Auditing Case study

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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 helps to ensure the authenticity, accuracy, and verifiability about auditor actions. To just get ahead of the unmemorable style of the interim report, such a need to convey key audit matter has been affected (Gao and Zhang, 2017). The addition of Key audit subject would allow the audit report to be further relevant and 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 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 to and 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 applied when external auditor identify and describe the primary audit matter in the final report. The main features of respective standard are discussed underneath:

• The main communication of KAM that is determined by the Auditor is 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 pattern and approach which are 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, and urgent matters should be included in reports.

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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 at 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 (HoÅŸgör 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

• 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 December 15, 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 to disclose KAM in the inspector's paper. To put this topic into context, the banking industry of Australia is selected. 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 considered to be the pillar of the 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 disclosure of KAM in annual report is 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 September 30, 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.

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 considered to be the biggest regional bank that is 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 mistakes and contributes to audit difficulty.

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 has not yet been disclosed to the Group. It could take several years to file a complaint, 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.
• The Suncorp bank has hired an existing specialist to help set the cost of capital. 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 preparation 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 considered an important activity which must be followed by each type of organisation. This supports checking 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 an 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.For further clarification or guidance, Assignment Help services can be a valuable resource.

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