Evaluating Key Audit Matters in Independent Auditor's Report

This report provides a critical analysis and evaluation of key audit matters (KAMs) within independent auditor's reports, focusing on the introduction of the new auditing standard ASA 701 in response to the global financial crisis, particularly the Lehman Brothers case. The report examines the rationale and objectives of KAMs, their prerequisites, and application, including the deficiencies in the Lehman Brothers audit. It also addresses the revision of ASA 570 concerning going concern issues. The analysis extends to evaluating the efficiency of KAM disclosures in the financial reports of several Australian Stock Exchange (ASX)-listed banks, including QBE Insurance Group, Commonwealth Bank of Australia, Macquarie Group Limited, Queensland Bank, and Pendal Group Limited. The report assesses whether KAM disclosures provide more informative details to users of financial statements, and concludes with a summary of the findings.

Running head: CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN
THE INDEPENDENT AUDITORS REPORT
Critical analysis and evaluation of key audit matters in the independent auditors report
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CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Executive summary:
The report elucidates the introduction of the new auditing standard in the wake of financial
crisis.ASA 701 and its implementation have been assessed by evaluating the key audit
matters of the companies chosen from ASX. These companies comprise of QBE Insurance
group, Commonwealth bank of Australia, Macquarie group limited, Queensland bank and
Pendal group limited. For the detailed analysis for the reason for the introduction of ASA 701
has been explained by describing the case of Lehman brother. In addition to this, the revision
of ASA 570 has also been analyzed and its importance of the auditors has also been
illustrated.

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Table of Contents
Introduction:...............................................................................................................................4
Discussion:.................................................................................................................................4
Rationale and objectives of key audit matters:..........................................................................4
Prerequisite and application of key audit matter:.......................................................................4
Issue of Lehman brother case:....................................................................................................4
What did auditors do wrong?.....................................................................................................4
How key audit matters address the case:....................................................................................4
Revision of ASA 570:................................................................................................................4
Evaluating the going concern importance in auditor’s report:...................................................4
Evaluating the efficiency of key audit matters in the financial report of the chosen banks:.....4
Do key audit matters disclosures provide more information to users?......................................4
Conclusion:................................................................................................................................4
References list:...........................................................................................................................5

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Introduction:
The paper intends to conduct an analysis on the new auditing standard “ASA 701
Communicating key audit matters in the independent audit report” that is applicable for the
audit of the financial report for the financial year. It is inferred from the evaluation of the
reasons associated with the introduction of the standard that the failure of organizations and
financial crisis has resulted in the standard setter making improvement to the o auditing
standard as it did not fulfill all the criteria of fair representation. In this regard, the case of
Lehman brothers has been presented and the auditing failure and its associated reasons are
demonstrated. The facts presented under the new auditing standard are accounted for
conducting an analysis of the key audit matters of the companies chosen from the banking
sector. For the analysis of the key audit matters six major operating banks have been chosen.
In addition to this, the revision of ASA 570 has been analyzed and the reasons why the issue
of going concern is considered crucial in the process of auditing is explained in the further
section of the report.
Key audit matters forms the most important part of the auditing process because such
matter is considered as significant and influence the materiality of the account in their
professional judgment. The new auditing standard mandates the communication of the key
audit matters identified by the auditors in their independent auditor report (Brasel et al.
2016). This also helps in enabling other auditors to decide on whether such matter should be
included in the auditor report.
Discussion:
Rationale and objectives of key audit matters:
The ASA 701 entrust the auditor with the responsibility of communication the key
auditor matters in the report published by them. It helps in addressing the judgment of auditor
as to what should be communicated in the report along with the content and form of
communication.
The objective of introducing this standard is to provide greater transparency to the
users of financial statement about the audit hat has been performed by enhancing the
communicative value of the auditor’s report. In addition to this, users are provided with the
additional information that assists them in gaining an understanding of the matters that are of
most significance in the judgment of auditors. The areas of significant judgment and
estimates made by management are evaluated and ascertained by the user using this standard
(Cordoş and Fülöp 2015). Furthermore, users are provided with the basis that helps them in
engaging with the people charged with governance and those of management. It is required
by the auditors to form an opinion on the financial report of the entity by determining the key
audit matter.
Prerequisite and application of key audit matter:
For determining the key audit matters, the auditor is required to take into account the
matters that is communicated by the management and governance people and requires
significant attention in the auditing process. They should consider the significant judgment

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
made by the auditors concerning areas such as accounting estimates and judgment of
management. Any impact on the audit of transactions and significant events that occurred
during a particular period should also be accounted for (Simnett et al. 2016). However, for
expressing a modified opinion, the presentation of key audit matters cannot be regarded as
substitute.
It has been found from the review of several research papers that there is considerable
number of benefits due to the introduction of ASA 701. The benefits have been observed in
terms of the financial reporting, process of auditing and enhancing the governance structure.
Therefore, it can be inferred that some of the reporting areas in relating to auditing would
improve due to the identification of key audit matters and thereby creating a favorable impact
on the process of reporting. A transparency is created between the audit committee and
people charged with governance with the help of key audit matters and thereby addresses the
audit issues (Minnis and Shroff 2017).
Issue of Lehman brother case:
What did auditors do wrong?
The collapse of Lehman brother is considered as one of the largest collapse in the
history of banking world. The failure was attributable to the defective accounting policy
implemented by the management of large investment bank and the failure of the auditor to
account for such defect and issued a qualified audit opinion on their financial report. Such
failure of auditing is associated with ineffective auditing policies in accordance with the
requirement of old auditing standard that required auditors to conduct the audit as per the
mentioned criteria. The earnings report of the firm and its credibility was questionable which
the auditor failed to do. The commitment of Lehman brother to subprime loans user the Repo
105 and the ongoing defects associated with the issuing of defects and this particular view
was influenced by the negligence of auditors. Excess borrowing should have been disclosed
by the auditors. Hence from the analysis of the case, it is inferred that the failure of the large
investment bank was also attributable to the failure of independent audit report to
communicated and reveal the repurchase transactions along with the deceitful accounts.
How key audit matters address the case:
The development and review of the auditing standard was necessitated due to the
issues presented in the case of Lehman brother. As per the new standard, auditors are
required to communicate the authorization of the key audit matters and determine the key
audit matters as per the guidelines. The auditing issues faced by Lehman brother is addressed
under the ASA 701 by addressing the loopholes that existed under the old auditing standard.
Had this auditing standard into existence during the time of collapse of the bank, the key
audit matters would have been addressed and communicated to the people associated with the
entity. Some of the high risk areas could have been included in the key audit matters which
would have account for the looming collapse of mortgage market. The high leverage ratios of
the bank were concealed with the help of the Repo transactions done by the bank. Disclosure
of all such key audit matter would have assisted the investors in making strategic decision
making that takes into account all the key and highly risky areas (Cannon and Bedard 2016).
Therefore, the auditors would have been able to identify the areas requiring significant
judgment by alerting on the key audit matters.

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Revision of ASA 570:
Investors have become well acquainted with the importance of addressing the issue
associated with the going concern due to the failure of several organizations. Auditors in the
auditing process are required to conduct an assessment of the going concern issue by
evaluating the accounting basis that is used for going concern. Auditors are required to make
a conclusion on the accounting used by the management for going concern by sorting it as the
description that is enhanced.
Evaluating the going concern importance in auditor’s report:
Concerning the going concern issue, the auditor has the responsibility of analyzing
and evaluating the issues associated with the going concern ability of the organization. The
auditor should issue an adverse or unqualified opinion on the financial report if they do not
find appropriate audit evidence regarding the accounting policy that is used for measuring the
going concern ability of organization (Auasb.gov.au 2019). Therefore, regarding the
assumptions and estimated used in the accounting process of going concern of the
organization, it is essential for auditors to obtain appropriate and sufficient audit evidence.
Moreover, auditors should make conclusion on the ability of the entity to continue as going
concern by assessing the materiality if any associated with this particular aspect.
Evaluating the efficiency of key audit matters in the financial report of the chosen
banks:
The analysis of the key audit matters of the banking organization listed on Australian
stock exchange is demonstrated in this section. The selected banking organizations for which
the analysis of the key audit matters has been presented below comprise of QBE Insurance
group, Commonwealth bank of Australia, Macquarie group limited, Queensland bank and
Pendal group limited. All the identified key audit matters identified were addressed in the
context of auditing of the financial report for year ending 2018.
From the financial report of QBE Insurance group limited, it has been found that the
auditors have reported on the key audit matters in a separate section. The key audit matters
include net outstanding claims valuation, estimates on the gross discounted central, adequacy
probability, recoveries, goodwill valuation, deferred tax assets recoverability, IT control and
system and valuation of investment. Auditors have presented a detailed disclosure of why the
matter is considered as importance in their process of auditing. All the key audit matters
identified have been addressed by them with the help of appropriate audit procedures such as
sampling and test of control (Qbe2018.qreports.com.au 2019). ‘
The financial report of Macquarie group limited demonstrate the key audit matters
which has been identified by auditors and they have framed their opinion based on their
professional judgments about the matters identified. Key audit matters of the group include
IT control and system, loss provision, financial liabilities and assets valuation, deferred tax
liabilities and assets (Static.macquarie.com 2019). In addition to this, all such matters have
been appropriately addressed by the auditors by gathering sufficient audit evidences along
with implementing the proper analytical procedures.
Looking at the financial report of Pendal group limited, it is observed that auditors
have identified the key auditing matters such as investment management contracts, carrying

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
value of intangible assets, employee incentives and scheme of remuneration. The reason
associated with the accounts identified being a key audit matter has been explained by auditor
by referring to the notes to the financial statement presented at the end of financial report.
For addressing each of the matters identified, auditors have adopted different auditing
procedures as per the suitability of accounts (pendalgroup.com 2019).
Some of the key audit matters identified by the auditors of Queensland bank of
Australia include measurement of fair value of financial instruments, valuation of intangible
computer software and goodwill and provision of collective impairment. There has been a
separate presentation of the key audit matters and the reason why the account is considered
material is also presented in a separate section (Boq.com.au 2019). All the identified key
audit matters are addressed by auditors by adopting the appropriate techniques and test of
control development as per the requirement of new auditing standard.
The key audit matters of ANZ bank has been identified in the context of preparation
of the financial report for the year 2018. The bank has some accounts which are judged by the
auditors to have material impact such as valuation of financial instruments, provision for
customer remediation, provision for credit impairment and IT system and control. For
evaluating and addressing the identified key audit matters, auditor has adopted the technique
that enabled them to gain an in depth understanding of the process of entity
(Shareholder.anz.com 2019). The associated assertions of the accounts have been tested by
developing the appropriate sampling plan.
When looking at the annual report of Common wealth bank of Australia, it can be
observed that the auditors have identified any key audit matters in relation to provision for
risk and regulator action, provision for loan impairment and financial instruments valuation.
However, they have formed an opinion on the financial information presented by the bank
using their professional judgment and in accordance with the requirement of auditing
standard and code of ethics (Commbank.com.au 2019).
Do key audit matters disclosures provide more information to users?
The key audit matters of the chosen banks have been identified and reported in
accordance with the requirement of ASA 701. Users are provided with the basis of making
strategic investment decisions because of enhancement in the transparency of the information
that has been presented. From the evaluation of the report, it is observed that auditors have
identified such matters by producing reasonable basis by referring to the facts in the notes to
financial statements (Gaynor et al. 2016). In addition to this, auditors have implemented
proper producers for addressing the key audit matters. Therefore, it can be said that the
disclosure of key audit matters have served the purpose of enhancing the transparency of the
information to the users.
Conclusion:
The introduction of ASA 701 has resulted in enhancing the information transparency
and provides assistance to the users in making investment decisions. It was in the aftermath
of global financial crisis that resulted in the introduction of new standard. The issue of going
concern in the auditing process was also addressed with the revisions of ASA 570.
Furthermore, it can be inferred from the analysis of key audit matters of the chosen banks, it

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
can be inferred that the auditors have presented a detailed explanation of such matters along
with adopting of suitable techniques for addressing the facts.

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
References list:
Annual-report-2018.pendalgroup.com., 2019. [online] Available at: https://annual-report-
2018.pendalgroup.com/uploads/Pendal_FinancialStatements2018.pdf [Accessed 22 May
2019].
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 22 May
2019].
Auasb.gov.au., 2019. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 22 May
2019].
Boq.com.au., 2019. [online] Available at:
https://www.boq.com.au/content/dam/boq/files/shareholder-centre/financial-results/2018/
FY2018_Annual_Report.pdf [Accessed 22 May 2019].
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding
negative outcomes: The effects of reporting critical audit matters on judgments of auditor
liability. The Accounting Review, 91(5), pp.1345-1362.
Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements:
Evidence from the field. The Accounting Review, 92(4), pp.81-114.
Commbank.com.au., 2019. [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 22 May 2019].
Cordoş, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
Informatica de Gestiune, 14(1).
Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L., 2016. Understanding the relation
between financial reporting quality and audit quality. Auditing: A Journal of Practice &
Theory, 35(4), pp.1-22.
Minnis, M. and Shroff, N., 2017. Why regulate private firm disclosure and
auditing?. Accounting and Business Research, 47(5), pp.473-502.
Qbe2018.qreports.com.au., 2019. Retrieved 22 May 2019, from
https://qbe2018.qreports.com.au/xresources/pdf/qbe18-annual-report-complete.pdf
Shareholder.anz.com. 2019. [online] Available at:
https://shareholder.anz.com/sites/default/files/anz_2018_annual_report_final.pdf [Accessed
22 May 2019].
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and
assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of
Practice & Theory, 35(3), pp.1-32.

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Static.macquarie.com., 2019. [online] Available at:
https://static.macquarie.com/dafiles/Internet/mgl/global/shared/about/investors/results/
2018/Macquarie-Group-FY18-Annual-Report.pdf? [Accessed 22 May 2019].
Appendix:
Pendal group limited:

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
QBE Insurance group limited:

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT