Auditing Case Study: ASA 701 and Key Audit Matters in Banking

This case study report examines the concept and significance of Key Audit Matters (KAM) as described by auditors in annual financial statements. It focuses on the effectiveness of the new auditing standard ASA 701 in enhancing transparency and providing better results to users. The report begins with an introduction to auditing and KAM, followed by a detailed analysis of the ASA 701 standard. The task section further explores the standard's features, scope, and reasons for its implementation. The study then applies these concepts to the banking industry in Australia, providing examples from Westpac Bank, Bank of Queensland, and Suncorp Bank. The report highlights specific KAMs, such as expected credit losses, valuation of financial instruments, and goodwill valuation, as they relate to each bank. The case study aims to provide a comprehensive understanding of how KAMs are communicated in auditor's reports and their impact on financial reporting, concluding with a discussion on the importance of these matters for stakeholders and the overall financial health of the banking sector.

Auditing Case study

EXECUTIVES SUMMARY
The report includes the concept and importance of Key audit matter as there are consider
to be those matter which are described by auditor while auditing annual financial statements. The
respective report also summarise the effectiveness of new auditing standard in the meanwhile
that gives more transparency and better results to user. The statement of all KAM in the
investigator document must consider a remark to the accompanying disclosure that are either
listed in financial statements.

Table of Contents
EXECUTIVES SUMMARY ..........................................................................................................2
INTRODUCTION...........................................................................................................................2
TASK ..............................................................................................................................................2
New Auditing standard ASA 701 ..............................................................................................2
CONCLUSION ...............................................................................................................................8
REFERENCES ...............................................................................................................................9
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INTRODUCTION
In accounting term, a type of report that is prepared and presented by auditor that gives
an opinion relevant to reliability and credibility of companies annual statements is known as
auditor report (Lee and Talen, 2014). Key audit matter are described as matter which are gives
by auditor in their professional decision that are most crucial within audit program about the
financial statements of company during a respective year. In order to better understand the
importance of KAM banking industry of Australia have been selected.
In this report, idea and understanding of new auditing standard ASA701 have been
elaborated. In addition, proper analyse of Key audit matters within independent auditor report
related to current financial statements of banking industry is discussed.
TASK
New Auditing standard ASA 701
The Auditing standard board of America institute of certified public accountant have
developed generally accepted auditing standard. The GAAS is defined as the set of specific rules
and systematic framework which is used by respective auditor in order to perform audit work for
a company. This help to make sure the authenticity, accuracy, verifiability about auditor actions.
To just get ahead of the unmemorable style of the interim report, such a need to convey key audit
matter have affected (Gao and Zhang, 2017). The addition of Key audit subject would allow the
audit report further relevant, informative and therefore will attract the attention of the annual
reports users to issues which were greatly essential to the firm's formal auditor's professional
opinion. The auditor committee established the ASA 701 record keeping norm. Coordination of
core internal audit problems in independent bodies monitoring. The internal audit requirement
was adopted on December 1st, 2015. The auditing and assurance standard board established the
Auditing standard act 701 which is related to communicating of KAM in the independent
Auditor report. This collected edition of ASA 701 contains corresponding changes found in some
other AUASB accounting norm up including 30 May 2017. Application of ISA 701 is centred on
the obligation generated by the Committee of International Auditing and Certainty Standards to
check the progress and advancements in audit disclosure. Essentially, the internal audit criteria
are related to the common goals of public companies' financial reports. So all of these norms are
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applied when external auditor identify to describe the primary audit matter in the final report.
The main features of respective standard are discussed underneath:
 The main communication of KAM that are determined by the Auditor are mainly
concerned within the organization.
 All the Key audit matter that are included in the annual report encourage the external
auditor to make a sound decision about the financial stability and position of company in
a year (Han, Li and Stroulia, 2015).
 It also support auditor to evaluate the crucial audit concerns like determination of main
issue of company which need the attention of auditor the most.
 It also disclose the patter and approach which is being used to elaborate the Key audit
matter. They also need to recognise areas for improvement which need more assessment.
Investigator opinions on the effect of important events, major decisions, urgent matters
that should be included in reports.
Scope of ASA 701
 The main aim of interpreting the KAM is to increase the main abstraction value of
auditor reports which is by delivering better clarity in context of audit that are executed in
specific time.
 The auditing norm fulfils auditors' duty to convey auditors' core monitoring problems.
This is meant to determine both the auditors decision as to what kind of description is
required to be included in report of auditors (Hoşgör and Fischbeck, 2015).
 In addition, the identification of key audit concerns in the inspector's report may provide
intended consumers with a forum for more contact with members and those accountable
for management on certain matters involving to the business, the financial statements or
the audit conducted. This Auditing Rule applies to inspections of the mentioned entities open source financial
statements and conditions where the auditor without it decides to disclose key compliance
matters in the inspector's report. This auditing requirement also refers when the auditor is
needed to interact key audit issues in the audit document by law or policy.
Reasons for Issuing Auditing Standard ASA 701
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 In the situation where reason for the decision of the accountant never to disclose a subject
considered to be a significant audit issue throughout the auditors study.
 Issues which require considerable auditor consideration as defined as auditing
requirements. As well as reasons for the auditor's opinion as to how these issues are
relevant audit subjects or not. Issues that require attention as determined in compliance with this regulatory compliance
framework and auditors decision reasoning are deciding whether or not these issues must
be regarded as a main audit question.
Objective of new auditing standard
The auditor's tasks are to evaluate and deal with main audit concerns by identifying it in
the inspector's report after making a judgement on the annual report. The auditor's tasks are to
evaluate and deal with main audit concerns by identifying it in the inspector's report after making
a judgement on the annual report (Alqahtani and Gamble, 2014). From the matters
communicated to those charged with ruling, the accountant will agree on such matters that
require significant involvement by the accountant in performing the audit. The auditor will
follow basic components such as:
 Higher places of risk for content shortcomings or real risks identified in accordance with
Auditing standard act 315.
 Significant auditor decisions pertaining to sections of the financial statement requiring
substantial performance judgement, including accounting predictions defined as strong
expected uncertainty.
The ASA 701 should be included in the financial statements of companies which would
have obtained their accounts for the year of 15 December 2016. The purpose of the study is to
promote greater consumer trust in the coverage of the organization and even in the assessment
process. The primary objective of this was to ensure clear accountability for company customers,
so that they can make decisions smoother (Westhausen, 2017). The new standard was created to
encourage auditing activities in line with the ISA 701 international internal audit requirements.
This is the primary goal for all the organizations embracing this new benchmark.
Banking industry of Australia:
The current auditing methodology (ISA 701) refers to reviews of the specified
organizations' full set of special purpose financial financial reports and once the auditor chooses
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though to disclose KAM in the inspector's paper. To put this topic into context banking industry
of Australia is selected. As every bank is required to formulate financial statements which helps
to describe the actual and true value of company or bank within that respective year (Lee Cooke
and Xiao, 2014). It is observed that banking sector is consider to be the pillar Australian
economy therefore external and internal auditor are more focused on developing better
descriptive and understandable report to contribute to the sector of public certainty and stability.
Interacting important audit concerns (KAMs) in the auditor's document reflects a relatively new
norm to help audit efficiency. Key audit matter disclosure by auditors is reacting to the increased
competition from investors and stakeholders for greater accountability and input in the
evaluation process. To better understand the disclose of KAM in annual report are being
discussed with support of few banks of Australia.
Westpac Bank: It is the first and the oldest bank of Australia and New Zealand (Westpac
Bank, 2020). From the annual report some of the crucial audit matter are discussed underneath:
Provision for expected credit losses:
 There has been considerable judgement on the expected credit loss by the auditor
that in effect resulted in a high level of accounting firm subjectivity in ECL
related processes and presumptions was using to calculate the ECL.
 The condition for ECL on overall loans were $3,913 Million for respective group
and for parent group ECL was $3,378 Million on 30 September 2019.
 The true extent of the assessment evaluations included the evaluation of audit
evidence relating to key data components used throughout the ECL.
 The participation of experts with advanced skills and expertise to aid in the testing
of the delivery of ECL loans by assessing the rationality of the concept and the
conclusions applicable to MES and SICR.
Valuation of Level 2 financial instruments at fair value
 The Group and the Parent made substantial judgements in determining the market
valuation of Level 2 financial products utilizing internal designs, including components
as well as other estimates. Major assessment and audit efforts have been made to examine the evidence gathered in
relation to assessment frameworks, inputs and conclusions, and the audit initiative
requiring the use of skilled and knowledgeable.
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Compliance, regulation and remediation provisions and contingent liabilities
 The clauses on enforcement, supervision, and decontamination apply to concerns of
alleged wrongdoing in providing services to clients found as a consequence of
enforcement action and organizational assessments.
 There was a reasonable decision by the bank to whether or not the loss was likely to have
happened and to measure clauses that used the duration, extent and amount of the
relevant cash outlays.
Bank of Queensland: The BOQ is consider to be the biggest regional bank that are
mostly operated by local manager (Bank of Queensland, 2020). The KAM of respective bank are
as follows:
Expected credit loss (ECL) for loans
 Monitoring the accuracy and consistency of specific data aspects used in a sampling of
consumers inside ECL templates, like reviewing year-end accounts to the general ledger
and documentation of redemption and vulnerability rates to source codes. Evaluating the ECL predictions toward forward-looking economic and financial
information available, like real-GDP estimates, housing price index and rates of
unemployment.
Valuation of goodwill
 Assuming the suitability of the VIU approach used by the Merged Company and Bank to
conduct the regular goodwill impairment check toward the international standards
criteria. The industry in which the Incorporated Company and Bank works is extremely
competitive but faces lower growth and legislative changes, thus increasing the risk of
incorrect forecasts.
Valuation of financial instruments at fair value
 The assessment of financial instruments calculated at fair market value is considered a
possible Key audit concern because assessing the fair value of financial products requires
a substantial degree of decision by the merged Company and the Bank. The degree of judgement rises when key profitability variables were not quickly available
in the market and involve further assessment. This increases the possibility of mistake,
and contributes to audit difficulty.
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Valuation of intangible computer software
 The overall amount is being capitalised within the respective year. The type and sum of
expenses to be capitalized in compliance with the accounting standards criteria, which
may necessarily be arbitrary for computer software programs that are produced
domestically.
 That evaluation is predicated on the asset's desired use. It can be judgemental and reliant
upon events in the future, such as technological advances, thus increasing the difficulty of
assessing useful life.
Suncorp Bank: The KAM of Suncorp Group Limited are considered in the the final audit
of the financial statements (Suncorp Bank, 2020). These are as follows:
Outstanding claims liabilities and reinsurance and other recoveries
 Assessment of future income for damages made at the filing date but has not yet been
disclosed to the Group. As it could take several years to file a complainant and the actual
costs may be affected by causes undisclosed at or outside the Group's control at the end
of financial year. Complicated the main cash flow prediction assumptions used throughout the VIU model,
leveraging experience of the Incorporated Organization and Company, their historical
success and management inquiries. Thus have contrasted core observations with FY20
budget accepted by the Incorporated Entity and the Bank's Board.
Expected credit loss provisions for loans and advances
 Utilizing AASB 9, the measurement of the ECL on loans and advancements requires
significant judgement, which integrates forward-looking presumptions that constitute the
perspective of the bank on the long term economic establishment. It relies on predicting the probability of an adverse incident and the current value of
projected future cash flows with significant prediction volatility. They concentrated on
the high level of prediction volatility associated with company and agribusiness
mortgages, since the expected cash flows rely on potential and unpredictable events.
Valuation of Goodwill
 In the present time the Company has faced competitive environment pressures and new
regulatory changes. These factors raise the risk of incorrect predictions or a broader range
of possible results for anyone to acknowledge and the probability of loss of goodwill.
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 The Suncorp bank has hired an existing specialist to help set the cost of capital. It is given
the complex nature of the Price to earning and discount rates, have engaged assessment
experts to complement due to which audit team members have used this as a KAM.
Information Technology
 Access restrictions and improvements to IT processes are vital to the collection of
financial data as well as the preparing of a financial statement that offers a true and fair
representation of the financial situation and results of the Bank.
 The IT processes and systems, because they involve the monetary monitoring and
documentation of transfers, are a core audit concern and our audit methodology will
differ greatly based on the successful performance of the IT controls of the Bank.
CONCLUSION
In the end of this report, it has been concluded that auditing is consider to be an important
activity which must be followed by each type of organisation. This support to check the accuracy
and reliability of figures used in preparing financial statements. As per New auditing standard
701 in the auditor reporting help a auditor to communicate Key audit matter within their final
report. It is observed that all KAM determined by a Auditor group are communicated to internal
auditor to make them understand that these are fully addressed and proper plans are made to
remove the matters.
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REFERENCES
Books and Journals:
Lee, S. and Talen, E., 2014. Measuring walkability: A note on auditing methods. Journal of
Urban Design. 19(3). pp.368-388.
Gao, S. S. and Zhang, J. J., 2017. A comparative study of stakeholder engagement approaches in
social auditing. In Perspectives on corporate citizenship (pp. 239-255). Routledge.
Han, Z., Li, X. and Stroulia, E., 2015, June. A hierarchical security-auditing methodology for
cloud computing. In 2015 IEEE International Conference on Services Computing (pp.
202-209). IEEE.
Hoşgör, E. and Fischbeck, P. S., 2015. Virtual home energy auditing at scale: Predicting
residential energy efficiency using publicly available data. Energy and Buildings, 92,
pp.67-80.
Alqahtani, S. and Gamble, R., 2014, June. Embedding a distributed auditing mechanism in the
service cloud. In 2014 IEEE World Congress on Services (pp. 69-76). IEEE.
Lee Cooke, F. and Xiao, Y., 2014. Gender roles and organizational HR practices: The case of
women's careers in accountancy and consultancy firms in China. Human Resource
Management, 53(1), pp.23-44.
Westhausen, H. U., 2017. The escalating relevance of internal auditing as anti-fraud
control. Journal of Financial Crime. 24(2). pp.322-328.
Online
Westpac Bank. 2020. [Online] available through:
<https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2019_Westpac_Group_Annual_Report.pdf>.
Bank of Queensland. 2020. [Online] available through:
<https://www.boq.com.au/content/dam/boq/files/shareholder-centre/financial-results/
2019/annual-report-2019.pdf>.
Suncorp Bank. 2020. [Online] available through:
<https://www.suncorpgroup.com.au/uploads/FY19-Annual-Report_1.pdf>.
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