Analysis and Evaluation of Key Audit Matters in Financial Reports

This report provides a comprehensive analysis and evaluation of key audit matters (KAMs) within independent auditor's reports, with a particular focus on ASA 701 and its implications. The study begins with an examination of the rationale, objectives, and application of KAMs, followed by a detailed case study of the Lehman Brothers collapse, analyzing the auditing failures and how KAMs could have addressed the issues. The report also explores the revision of ASA 570 concerning going concern and its importance in auditor's reports. Furthermore, the efficiency of KAMs is evaluated through an analysis of the financial reports of several Australian banks, including Commonwealth Bank of Australia, Queensland Bank, Westpac, ANZ, National Bank of Australia, and Macquarie Group. The analysis assesses whether KAMs have achieved their intended purpose in the industry, offering insights into their impact on financial reporting transparency and investor decision-making. The report concludes with a synthesis of the findings and their implications for auditing practices.

Running head: CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN
THE INDEPENDENT AUDITORS REPORT
Critically analyze and evaluate 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 paper intends to conduct an in depth analysis of the ASA 701 that was introduced in the
wake of financial crisis and several corporate collapse. One such corporate collapse is the
case of Lehman brothers that have been analyzed and evaluated in respect of ASA 701. In
addition to this, the paper also focuses on ASA 570 that seeks auditors to take into account
the going concern issue when forming the judgment on the entity’s financial performance.
The later section of the report conducts an analysis and evaluation of (KAM) key audit
matters of the banking organizations such as Commonwealth bank of Australia, Queensland
bank, Westapc bank, ANZ bank and National bank of Australia and Macquarie group limited.
From the analysis it is ascertained that the disclosure of key audit matters have served the
purpose in the industry.

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
Application and requirement of key audit matter:.....................................................................4
Lehman brother case issue:........................................................................................................4
What did auditors do wrong?.....................................................................................................4
How key audit matters address the case:....................................................................................4
Revision of ASA 570:................................................................................................................4
Importance of going concern in auditor’s report:......................................................................4
Evaluating the efficiency of key audit matters in the financial report of the chosen banks:.....4
Does key audit matters achieved the purpose in the industry:...................................................4
Conclusion:................................................................................................................................4
References list:...........................................................................................................................5

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Introduction:
The report elucidates the evaluatio of the key audit matters of the banking
organizations listed on the ASX (Australian stock exchange). Such analysis is done to
contribute to the importance of understanding the key audit matters and it presentation in the
independent auditor’s report. The facts presented under ASA 701 “ASA 701 for
communicating the key audit matters in the independent auditors report” is essential to
take into account for assessment of the key audit matters of different companies. In the
aftermath of the financial crisis and the failure of several corporate organizations, the
standard board has introduced the revised auditing standard for enhancing the communication
value of the auditor report. The objective of introducing this new auditing standard is to
augmenting the financial information transparency that is presented in the annual report and
assist the investors in making strategic investment decision. The detailed investigation into
the auditing standard has been done by presenting the case of Lehman brother and how did
the auditors went wrong on disclosing the accounting defects and issued fair view on the
financial statements. The revision of ASA 570 concerning the importance that is placed on
the issue of going concern of entity has also been evaluated.
The matters that are considered noteworthy by the auditors as per their professional
judgment in the auditing of the financial report are regarded as key audit matters (Christensen
et al. 2016). All such matters in the respective financial report of the entities have been
addressed by auditors for forming view on the financial report.
Discussion:
Rationale and objectives of key audit matters:
The auditors are responsible for communication the identified key audit matters along
with the form and content of the communication and the judgment that they have used in
evaluating the identified matters. Investors and users are provided with greater transparency
when seeking the financial information with the help of presentation of key audit matters and
thereby contribute to enhance the value of the prepared auditors report. It is indented by such
matter to assist the users in assessing making the significant judgment made by the
management of organization (Ahmed and Anifowose 2016). Moreover, it also contributes to
the engagement of the users with the management and personnel who are changed with
governance in an organization.
Requirement of key audit matter:
Since the key audit matters are considered to be relevant in the decision making
process of investors, it is essential for the reporting entity to make a presentation of such
matters in their financial report as per the new auditing standard. The importance of
presentation of such matters is attributable to the fact that they helps in determining the
existence of materiality in such accounts and how they would contribute to material
misstatement existence in the financial statements (Auasb.gov.au 2019). Therefore, it is of
utmost importance for the auditors to identify the key audit matters.
The auditing process is provided with several benefits due to the incorporation of the key
audit matter and its identification in the report. In this regard, it can be inferred that some of
the specific areas in reporting would improved due to identification of such matters and

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
thereby creating a positive impact on the overall reporting process of entity. Furthermore,
concerning the issues identified in the accounting treatment relating to any account, there
would be creation of transparency between such issues between the audit committee and
auditor due ti the identification of key audit matters.
Lehman brother case issue:
What did auditors do wrong?
This section discusses about the ineffective auditing practice due to the ineffective
auditing standards that failed to ascertain the accounting defects of the Lehman brother. The
failure of Lehman brother is considered as the largest collapse of the financial system with
the secondary reason attributable to the fair opinion by the auditors which duped many
investors into the wrongful investment decision making. Investors of the company were not
provided with great assistance in understanding the true financial performance of the Lehman
brother because the auditors and the auditing process was ineffective in identifying the key
audit matters that resulted in the failure of the corporate organization. The auditors were
negligent in reviewing the subprime loans that was issued by the banks for investors and the
long term projections considering the market uncertainties and risk was not reported by the
auditors. No investigation was conducted by the auditors on the defective accounting policy
of Repo 105 that was adopted by the large investment bank and accordingly they issued a
favorable audit opinion on the financial information (Gimbar et al. 2015). It was required by
the auditors to identify the reason for excess borrowing and its basis and their failure resulted
in the collapse. Therefore, it can be said that the failure was basically due to issue of
unqualified audit opinion as per the requirement of old auditing standard.
How key audit matters address the case:
Assessment of professional judgment by auditors is done in the new auditing standard
regarding the matters that should be communicated in the report. The transparency of the
financial report would have been enhanced by accounting for the key audit matters and
provided investors with the detailed of the financial information presented in the report. It is
done by the auditors highlighting the areas of material misstatements identified according to
the auditing standard. Furthermore, the auditors while framing the significant judgment and
determining the accounting estimates, uncertainty and assumptions would have evaluated the
management’s judgment (Auasb.gov.au 2019). Therefore, it is said that auditors would have
been able to identify the areas of significant judgment in the valuation of the accounts and
treatment under the auditing standard 701. The users would have been alerted on the defects
and the accounting gimmicks that misrepresented the financial statements.
Revision of ASA 570:
Investors have become well acquainted with the issues of the organization and their
organization’s ability to operate persistently due to the failure of organizations and after the
financial crisis. It is essential for the auditors to take into account the analysis of the
uncertainties which the organizations are exposed to for assessing their ability to operate
persistently. An assessment of the going concern should be conducted by the auditor along
with evaluating the appropriateness of the accounting policy associated with this particular
aspect. The auditor should make a conclusion remark on accounting policy used by the

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
management for going concern (Auasb.gov.au 2019). Furthermore, they are also required to
make reporting of the uncertainty if any with the going concern issue.
Importance of going concern in auditor’s report:
Auditors are entrusted with the responsibility for evaluating and analyzing the issue
associated with the going concern of reporting entity. It would be required by the auditor to
issue an adverse opinion on financial report of the entity for which there is an evidence of
using an inappropriate using the assumptions and the accounting basis regarding the going
concern. In this regard, it is essential for the auditors to obtain sufficient and appropriate audit
evidence on the assumptions and estimates made by the management regarding the entity to
continue as going concern (Knechel and Salterio 2016). Furthermore, it is also required on
the part of auditors regarding the existence of any material uncertainty doubting the ability of
the organization to continue as going concern to make conclusion and state why they think
there are issues with the same.
Evaluating the efficiency of key audit matters in the financial report of the chosen
banks:
In this section, the evaluation and analysis of the key audit matters presented in the
financial report of the banking organizations listed on the ASX has been demonstrated. The
selected organizations comprise of Commonwealth bank of Australia, Queensland bank,
Westapc bank, ANZ bank and National bank of Australia and Macquarie group limited.
The auditors of Queensland bank of Australia have assessed key audit matters such as
goodwill valuation, fair value measurements of financial instruments, intangible computer
software valuation and collective impairment provisions. All the key audit matters have been
identified and presented in a separate section for which a detailed explanation on the reasons
of why particular account is regarded as material. The identified key audit matters are
addressed by employing appropriate technique such as developing the test of control and
using the appropriate sampling plan (Boq.com.au 2019). The key audit matters are assessed
by making reference to the notes to financial statements where details of each of the accounts
are given.
When analyzing the financial report of National bank of Australia, it has been
ascertained that the auditors have not identified any key audit matters for the year ending
2018. The auditors have presented a relevant view of the financial statements of the bank and
have based their opinion as per the auditing standard of Australia and according to the
requirements of the code of ethics. Therefore, it can be inferred that either there are not any
key audit matters identified from the financial information produced by the bank or the
auditor have not complied with the requirement of ASA 701 (Capital.nab.com.au 2019).
The auditors of Macquarie group limited have formed their opinion based on the
proficient judgment and identification of the key audit matters. Such matters identified relates
to the consolidated entity and the company as a whole. Some of the key audit matters that
have been identified include valuation of financial liabilities sand assets, provision for loss, It
system and control, impairment of assets, deferred tax liabilities and tax payable. The reason
why the accounts are considered to be of most significance has been disclosed by referring to
the notes to financial statements (Static.macquarie.com 2019).

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
The identification of key audit matter of ANZ bank is done by auditors in relation to
the financial report as a whole. The identified key matters include provision for customer
remediation, accounting for divestments, financial instruments valuation, credit impairment
provisions and IT control and system. All the matters that are of significance in the auditing
process shave been addressed by the auditors using the appropriate audit procedures and
performing the proper assessments (Shareholder.anz.com 2019). In addition to this, auditors
also conducted an enquiry and obtained an understanding if the process of entity. Moreover,
the sampling plan has been developed that helps in testing the assertions related to each of the
accounts identified.
When analyzing the financial report of the Westpac bank of Australia, it was found
that an ongoing dialogue was maintained between the external auditor and audit committee
that the matters which are considered to be significantly important would be regarded the key
audit matters. A favorable opinion has been on the financial statements which indicate that
they present a true and fair view and there do not exist any material information leading to
materially misstate the financial information.
The auditors of Commonwealth bank of Australia have identified some of the key
audit matters such as provision for loan impairment, financial instruments assessment,
expected credit loss and provision for regulator action and risk. The assessment of the key
audit matters is done by developing the test of control and procedures such as testing the
accuracy and evaluating the valuation model (Commbank.com.au 2019).
It is inferred from the analysis of the key audit matters for the chosen banks all such
matters have been identified as per the requirements and responsibilities of the evaluation of
the financial statements and in the preparation of the financial report. In addition to this, there
has not been any separate opinion on the matters that are important for audit. Nevertheless,
the opinion on the financial system has been formed on the basis of the facts derived from the
key audit matters. In addition to this, the auditors are addressed such matters by developing
the analytical procedures and performing the proper test of control and conducting inspection
wherever required.
Does key audit matters achieved the purpose in the industry:
Evaluation of the financial report of all banks listed on ASX, it can be deduced that
while identifying the key audit matters, auditors have maintained professional judgment and
have determined appropriate threshold. Auditors have also presented the detailed reason by
referring to the financial statements notes in relation to the particular account explaining why
the matter was regarded as key audit matters and how it is relevant in the auditing process
and plan. Furthermore, auditors have implemented appropriate techniques wherever required
to address the matters identified. The financial report is an evident of the well documentation
and announcement of the key audit matters to the people and management as a whole
(George and Melinda 2015). Such disclosures have enhanced the transparency of the
financial information provided and therefore they formed the basis of strategic investment
decision making by the investors.
Conclusion:
The current paper demonstrating the importance of the new auditing standard has
revealed that its introduction has resulted in improving the transparency of information
provided to the users. It was also ascertained that the introduction of ASA 701 in the
aftermath of the financial crisis have necessitated the discourse of key financial matters.

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Moreover, the auditors have also placed great importance on addressing the issues associated
with going concern and its relevance in determining the financial position of the entity. It has
been found from investigation on the case of Lehman brothers that the favorable opinion on
the misrepresented financial statements of the bank has resulted in its downfall. From the
analysis of the key audit matters of the chosen banks, it has been ascertained that the auditors
have identified as well addressed such matters and formed their audit opinion based on their
professional judgment as well as key audit matters.
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INDEPENDENT AUDITORS REPORT
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Appendix:
ANZ bank:

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Commonwealth bank of Australia:

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

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
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Key Audit Matters of NBA:

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

CRITICALLY ANALYZE AND EVALUATE KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITORS REPORT
Key audit matters of Macquarie group limited:

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

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