Key Audit Matters in Independent Auditor’s Report: Banking Sector-Case Study 1
The new auditing standard ASA 701 communicating key audit matters in the independent auditor’s report was developed in the wake of the global financial crisis (note: following the demise of Lehman Brothers shortly after it received an unqualified audit report, i.e. no prior warning of its demise). This development is in response to calls from shareholders to know more about the companies they invest in (students would need to explain what happened in Lehman Brothers which would evidently be a key audit matter if such an auditing standard had existed then). Further, investors have also requested earlier warnings of potential issues that may exist with respect to an entity’s ability to continue as a going concern which resulted in the revision of ASA 570 (ISA 570) going concern (to include a going concern uncertainty paragraph. Note: during the global financial crisis there was an increase in emphasis of matter paragraph mainly relating to going concern uncertainty now replaced by a “material uncertainty related to going concern” paragraph).
Required: Students are required to research into the rationale for the new auditing standard ASA 701 and explain clearly what it is. Each student is to select an industry, eg. banking, mining, etc and analyse key audit matters in the independent auditor’s reports of all companies in that industry in ASX top 100 listed companies so as to evaluate the efficiency of reporting key audit matters in the independent auditor’s report (i.e. does key audit matters disclosure provide more information to users).
Solution
Executive Summary
This report is based on Key Audit Matters (KAM) of banking sector of Australia. Accounting standards help to improve financial accuracy and reduce the chances of fraud. Implementation of ASA 701 and ASA 570 has made it mandatory for auditors for disclosing key audit matters in the audit report identified during the audit procedures. It would help to reduce corporate governance-related frauds. Audit reports for selected banks in this study suggest that they should have disclosed their key audit matters in their respective audit reports except for Westpac Bank. If this standard would have been implemented earlier, then it might have reduced the chances of significant failure of Lehman Brothers and other giant companies like WorldCom.
Introduction
Effective implementation of auditing standards not only improves the reporting and accuracy of financial statements but also is beneficial from an economic perspective. It helps to create the value for the financial statements and reports for the stakeholders of the organization. It enhances the shareholder’s wealth as it makes sure that the information related to the amount invested by shareholders is being disclosed properly or not in financial statements. ASA 701 is specifically important after identification of significant fraud cases like WorldCom, Lehman Brothers, and related cases. These standards do make sure that the audit procedures have been implemented more professionally (Baker et al., 2014).
Lehman Brothers Case:
Lehman Brothers is a prominent bank, and in the US, it is one of the top banks. Lehman Brothers were able to survive the world largest disasters like the Great Depression, two world wars, and many other financial crises. Lehman Brothers were not able to stop its downfall in 2007 because of recent global financial crisis mostly because of the enhanced amount of leverage and adventure into subprime lending facilities by the bank to its customers. Auditor of the company was not able to recognize the increased risk associated with an investment in subprime-related securities even though subprime-related securities were failing in the market. This failure was due to the global financial crisis and the collapse of the United States housing bubble (Sraders, 2018). It is noted that the implementation of auditing standard 701 related to communicating key audit material would have significantly contributed towards providing information regarding concerns of Lehman Brothers. These concerns are related to providing financial statements for the shareholders and stakeholders of the company. It would have provided advance caution to shareholders and stakeholders for investing. Moreover, Lehman Brothers should have looked towards the risk to Lehman Brothers.
ASA 701:
Auditing standards 701 are associated with effectual communication of key audit matters in the independent report, which is provided for the audit of financial statements of the company by the auditor. Moreover, the aims of this standard are to provide communication to shareholders of the company. This standard is also focused on determining elements related to key audit matters. This standard is also associated with analyzing the governance implemented in the organization and significant audit attention required for such governance-related matters (Auditing and Assurance Standards Board, 2015). The standard is also considered as an area associated with a high level of risk, the significant judgment of the auditor, a significant judgment made by the management, and the influence of significant transactions and events. This audit standard also allows the auditor to decide which significant matter should be reveald in the report issued by the auditor in the annual report of the company. It has been recently formulated. It has been implemented on December 15 and has been compulsory to consider the standard from auditors during conducting an audit and it is imperative for the auditors to include a paragraph in the report communicating the key audit matters to shareholders and stakeholders of the company.
One of the most significant objectives behind formulating this standard is to provide clear public interest for financial statements of the organization and to increase the standard of quality related to the audit report for the financial statements. Audit firms should make sure that auditors are capable of enforcing this newly formulated auditing standard during his audit practice (Auditing and Assurance Standards Board, 2015).
ASA 570:
So far as the standard of auditing No. 570 is concerned, it is related to “Going Concern” concept under Generally Accepted Accounting Principles. Some of the main features related to auditing standard 570 have been discussed in this assignment. One of the most significant objectives of this standard is to increase the audit quality by focusing on “Going Concern” of the business. The recent revision of auditing standard 570 is associated with enhancement of audit report issued by the auditor related to the financial statement. It is significant for the auditor to make sure that “Going Concern” should abide by provisions and standards of international standard boards. If there is any kind of risk related to the “Going Concern” of the business, then it must be disclosed in the report developed for audit purpose accordingly. Thus, it serves the purpose of providing full and detailed information regarding the future aspect of the business to potential shareholders and stakeholders of the company (Auditing and Assurance Standards Board, 2015).
Key Audit matters in selected Industry:
Commonwealth Bank of Australia:
The Commonwealth Bank of Australia is a multinational bank which is associated with conducting business operations in Asia, Australia, the United States, New Zealand, and the United Kingdom. The bank is responsible for providing employment opportunities to approximately 52,000 employees according to 2017 statements, and the headquarters of the bank are situated in Sydney, Australia. According to the 2017 financial statements of the organization, Commonwealth Bank of Australia was able to generate 26 million Australian dollars revenue. The bank is also responsible for managing different subsidiaries like bank-west, Commonwealth securities, and other related subsidiaries.
To analyze the disclosure related to key audit matters, annual report for 2018 for Commonwealth Bank has been analyzed. As per annual report 2018 for Commonwealth Bank, proper disclosure has been provided related to key audit matters. Different major audit-related matters related to the financial reports of the bank for the current year has been disclosed in this section of the audit report. The proper table has been formulated providing details regarding the identified significant audit matters and their relationship with the conducted audit procedures. Some of the identified significant audit-related matters in the audit report by the auditor includes identification of impaired loans by Commonwealth Bank, reliability and integrity related with credit information maintained by the system implemented in the group, transfer of data from the underlying system available in the group to the environment provisioning models and assessment of the group related to integrity of these implemented models (Pinto & Morais, 2018).
Significant and key audit matters present in the audit report stated that proper examination of cash flow forecasting was made to examine the identified significant audit-related matters. The report also stated that the completeness, as well as the accuracy of the disclosed data in the financial statements, was also analyzed. Different market-related practices and assumptions made by the group related to the identified significant matters were also analyzed. Auditors also compared the calculations related to the implemented models with the calculations related to the expected numbers by formulating a simple sample basis. Key audit matter which is part of the audit report has provided detailed information regarding every identified audit matter (Common Wealth Bank, 2018).
Medibank Private Limited:
Medibank Private Limited is a national Private Health company based in Australia. It is considered to be the second largest Health Insurance related company in Australia after Bupa with approximately 4 million members. These members formulate approximately 29 % of the total market, which is considered to be a significant share. Medibank has a vast experience of more than 40 years related to the health sector in Australia. It is responsible for providing health-related services to members in Australia, such as mental health support, integrated primary care, preventative care, and other related Healthcare Solutions. Medibank Private Limited is also listed on the Australian securities exchange, and the headquarters of the Medibank private limited is situated in Melbourne, Australia. On an annual basis, management of the bank is responsible for publishing annual report related to the performance of the business, and this annual report also contains the statements of the bank and the auditor report for the financial statements for that specific financial year. To analyze key audit matters of the audit report, statements, and annual report 2018 for the Medibank private limited has been analyzed.
Annual report 2018 of Management Private Limited contains audit report for the year 2018, and it also contains key audit matters related information. Key audit matters provided information related to material elements identified during the audit procedures, the scope of the audit related to the identified material elements and key audit matters. According to audit matters, auditors PWC identified some significant matters during the audit procedures. These identified significant audit matters are estimation related to the outstanding claims liability and dependence on an automated process implemented in the organization and controls implemented in the organization. Detailed information has been provided in the key audit matters portion of the audit report related to these identified significant matters (Segal, 2017).
Audit report suggested that estimation related to outstanding claims liability is considered to be one of the most significant aspects for any insurance related banks. The judgment of the auditors was used to estimate the type as well as the amount related to the claims which were incurred during the last two months of 2018 part 20 claims have not been yet received or processed by the end of the year 2018. Auditor’s judgment was also used to estimate the speed related to the processing of the claims by the providers issuing claims on behalf of the policyholders. Auditor’s judgment was also used to analyze the claims cost inflation as well as the medical Trends influencing the utilization of advantages by the members of the insurance services provided by the bank. Key audit matters also analyzed Information Technology related implemented in the company to mitigate the risk related to the chances of fraud or error. The understanding was developed related to the development and changes of the information technology program, access to the data and program implemented in the organization, computer-related operations, data migration and finally processes implemented by using Information Technology governance Framework (Medibank, 2018).
Bank of Queensland:
Bank of Queensland is an Australian bank which is headquartered in Queensland. The bank is considered a top performing and bank of large scale in Australia. It has approximately more than 252 branches operating throughout Australia. Out of these total branches, 78 branches are corporate branches, and the remaining 166 branches are owner managed branches. To analyze the independent auditor report of Bank of Queensland, an annual report for the year 2018 has been analyzed. According to the audit report of Bank of Queensland in the annual report of 2018, audit firm KPMG has conducted the annual audit of the retail bank in 2018.
The audit report of the bank of Queensland contains the paragraph related to matters which are there for audit purposes. Different key audit matters have been identified from the consolidated financial statements of the bank and have been accordingly reveald by the auditor in the audit report. These identified key audit matters include provisions developed for specific and collective impairments related to the loans and advances at amortized cost, valuation and calculation related to Goodwill of the company, valuation and calculation related to the intangible computer software being used by the company, fair value measurement technique used by the company for the financial instruments and information technology system implemented in the company and the control environment prevailing in the company(Altawalbeh & Alhajaya, 2019). These factors have been identified as significant audit matters and have been disclosed accordingly in the audit report by KPMG in annual report 2018 of Bank of Queensland.
Key audit matters paragraph also suggested that the identified metals are based upon the professional finding of the auditors and are considered to be major concerning the audit of the financial statements related to 2018. Auditors suggested that the audit opinion has been formulated by considering these significant audit-related matters as well. Auditors are not bound to provide separate opinion related to this identified significant matters, but they are required to be disclosed in the audit report for expanding the information related to significant audit matters for enhancing the decision-making process of shareholders and stakeholders of the company (Bank of Queensland Limited, 2018).
Key audit matter related paragraph also provided a detailed table related to the identified matters and their related information. It also provided information regarding the fact that how the identified matter has been addressed in the audit of the company by KPMG. This part of the audit matter report provided information on how to audit procedures were applied on the financial statements of the company and how identified significant audit issues were associated with the applied audit procedures during the audit process (Gimbar et al., 2016).
National Australia Bank Limited:
National Australia Bank Limited is a limited public bank and operating under the industry of banking and financial services. It was formulated back in 1982 and the headquarters of National Australia Bank Limited located in Melbourne, Australia. This bank is responsible for providing Financial Services to customers in Australia, New Zealand, and. Provide different products and services related to banking, consumer banking wholesale banking, insurance, and Wealth Management. According to the 2016 annual reports of the company, approximately 35000 employees are working with this Bank. This Bank is one of the most prominent and successful institutions in the financial industry of Australia about market capitalization, customers, and earnings.
To analyze the auditor report, financial statements of the company for the year 2018 were analyzed, and the annual report for the year 2018 was analyzed. According to the annual report 2018 of the company, Audit Company EY conducted the annual audit of the bank in 2018 and provided their report developed and prepared by independent auditors, and it is presented to the members of the National Australia Bank Limited in annual report 2018. After analyzing the audit report provided by the auditor of the bank, it can be suggested that proper information has been disclosed related to key audit matters identified by the auditor during the audit. There were different significant audit-related matters which have been identified by the auditor during the audit procedures (Sirois et al., 2018).
Key Audit matters portion of the audit report suggested that different samples were analyzed during the audit for identifying the exposures related to the significant deterioration in credit quality; samples were also analyzed to evaluate the expected loss related calculation. These matters are significantly important for National Australia bank because expected loss calculation is a concept which has been implemented in the bank and his beak used on an individual and daily basis due to which it is closely associated with operational risk of the bank.
Auditors also considered the process implemented to identify as well as analyze and manage the climate associated risk related to the group loan portfolio. Auditors also analyzed the adequacy related to the financial reports of the company. Auditors also analyzed the information technology system implemented by the organization, and proper IT specialist was used to analyzing the information Technologies system implemented by the company and control system prevailing in the company. The significant objective behind implementing audit procedures on the information Technologies system implemented by the organization was to make sure that the implemented Information Technology systems and controls are according to the requirements of the financial reporting process of the complete group. It is important to make sure that the available Information Technology system and control system is meeting the financial reporting requirements to reduce the chances of frauds and errors(National Australia Bank, 2018).
Westpac Bank:
Westpac banking corporation is an Australian bank, and it is associated with providing different kinds of financial services to two customers in Australia. It is listed in the Australian stock market, and it has subsidiaries like Saint George bank, bank of Melbourne and other related banks. To analyze the key audit matters related portion, financial statements, and annual report, 2018 of the bank has been analyzed. Annual report 2018 analysis states that the audit was conducted by PWC. The report does not contain a detailed audit report. The audit report available in the annual report 2018 only suggest that the auditor’s Independence declaration report has been conducted properly, and the auditor’s identified the financial statements to be formulated under qualified opinion. Annual report 2018 of the bank does not contain detail information regarding key audit matters. Audit report suggests that all the Australian accounting standards have been implemented by the management to formulate the financial statements 2018 of the bank (Westpac Bank, 2018).
ANZ Banking Group Limited:
Australia and New Zealand bank is an Australian multinational bank which is associated with providing different kinds of financial services to customers in Australia and New Zealand. It is considered to be the third largest bank in Australia from a market capitalization perspective. To analyze the disclosure related to ASA 701, annual report 2018 of the bank has been analyzed. Audit report suggests that auditors have properly disclosed paragraph related to key audit matters in which important audit matters have been disclosed which were identified during the audit procedures. Some of these identified significant audit matters include Information Technology system and control system implemented in the bank, accounting related to divestments, the provision related to customer remediation coma evaluation related to financial instruments recorded at fair value and provision related to credit impairment. These metals were identified as the most significant matters during the audit of financial statements of the bank by the auditors (ANZ Bank Limited, 2018).
Conclusion
Analysis of key audit components present in the report for the selected four banks suggests that all these banks have disclosed required information related to significant and material financial statement elements according to the recently formulated requirements of ASA 701. This will certainly help investors and stakeholders in their decision-making process. It will also help to improve the level of corporate governance in limited public organizations and will reduce the chances of significant frauds in the future in public limited companies.
References
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