BAO5524 Professional Auditing - SBL Audit Planning Memorandum

This audit planning memorandum outlines the legal and other considerations for auditing Sustainability Bank Ltd (SBL) as its newly appointed auditor. It emphasizes the importance of adhering to International Standard on Auditing (ASA) 250, which requires auditors to consider laws and regulations affecting financial statements. The memorandum highlights the need to assess SBL's compliance with banking industry regulations, potential litigation risks, and the impact of economic factors such as the housing market slump and changes in government-supported programs. It also addresses the auditor's responsibility to identify material misstatements resulting from non-compliance with laws and regulations, while acknowledging the management's primary role in ensuring compliance. The auditor must obtain sufficient audit evidence regarding the bank's adherence to legal frameworks and perform procedures to detect non-compliance that could materially affect the financial statements.

AUDIT PLANNING MEMORANDUM (LEGAL AND OTHER CONSIDERATIONS) 1
AUDIT PLANNING MEMORANDUM (LEGAL AND OTHER CONSIDERATIONS)
By (Name)
Name of the Course
Professor
Name of University
City and State
Date

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Introduction
Having been assigned a new client, Sustainability Bank Ltd (SBL), and working as one of
the audit team members, you have been asked to help in the process of planning the audit of
SBL. The aim of this paper is to draft an audit planning memorandum that explains the legal and
other considerations that ought to be considered by the audit firm as the newly appointed auditor
for SBL.
Legal and Other Considerations that Need to Be Considered
According to International Standard on Auditing (ASA) 250, an auditor has a
responsibility to consider legal considerations such as laws and regulations during a financial
statement audit. These legal laws and regulations have varying effects on financial statements of
a company, especially if it has various branches or subsidiaries in various countries and locations
(Elder, Beasley and Arens 2011, pp. 78). This is because the legal and regulatory framework is
primarily constituted by these laws and regulations. The financial statements of a company are as
well affected directly by the provisions of such laws and regulations by determining the amounts
and disclosures reported in the financial statements of an entity. In addition to this, there are
other laws and regulations that indirectly affect how an entity should be managed by its
management (Eilifsen et al. 2013, pp. 26). Some of the legal and other considerations that must
be considered by the audit firm as the new auditor for SBL are discussed below.
Most banks are highly affected by the heavy and strict regulations set out in their
industries. Failure to comply with such laws may lead to imposition of heavy penalties and fines
by the regulation agencies. It is therefore important for the new auditor to consider whether the
bank (SBL) complies fully with these regulations and laws. This may also cause possible

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litigations and other consequences to the bank, which may affect its financial statements
materially. According to this standard, the responsibility of governing and overseeing the
operations of the bank lies with its management (Arens, Elder and Mark 2012, pp. 56). The
management must make sure that the operations of the bank are carried out in a manner that is in
compliance with the provisions of the industry’s set laws and regulations. However, as the
bank’s auditor, the firm has a responsibility of reviewing and examining the bank’s operations
with a view to identifying possible material misstatements in the bank’s financial statements
resulting from its failure to comply with the laws and regulations. However, there is no
expectation for the auditor to detect the bank’s failure to comply with all regulations and laws
(Hayes, Gortemaker and Wallage 2014, pp. 13).
In addition to this, the audit firm has a responsibility to obtain reasonable and sufficient
assurance that the financial statements of the bank (SBL), taken in entirety, are not prone to any
material misstatement, resulting from either error or fraud. The audit firm must consider the legal
and regulatory frameworks that are applicable to the firm and its branches. According to ISA
250, the audit firm should consider the compliance of SBL bank with the provisions of
regulations and laws that directly affect how material disclosures and amounts in its financial
statements are determined. Examples of these legal considerations are pension and tax laws and
regulations (Messier, Glover and Prawitt 2008, pp. 23-24).
Furthermore, considerations regarding other regulations and laws must also be made by
the auditor even though they are believed not to directly affect the determination of the
disclosures and amounts reported in the financial statements of the SBL bank. These laws should
be considered because the compliance of the bank to them is very fundamental to the aspects of
its business operations. To its ability of continuing its business, or avoiding significant penalties.

AUDIT PLANNING MEMORANDUM (LEGAL AND OTHER CONSIDERATIONS) 4
Examples of these other legal considerations are compliance of the bank to environmental
regulations, requirements of regulatory solvency and operating license terms (Louwers et al.
2015, pp. 45).
As it has been proven that SBL operates in an industry which is very competitive, the
audit firm must seek sufficient audit evidence to ascertain whether the economic downtown
experienced by firms in this industry has caused significant misstatements in the financial
statements of the bank. This is because, as reported in the media, there has been a material slump
in the housing market, which is the core business operation of the SBL bank. It is also outlined
that banks have generally experienced a drop in the applications for personal loans and housing
credit facilities since June 2017, and the default rates of existing loan repayment has been rising
significantly. The audit firm should consider ascertaining how this affects the amounts and
disclosures reported in the financial statements of the SBL bank.
In January 2018, the bank launched a Sustainable Living program which was key in
maintaining its market share as regards to customer lending. This program was also highly
supported and funded by the government, through provision of subsidies that encouraged
homeowners to adopt the program with much ease. However, upon withdrawal of the
government’s support from this project in April 2018, the bank must have experienced material
effects in its financial statements in its efforts to accommodate the financial changes. The auditor
must therefore consider determining how materially the financial statements of the SBL bank are
misstated as a result of this consequence. Additionally, the audit firm must ascertain, by seeking
appropriate audit evidence, how the financial statements of the SBL bank are materially
misstated due to the defrauding experienced from its employee in October.

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As discussed above, the responsibility of the new auditor in the SBL bank is to identify
any material misstatements in its financial statements that may have been caused by its non-
compliance with the laws and regulations set out in the Australian banking industry. However,
the responsibility of ensuring that SBL bank operates according to these laws and regulations lies
with its management. In doing this, the auditor is expected to obtain sufficient as well as
appropriate audit evidence with regard to the bank’s compliance with the provisions of those
laws and regulations. The audit firm should also be keen to perform specified procedures of audit
that are useful in identifying any cases of the bank’s non-compliance with other laws as well as
regulations that are considered to affect its financial statements materially (Messier, Glover and
Prawitt 2008, pp. 23-24).

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References
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson
education.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance
services. McGraw-Hill.
Hayes, R.S., Gortemaker, H. and Wallage, P., 2014. Principles of auditing: an introduction to
international standards on auditing. Prentice Hall, Financial Times.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing
& assurance services. McGraw-Hill Education.
Messier, W.F., Glover, S.M. and Prawitt, D.F., 2008. Auditing & assurance services: A
systematic approach. Boston, MA: McGraw-Hill Irwin.