrates the presence of certain
similarities in KAMs along with certain differences. Similarities are there because of the
same nature of operations of these banks. For example, IT system is a common KAM in these
banks as all of them largely depend on advanced and complex IT systems for banking and
financial reporting operations. Since all these banks provide the loan facilities, credit loss is
another common KAM having presence in all these banks and this is because these banks use
different assumptions and judgements for this calculation. Moreover, valuation of financial
instruments is another common KAM in these banks because of the exposure of them to same
kind of financial risks while dealing with these financial instruments. Apart from similarities,
these banks have some different KAMs such as accounting for divestment as a KAM in ANZ
Bank, valuation of intangible computer software as a KAM in Bank of Queensland, wealth
classification as a KAM in National Aust. Bank and compliance, regulation provision and
contingent liability in Westpac Bank.
Requirements of ASA 701
Analysis of the above KAMs of these banks shows the efficiency of the auditors in
determining the KAMs by maintaining adherence with the requirements of ASA 701. This is
further discussed below in details:
1. The auditors have determined these KAMs when the managements of these banks
have used significant accounting judgements and estimates having major uncertainty
as these can create chances of material misstatements in the financial statements.
Undertaken audit procedures against these issues have also been disclosed which
shows the effects of audit on these major events (Boolaky and Quick, 2016).

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2. The KAMs of each of the bank have been properly described by referring the
associated notes under the “key Audit Matters” section of the audit report. This
section also includes the audit procedures undertake against each of these issues. It
means all the KAM have appropriately been communicated (Lennox, Schmidt and
Thompson, 2018).
3. All these KAMs of these banks have been properly communicated with those
accountable for governance within these banks. This makes the managements of these
banks aware of these key issues so that proper remedial actions can be taken by them
against each of these issues (Fülöp and Pintea, 2014).
4. These KAM have appropriately been documented since the auditors have disclosed
the rationales for considering each of these matters as the KAM.
Therefore, the conclusion can be drawn based on the above analysis that the auditors of
the selected banks have shown their efficiency in identifying and communicating the KAM
by complying with each of the requirements of ASA 701.
Recommendations
Certain recommendations are outlined below based on the outcome of the above
whole analysis:
 In line with ASA 701, Australian auditors are recommended to consider the provided
requirements every time they undertake the assessment of clients’ KAM. This will
enhance the audit quality while increasing the trust of investors and other users on the
audit report.
 While assessing the going concern position of the clients, the auditors are
recommended to adhere to all requirements provided in ASA 570 since this will help
them in identifying the presence of any material uncertainty regarding the going
concern position of the clients.
 It is recommended to the managements of the companies to undertake the assessment
of their going concern status on periodic basis since this will help in reducing the risk
of business failure or bankruptcy.
 The managements of all the Australian business organizations are recommended not
to use any prohibited accounting practices for short-term gains like Lehman Brothers.
This will help them in ensuring the long-term sustainability of their businesses.

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