Bao5524 Professional Auditing For Legal Assessment Answers

You are required to:
a) Draft an audit planning memorandum highlighting:
i) the legal and other considerations that need to be considered by your firm as the new auditor of SBL;
ii) the major risk areas to be addressed in the audit of the SBL Ltd for the year ended 31 December, 2018. Give reasons why the identified areas are considered to be high risk.

 

Support your answer by calculation of appropriate ratios and/or comparisons. The use of Microsoft Excel to calculate ratios is encouraged.

b) Outline the six audit procedures for any six of the risk areas identified in (a).
c) Use the Active Data for Excel as a CAAT to analyse the transactions of XYZ on 29 February, 2018. Following documentation must be provided:

all Active Data sheets generated,
A report summarizing the analyses and their implications for the audit.

Answer:

Introduction

Having been assigned a new client, Sustainability Bank Ltd (SBL), and working as one of the audit team members, you have been asked to help in the process of planning the audit of SBL. The aim of this paper is to draft an audit planning memorandum that explains the legal and other considerations that ought to be considered by the audit firm as the newly appointed auditor for SBL.

Legal and Other Considerations that Need to Be Considered

According to International Standard on Auditing (ASA) 250, an auditor has a responsibility to consider legal considerations such as laws and regulations during a financial statement audit. These legal laws and regulations have varying effects on financial statements of a company, especially if it has various branches or subsidiaries in various countries and locations (Elder, Beasley and Arens 2011, pp. 78). This is because the legal and regulatory framework is primarily constituted by these laws and regulations. The financial statements of a company are as well affected directly by the provisions of such laws and regulations by determining the amounts and disclosures reported in the financial statements of an entity. In addition to this, there are other laws and regulations that indirectly affect how an entity should be managed by its management (Eilifsen et al. 2013, pp. 26). Some of the legal and other considerations that must be considered by the audit firm as the new auditor for SBL are discussed below.

Most banks are highly affected by the heavy and strict regulations set out in their industries. Failure to comply with such laws may lead to imposition of heavy penalties and fines by the regulation agencies. It is therefore important for the new auditor to consider whether the bank (SBL) complies fully with these regulations and laws. This may also cause possible litigations and other consequences to the bank, which may affect its financial statements materially. According to this standard, the responsibility of governing and overseeing the operations of the bank lies with its management (Arens, Elder and Mark 2012, pp. 56). The management must make sure that the operations of the bank are carried out in a manner that is in compliance with the provisions of the industry’s set laws and regulations. However, as the bank’s auditor, the firm has a responsibility of reviewing and examining the bank’s operations with a view to identifying possible material misstatements in the bank’s financial statements resulting from its failure to comply with the laws and regulations. However, there is no expectation for the auditor to detect the bank’s failure to comply with all regulations and laws (Hayes, Gortemaker and Wallage 2014, pp. 13).

In addition to this, the audit firm has a responsibility to obtain reasonable and sufficient assurance that the financial statements of the bank (SBL), taken in entirety, are not prone to any material misstatement, resulting from either error or fraud. The audit firm must consider the legal and regulatory frameworks that are applicable to the firm and its branches. According to ISA 250, the audit firm should consider the compliance of SBL bank with the provisions of regulations and laws that directly affect how material disclosures and amounts in its financial statements are determined. Examples of these legal considerations are pension and tax laws and regulations (Messier, Glover and Prawitt 2008, pp. 23-24).

Furthermore, considerations regarding other regulations and laws must also be made by the auditor even though they are believed not to directly affect the determination of the disclosures and amounts reported in the financial statements of the SBL bank. These laws should be considered because the compliance of the bank to them is very fundamental to the aspects of its business operations. To its ability of continuing its business, or avoiding significant penalties. Examples of these other legal considerations are compliance of the bank to environmental regulations, requirements of regulatory solvency and operating license terms (Louwers et al. 2015, pp. 45).

As it has been proven that SBL operates in an industry which is very competitive, the audit firm must seek sufficient audit evidence to ascertain whether the economic downtown experienced by firms in this industry has caused significant misstatements in the financial statements of the bank. This is because, as reported in the media, there has been a material slump in the housing market, which is the core business operation of the SBL bank. It is also outlined that banks have generally experienced a drop in the applications for personal loans and housing credit facilities since June 2017, and the default rates of existing loan repayment has been rising significantly. The audit firm should consider ascertaining how this affects the amounts and disclosures reported in the financial statements of the SBL bank.

In January 2018, the bank launched a Sustainable Living program which was key in maintaining its market share as regards to customer lending. This program was also highly supported and funded by the government, through provision of subsidies that encouraged homeowners to adopt the program with much ease. However, upon withdrawal of the government’s support from this project in April 2018, the bank must have experienced material effects in its financial statements in its efforts to accommodate the financial changes. The auditor must therefore consider determining how materially the financial statements of the SBL bank are misstated as a result of this consequence. Additionally, the audit firm must ascertain, by seeking appropriate audit evidence, how the financial statements of the SBL bank are materially misstated due to the defrauding experienced from its employee in October.

As discussed above, the responsibility of the new auditor in the SBL bank is to identify any material misstatements in its financial statements that may have been caused by its non-compliance with the laws and regulations set out in the Australian banking industry. However, the responsibility of ensuring that SBL bank operates according to these laws and regulations lies with its management. In doing this, the auditor is expected to obtain sufficient as well as appropriate audit evidence with regard to the bank’s compliance with the provisions of those laws and regulations. The audit firm should also be keen to perform specified procedures of audit that are useful in identifying any cases of the bank’s non-compliance with other laws as well as regulations that are considered to affect its financial statements materially (Messier, Glover and Prawitt 2008, pp. 23-24).

References

Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.

Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson education.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Hayes, R.S., Gortemaker, H. and Wallage, P., 2014. Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Messier, W.F., Glover, S.M. and Prawitt, D.F., 2008. Auditing & assurance services: A systematic approach. Boston, MA: McGraw-Hill Irwin.