Corporate Governance, Risk Assessment, and Audit of Commonwealth Bank

This report provides an executive summary of the corporate governance framework of Commonwealth Bank (CBA), a multinational bank listed on the ASX. It analyzes the bank's governance structure in accordance with ASX corporate governance rules and principles, assessing the presence of a solid framework for management and oversight, board structure, ethical conduct, financial reporting integrity, timely disclosure, shareholder rights, risk management, and remuneration practices. The report also conducts a risk assessment, focusing on credit risk, market risk, and liquidity risk, and identifies potential audit risks and mitigation measures. The analysis includes a review of financial ratios and an overview of the company's market position and compliance with relevant regulations, including AUASB auditing standards. The report concludes with a comprehensive evaluation of CBA's governance and risk management practices, offering insights into its financial health and compliance with regulatory requirements.

Audit, Assurance and Compliance
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Executive Summary
The report has been developed for gaining an understanding of the corporate governance
framework of business entities listed on ASX. The business entity selected for the purpose is
Commonwealth Bank, a multinational bank of Australia having businesses across the US, the
UK and Asia. The corporate governance framework of the banking institution is analyzed in
context of the ASX corporate governance rules and principles. Also, the report has conducted a
risk assessment of the banking institution to identify the audit risk so that necessary steps can be
taken for reducing the risk that can have a materialistic impact on the financial information
disclosed to the end-users.
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Contents
Implication of ASX Corporate Governance Principles..................................................................................4
Presence of Solid Framework for Management & Oversight..................................................................4
Structuring the Board to Add Value.........................................................................................................4
Ethical and Responsible Way of Acting....................................................................................................5
Safeguarding Integrity in Financial Reporting..........................................................................................5
Making Timely & Balanced Disclosure.....................................................................................................5
Rights of Security Holders........................................................................................................................6
Recognizing & Managing Risk..................................................................................................................6
Fair & Responsible Remuneration...........................................................................................................6
Risk Assessment..........................................................................................................................................7
Nature of Company.................................................................................................................................7
Market Overview of the Company..........................................................................................................7
Computation of income statement and balance sheet ratio.......................................................8
Audit Risk and the measures for their Mitigation....................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................11
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Implication of ASX Corporate Governance Principles
ASX has laid the foundations of Corporate Governance principles that the business
organizations in Australia listed on the stock exchange need to adopt for promoting transparency
within the business operations. Commonwealth Bank involved in financial products ands
services need to place large emphasis on developing an effective corporate governance
framework to protect the interests of investors. The analysis of corporate governance statement
of the bank as per the ASX principle is carried out as follows:
Presence of Solid Framework for Management & Oversight
ASX Corporate Governance Statement (CGS) has directed the business entities listed on
ASX to establish the clear roles and responsibilities of the board and management. Also, it
should adequate disclose the process selected for monitoring and evaluating their performances
(Plessis, McConvill and Bagaric, 2005). In this context, Commonwealth Bank has clearly
defined the board roles and responsibilities sin its corporate governance statement. The role of
Board is to provide an overall strategic direction to the Group on the behalf of the shareholders.
The major responsibility of the Board is to develop the overall strategies of the Group and
appoint, monitor and regulate the performance of the Key Management Personnel (KMP). The
management role is to regulate the daily activities of the banking institution as per the long-term
goals and objectives. The CEO is accountable to the Board and carries out the responsibility of
designing and implementation of a system to manage the material business risks, achieve
customer satisfaction and developing a healthy workplace environment. The Board reviews its
performance on an annual basis through the development of a Board Committee in support of an
external consultant (2017 Corporate Governance Statement, 2017). The Board has developed
remuneration committee for monitoring and evaluating the performance of Key Management
Personnel. Therefore, the bank has effectively complied with this ASX CGS principle (ASX
Corporate Governance Council, 2014).
Structuring the Board to Add Value
ASX listed entities should effectively structure the Board to include diverse skill set and
expertise to effectively meet its different roles and responsibilities. As analyzed from the
corporate governance statement of the banking corporation, it has ensured that Board carries out
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its responsibilities independently and includes an appropriate mix of expertise and diversity. The
Board is effectively composed having non-executive directors and the CEO. The Board ahs
maintained an appropriate size to ensure that it possess divers range of skills, experience and
diversity for meeting the strategic objectives of the Group. It has also presented the current skills,
expertise and experience possessed by Board in the Board skills matrix in its corporate
governance statement (2017 Corporate Governance Statement, 2017).
Ethical and Responsible Way of Acting
Commonwealth Bank as per the ASX sited principle develops and prepares its distinct set
of document defining its Code of Conduct known as ‘Our Commitments’. It has defined the
standard behavior of people of the banking group including directors, senior executives and
employees. The Code of Conduct is developed on the ethical policies of integrity, honesty,
accountability, collaboration and service. The Code of Conduct contains an additional document
known as ‘Value Guidelines’ for providing assistance to the people of the Group about its vision
and values. It has also developed effective policies in relation to preventing the occurrence if
practices of anti-bribery and corruption, securities trading and whistle blower protection. The
presence of all such policies ensures that the banking institution carried out its business
operations in an ethical and responsible manner (2017 Corporate Governance Statement, 2017).
Safeguarding Integrity in Financial Reporting
Commonwealth Bank in accordance with the ASX principle of promoting integrity in
financial reporting has developed an Audit and Risk Committee for reviewing the finance
reporting process. Thus, the independent verification by the auditors and risk management team
ensures that financial reporting process of the bank is reliable and provides accurate results. The
committee also conducts an analysis of the internal control processes and frameworks of the
company to ensure that financial reporting is carried out in an appropriate manner (2017
Corporate Governance Statement, 2017).
Making Timely & Balanced Disclosure
The banking Group also provides timely information about its performance to the
shareholders through developing annual report, corporate responsibility report, full year and half
year financial results (Fleckner and Hopt, 2013). Also, it disseminates all the material
information to the shareholders in relation to the Australian Securities Exchange (ASX) and
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Corporations Act 2001. It has also developed a written formal policy that is disclosed in the
Bank’s Guidelines to facilitate communication between the bank and its shareholders. It also
updates all the materialistic information that can impact its securities prices on the ASX website.
In addition to this, the annual general meetings and electronic communication via e-mail also
facilitates the bank to provide regular and updated information to its shareholders (2017
Corporate Governance Statement, 2017).
Rights of Security Holders
The corporate governance statement of the bank has recognized shareholders as its
owners and as such places great emphasis on protection of their rights. The investor relation
program of the bank is specifically developed for promoting the participation of the shareholders
in the meetings and programs (2017 Corporate Governance Statement, 2017). The rights of the
security holders are protected by disclosing them all the relevant and required information so that
they can take accurate decisions by analyzing its the future growth prospects (Bazley, Hancock
and Robinson, 2014).
Recognizing & Managing Risk
This ASX Principle has directed the business entities to develop and implement an
effective risk management framework for identification, managing, control and review of all the
materialistic risks that can impact its financial performance. Commonwealth Bank ahs developed
a risk committee for providing assistance to the Board for fulfilling its responsibilities in relation
to the materialistic risks. The risk committee reviews the risk management framework of the
Group and monitors the policies and processes supporting the strategies developed for
identification and mitigation of the risk (2017 Corporate Governance Statement, 2017).
Fair & Responsible Remuneration
The remuneration committee developed by the Board provides assistance in framing and
implementation of the remuneration policies for key management personnel. As per ASX
principle, it is essential for the bank to develop an effective remuneration policy for attracting,
motivating and retaining competent people to help realize its long-term goals and objectives
effectively. The CEO and others senior executives of the Bank have developed written policies
stating the terms and conditions of their employment conditions (2017 Corporate Governance
Statement, 2017).
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Risk Assessment
ASX entities need to comply with Auditing and Assurance Standards Board (AUASB) in
carrying out its audit. AUASB is an independent statutory agency of the Australian government
carrying out the responsibility of developing and implementing auditing and assurance standards.
This is necessary to ensure that auditing is carried out effectively and reduce the possibilities of
presence of any materialistic error in the financial statements disclosed to the end-users
(International Standard on Auditing 315, 2009). In this context, auditing standard ASA 520 is
developed for stating analytical procedures to assess the materialistic risk present in the financial
statements. ASA 520 requires the business entities to identify the nature of audit risk through
developing an adequate understanding of its environment and internal control processes. It is
carried out to assure that the information presented to the auditor’s is relevant of identifying risks
of material misstatements (Auditing and Assurance Standards Board, 2009). The various steps of
risk assessment procedures that can be used for identifying and mitigating the audit risk in
Commonwealth Bank can be stated as follows:
Nature of Company
Commonwealth bank is a multinational bank carrying out its operations across large
number of countries and is a public company. It has presence of an effective corporate
governance framework as per the ASX listing rules and recommendations. The banking group
provides wide range of financial products and services to the consumers. Commonwealth bank of
Australia is the parent Group and its related parties include its different subsidiaries, associates,
joint ventures, pension plans as well as other persons. The bank carries out its financial
transactions as per the AASB and Corporations Act 2001 rules and regulations (Commonwealth
Bank of Australia: Annual Report, 2017).
Market Overview of the Company
The banking institution carries out its operations across the large number of countries
particularly New Zealand, Asia, the US and the UK. It strategic objective is to create value for all
its customers and communities through delivering them the best financial products and services.
It carries out is business activities as per the regulator compliance of Australian Prudential
Regulation Authority (APRA) and Australian Securities and Investment Commission (ASIC)
(Commonwealth Bank of Australia : Annual Report, 2017).
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Computation of income statement and balance sheet ratio
The computation of the income sheet and balance sheet rations helps in developing a
review of the entity’s financial performance and identify the future financial risks associated
with its operations (O'Donnell, & Perkins, 2011). The key ratios are computed as follows:
Financial Data on Commonwealth Bank
Particulars 2016 2017
Net profit 9,227 9,928
Revenue 24,225 25,089
Total Assets 933,078 976,374
Long term Debts 15,544 18,726
Shareholder's Equity 60,206 63,170
Income Statement Ratios Formula
Net Profit Ratio Net Profit/Revenue 38.09% 39.57%
Return on Assets Net Profit/Assets 0.99% 1.02%
Balance Sheet Ratios
Debt Equity Ratio Debt/Equity 0.26 0.30
Fixed Assets Turnover Revenue/Total Assets 0.03 0.03
Audit Risk and the measures for their Mitigation
The relevant audit risks that can impact the accuracy of the financial statements provided
to the auditors as discussed in the annual report are analyzed as follows:
 Credit Risk: The risk related to potential loss that can occur due to failure of counterparty
to meet the contractual obligations. The large exposure of the banking institutions to the
geographic regions and industry sector increases the chances of credit risk. The bank
though has developed governing policies for minimizing the credit risk such as Group
Credit Risk to minimize the chances of occurrence of such risk in the future. The risk can
largely impact the materialistic financial information presented to the auditors’ and
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therefore it is necessary for the auditors to review the internal control frameworks
implemented by the banking group to control such risk.
 Market Risk: It is the risk related to the presence of volatility in the market that can have
a potential impact on its profitability. These include change in interest rates, foreign
exchange rates, commodity prices, credit spreads and underlying operating leases. The
banking group in order to reduce the occurrence of such risk has developed a Group
Market Risk Policy that has determined the limits and standards in relation to traded
market risk, residual value risk and interest rates risk.
 Liquidity Risk: It can be regarded as the overall risk present within the banking group to
being not able to meet the financial obligations due to changes in the liquidity conditions
in the market. The Banking Group has implemented governing policies such as group
liquidity risk management policy for developing the limitation and standards in relation
to its control (Putra, 2010). The policy includes assessing the liquidity coverage ratio and
carrying out test scenarios for analyzing the liquidity in market that provides an
assessment of the liquidity risk faced by the banking group.
 Operational risk: The Group can also face some economic loss due to inadequacy of its
internal processes in the future context. The Banking Group has developed a group
operational risk management framework for controlling of such type of risk. The policy
requires carrying out investigation and reporting of losses that can occur in future due to
operational inefficiencies.
 Compliance Risk: The banking group can also suffer material losses due to decline in its
goodwill in the market in future as a result of its failure to comply with the regulatory
obligations. The governing policies present in the banking group to control and mitigate
such risk is compliance risk management framework that has established the standards
for managing the non-compliance risk if any in future (Commonwealth Bank of Australia
: Annual Report, 2017).
Conclusion
The report has concluded that Commonwealth Bank has developed its corporate
governance framework and risk assessment procedures in accordance with the ASX rules and
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regulations. This has enabled the bank to promote its long-term growth and development and
strengthen its goodwill in the market worldwide.
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References
2017 Corporate Governance Statement. 2017. Commonwealth Bank of Australia. [Online].
Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/
corporate-profile/corporate-governance/corporate-governance-statement-2017.pdf [Accessed on:
25 April 2018].
ASX Corporate Governance Council. 2014. [Online]. Available at:
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-
edn.pdf [Accessed on: 25 April 2018].
Auditing and Assurance Standards Board. 2009. Auditing Standard ASA 520 Analytical
Procedures. [Online]. Available at:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf [Accessed on: 25
April 2018].
Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage
Learning Australia.
Commonwealth Bank of Australia. 2017. Annual Report. [Online]. Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/annual_report_2017_14_aug_2017.pdf [Accessed on: 25 April 2018].
Fleckner, A. and Hopt, K. 2013. Comparative Corporate Governance: A Functional and
International Analysis. Cambridge University Press.
International Standard On Auditing 315. 2009. [Online]. Available at:
http://www.ifac.org/system/files/downloads/a017-2010-iaasb-handbook-isa-315.pdf [Accessed
on: 25 April 2018].
O'Donnell, Ed & Perkins, D. 2011. Assessing Risk with Analytical Procedures: Do
Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing;
Sarasota 30 (4), pp. 273-283.
Plessis, J., McConvill, J. and Bagaric, M. 2005. Principles of Contemporary Corporate
Governance. Cambridge University Press.
Putra, L. 2010. The Use Of Analytical Procedures In Auditing. [Online]. Available at:
http://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/
[Accessed on: 25 April 2018].
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