Evolution of Auditing Standard

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Requirement

1- Write a report on a Audit in about 2500 words with reference to Harvard .

Solution

Introduction-

This report consists of the research of the rationale of the new standards of auditing that is ASA 701 and its key factors that affect the organization. The report will be based on the understanding which shall be refined in respect to the significance and the importance of the new standard of auditing like ASA 701 that has been advanced after the universal financial crisis in order to give the company’s shareholders with a good and best view of few of the major reasons that can affect the making up of decision procedures of the shareholders of the organization. These matters are provided to the shareholders for the purpose of refining a good understanding of the effects of the new standards of auditing over the decision making procedures of the different kinds of stakeholders present in a company. The major reasons that have been stated in this report of the independent auditor the reports of the companies that are related to the banking sector and that come in the top 1000 industries that has been listed in the stock exchange of Australia shall be analyzed and discussed. When the whole process of the analysis and discussion over the different types of auditing matters that are normally listed up in the financial statements of the mentioned banks will be done then the conclusion of this report will be provided which will draw the attention to the usefulness of implementing of the new standards of auditing. 

The association of the new standard of accounting and the Lehman Brothers shall be harrowed from the downfall of the firm in 2008. Because of the collapse of the firm and the ensuing financial mess that led to the evolution of the ASA 701 the key audit matters of communicationin the Report of the Independent Auditor (Cordo? 2015).  The evolved and developed auditing matters of communication ASA 701 was able to address those auditing issues that were not addressed before in those times and this new auditing matters also audited the Lehman Brothers. This new standard of auditing method was recommended in the firm since the old method of auditing was not capable of fulfilling the loopholes of the firm and because of this poor auditing many loopholes resulted in the collapse of the old auditing matters of communication (Sorsa 2016). If this type of developed standard of auditing had been there during collapse then various major audit matters would have been noted and suggested to the Lehman Brothers (Ratzinger-Sakel and Theis 2018). 

Major audit elements discussed in the independent auditor’s report of the top banking industries listed in stock exchange of Australia:

National Australian Bank Limited:
Provisions referring to the reconstitution of the entity:

The administration of the National Australian Bank endorsed a method that help the company in accelerating this company’s growth agenda. After endorsing the growth agenda, it became very necessary for the management of this industry to transcript a provision in awe of prolixity, pertaining cost and outplacement for the management of the project. This issue was being taken as a major matter related to auditing by the auditor of the bank because of the high amount of judgment in respect of the understanding, measurement and exposures which are developed by the management of this industry to the provisions of restructuring (Nab.com.au. 2019). Various judgment areas of this industry are as:

  • As far as the recording provisions of restructuring by the industry are considered the standards of the Australian Accounting has issued various guidelines. If the plan of the company gets satisfied with the guidelines that are issued under various standards then an effort towards the plan is made (Hooks and Tooley2015). 

  • The hypothesis that has been adopted by the management of the company in order to determine the number of the unnecessary employees and their authorization in the industry. 

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Information technology used by the entity and the curb that are operated over the framework of financial reporting:

It is seen that the key features of the whole process which is required in the preparation of the financial report of the entity depends totally on the various systems of the information technology.These technological systems use the measures that are automatic in nature and various controls that are pertinent to the procedures of extracting and storing of several information (Asx.com.au. 2019).  One major factor that is taken into consideration while making up of these systems is the due consideration. As this is given to the fact that the functions of the system is based on the access of the appropriate user as well as the changes that have been made in the protocols of the management are followed up earnestly by the system (Feng et al. 2017). 
It is observed that the protocols that are used by the systems are significant in nature, the major reasons of the importance of the protocols is that it provides the IT structure of the entity and the change in the contained data within them are authorized and made by the appropriate authority only. These are taken as the main audit element since the data and informations major portion that the auditor of the industry audits derived from these systems (Asx.com.au. 2019). Thus the auditor ensure that fair amount of processes are employed to maintain the accuracy and the security of the systems. 

Provision in relation of the credit ruination on loans at harmonizing cost:

The different kinds of provisions that are related to the credit ruination of the entity are performed by the guidelines of the Australian Accounting Standards. AASB 9 is considered to be the major Australian Accounting Standard (Niescho 2018). The reason for determining AASB 9 as the major audit matter is the high amount of judgment that is included that is the timing and the high level of provision of the entity. Some major judgments that has been applied by the entity are as:

  • The first judgment is the different kinds of interpretations which are being made by the entity in order for determining the amount that needs to be recorded as ruination according to the provisions of AASB 9(Asx.com.au. 2019).   This same interpretation is reflected in the model of credit loss that has been enforced by the group. 

  • Secondly, the assumptions that the entity management utilizes is donefor utilizing the same assumption in the credit loss model.  The same judgment is utilized in order for conducting appraisal over the liability of an individual on cumulative basis. Some elements that are utilized in the model and which are also being used by the executive of the entity include the financial status of the antithetical party, the future expectation of the cash flow and various factors of the macro-economic(Asx.com.au. 2019). Few of the forward factors of macro-economic are the rate of interest, entity’s gross domestic product’s growth rate, unemployment, and the cost of the property prevailing in the market. 

  • Thirdly it is seen that some factors are there that are not nicely captured by the model of credit loss of the entity. It sees forward for incorporating the forward looking reports so that competent amount of reflection is done of the external and internal factors which are not emulated by the current model aptly (Cordo? and Fülöp, 2015).  

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Commonwealth Bank of Australia:
Judgments included in the methods of valuation of financial instruments:

It is seen that the full value of the financial instruments that is clutched by the entity is equivalent to nearly 17% of the full credit of the entity and nearly 5% of the whole debt of the entity (Commbank.com.au. 2019). The different kinds of financial instruments which are clutched by the entity are as:
1.    The credits and debts that are there in the life insurance department.
2.    The liabilities and the credits that are cognate in nature. 
3.    The expenses that are classified by the entity as feasible for sale. 
4.    The different kinds of discounted bills and the various credits that have been leveled by the entity at decent value. 
The maximum of the instruments that are clutched by the entity are thought to be simple in nature. The reason of considering the instruments as simple is the decent values of these instruments are based on the various rates and costs that are popular in the prevailing market (Cornish 2016). The entity management segregates maximum of the instruments thatare based on the guidelines that are broadcasted by the Australian Accounting Standards. These instruments are divided into two levels such as Level 1 and Level 2 (Commbank.com.au. 2019). The company’s auditor has considered these as the major audit matters because of their huge financial importance to the entity.  Some financial instruments are clutched by the entities that are classified inside the heading ‘Level 3’ according to the issued guidelines of the Australian Accounting Standards. In order to value these types of financial instruments some extra amount of inputs are needed such as the additional judgment level (Bell and Hindmoor 2019). The reason for the same is that it is not feasible to consider observable inputs since they are freely available in the market because of the important presence of complexity and liquidity of the market which is related to the merchandise of the entity (Commbank.com.au. 2019).  It is seen that the quantity of such financial instruments is limited when compared to the whole quantity of the financial instruments, and then also it is considered as the main audit matter because of the reason that they include huge levels of judgments when they are compared to the other instruments. 

Provisions created for organizing peril and regular action:

The management has affianced in the formation of the provisions in respect of the various legal proceedings that are run by the management in the court. In addition to these proceedings various reviews and investigations are operated by the regulators. These involve the proceedings that are being run reciprocal to the civil proceedings of the Austrian’s. These are the proceedings that are being run against the industry by the Royal Commission because of the misconduct on the part of the industry  in the banking, annuity and the financial service organization that come under the concept of the APRA’s Enforceable undertaking (Rawluket al. 2017). This was considered as the main auditing matter by the company’s auditor since it contains significant quantity of judgment included in the process of:

  • The different types of outcomes that might be gained in the mode of finance from the information obtained by the available sources

  • The quantity of sum that is expected can be given by the entity in awe of the different kinds of proceedings which are being run reciprocal to the entity which involves the various reviews and investigations. 

Valuation of the insurance policyholder liabilities:

The auditor of the industry regards this as the main audit matter because of the reason that the provisions which are made by the company’s management in respect of the agreement of the insurance claims that includes the subjective and complex judgments related to events of the future. The main problem that arises in the calculation of these provisions are that even a slight difference made by the management in the estimates might lead to the impact of the material on the estimation of various debts of the entity (Commbank.com.au. 2019). Some assumptions that are made by the experts that are hired by the entity’s management involves the following:

  • The estimates that includes the duration, amount and timing of the different allegations of the entity. In additional to this the probability of the lapse of the percentages of the policies of the leaseholders, pertaining rates to morbidity and mortality. The pertaining expenses to maintenance and the acquisition shall also be taken into consideration. 

  • Various pertaining assumptions of long term to the inflation rates. 

Bank of Queensland:

Peculiar ruination provisions:

Some of the features that advances to the consideration of the ruination provision as main audit matter is the quantity of relevance of the different advances and the various loans that has been provided by the entity. The degree of the implications that are included and the extent of judgment which is applied by the entity’s management for the reason to determine the quantity of these provisions (Boq.com.au. 2019). Some definite assumptions that have been taken as the main audit matter during the estimation of the quantity of ruination provisions are as:

Expected cash flows of the future:

The expected cash flow of the future is the management’s prediction that is based on the appraisal that is made on the extent of ruination in the advances and the loans which has been given by the entity’s management. Considering this appraisal an effort has been made for considering the different circumstances that come in the process of entity’s advances and loans (Boq.com.au. 2019).  The appraisal that is performed in this respect is very much complicated so all the consideration of the circumstances must be done that are prevailing reciprocal to the different types of advances and loans that are provided by the entity’s management. The quantity that shall be recovered from the credits shall be clutched as security by the entity. 

Collectively assessed provisions:

The entity’s management has enforced the new ruination model in order to determine the different quantities of the collective provisions. The assumptions have been considered by the management for the calculation of the collective provision (Boq.com.au. 2019).  The company’s auditor ascertains the quantity of the loss that the entity suffers in case of any occurrence of default. The entity’s management determines the different assumptions that are experienced based and they are regarding the losses faced historically by the entity and the different kinds of inputs which accepted by it from the experts reciprocal to the characteristically risks of the going on portfolios of  advances and the loans of the banks. The whole process of estimation becomes very tough since the future loss predictions are based on the loss that is experienced by the entity historically (Knechel and Salterio, 2016). 

AASB 9 Financial instruments- expected credit loss (ECL):

This accounting standard has been enforced recently during the year 2018.  The nature of this accounting standard can be said to be very complicated. This accounting standard becomes complex because of the good quantity of judgment that is required and the process of the interpretation in order for enforcing in measuring the provisions of credit loss which is expected reciprocal to the advances and the loans that the bank gives out (Boq.com.au. 2019). 

Assessment of goodwill:

The assessment of the goodwill value can be considered as the key audit matters since there remains a good amount of subjectivity which gets included in the making up of the forward looking assumptions. Some of the assumptions are as:

  • Firstly, the calculation of the referring cash flows operations of the entity should be done, various referring growth rates of the different materials of the entity and the various earnings terminals should be calculated (Boq.com.au. 2019). 

  • Second assumption is that the rates of discounts that are utilized by the entity’s management is also taken as the main audit matter. The main reason of this assumption is its subjective nature and also its variability of the prevailing conditions (Boq.com.au. 2019). 

Conclusion:

In completely doing the detailed analysis of the different types of main audit matters that are being classified by the auditors of the banking industries in the major 1000 listed  organizations in the Australian stock exchange it can be mentioned that the significance of the new auditing standard is huge.  The main reason that is taken into consideration in defying the new standards of auditing is that there are various transactions which are being acquired by the entity rather than its primary revenue developing actions that may not be inside the knowledgeable part of the company’s shareholders.  The disclosures that the entities have made which are pursuant to the standards of the new auditing helps the improvements of the understandings of the company’s shareholders in these matters.  The improved understating of the shareholders of the company shows that the shareholders will be able to take effective decisions when compared to the growth of the company and their own place inside the company and this will be done by them by using the informations that is given out to them by the entity’s financial statements. 

Reference:

  • Asx.com.au. 2019. [online] Available at: [Accessed 15 May 2019].

  • Bell, S. and Hindmoor, A., 2019. Avoiding the Global Financial Crisis in Australia: A policy success?. SUCCESSFUL PUBLIC POLICY, p.279.

  • Boq.com.au. 2019. 2018 | Bank Of Queensland. [online] Available at: [Accessed 15 May 2019].

  • Commbank.com.au. 2019. [online] Available at: [Accessed 15 May 2019].

  • Cordo?, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of Key Audit Matters. Accounting & Management Information Systems/ContabilitatesiInformatica de Gestiune, 14(1).

  • Cordo?, G.S., 2015. Implications of the current exposure draft on audit reporting. Management Intercultural, (33), pp.61-70.

  • Cornish, S., 2016. MONETARY TARGETING IN AUSTRALIA. Milton Friedman: Contributions to Economics and Public Policy, p.334.

  • Feng, T., Cummings, L. and Tweedie, D., 2017. Exploring integrated thinking in integrated reporting–an exploratory study in Australia. Journal of Intellectual Capital, 18(2), pp.330-353.

  • Hooks, J. and Tooley, S., 2015. Electricity pricing in New Zealand and the Australian State of Queensland: Accounting for the impact of sector restructuring. Financial Accountability & Management, 31(4), pp.439-462.

  • Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.

  • Nab.com.au. 2019. [online] Available at: [Accessed 15 May 2019].

  • Niescho, C., 2018. Triple whammy. Company Director, 34(5), p.62.

  • Ratzinger-Sakel, N.V. and Theis, J., 2018. Does considering key audit matters affect auditor judgment performance?.

  • Rawluk, A., Ford, R.M., Neolaka, F.L. and Williams, K.J., 2017. Public values for integration in natural disaster management and planning: a case study from Victoria, Australia. Journal of environmental management, 185, pp.11-20.

  • Sorsa, K. (2016). DOES THE BANKS CAPITAL STRUCTURE AFFECT BANK PERFORMANCE? NORDIC EVIDENCE.

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