HI6026 Audit - Assurance and Compliance For Utility and Transparency

Introduction

The International Auditing and Assurance Standards Board has implemented a host of reforms that have been intended to improve the utility and transparency of auditor report. These variations  have been in effect since 15^th December, 2015.Through the existence of the auditor’s report, the standard report enclosed a host of recommendations on how to better manage the exposure of auditors to litigation(Morley 2016.). However  as a result of the financial crisis that engulfed the globe, investors had to take a step back. They felt that they should have been warned of corporate failures prior to the crisis. The investors now demand more stringent examinations of financial statements by auditors. Under this new enhanced reporting, the auditors will need to deliver more evocative discernments into the audit (Kachelmeier,Schmidt and Valentine 2017). This can be done through customised disclosures. Diclosures of this nature will  facilitate an open communication between auditors and investors. The auditor’s opinion will be presented first. This will be  followed by  the  section contining the basis for opinion of the auditors report . There will be a new section, that will be made mandatory for listed entities (Newton et al.2015). This new section will summarise key audit matters . it is also compulsory for auditors to include a separate section  This section is called the material Uncertainty  section about the going concern risk of the company.  In this section there is  an uncertainty regarding the ability of the entity to continue its current form . This requires  the management to make adequate disclosures in respect of this matter.Auditors are also required to include an independence statement. This will declare the fact that the auditors have satisfied  all their ehical responsibilities (Yu et al.2018). The report analyses the effectiveness of the extended audit reporting procedures of the company Commonwealth Bank.

Discussion

About Commonwealth Bank

The commonwealth bank is one of the largest banks in Australia.it provides a host of financial services and communities all over Australia. It is presently one of the most reputable financial institutions. It provides institutional banking and wealth management services to multiple  countries all over the world.

Auditor’s Independence Declaration

According to the external auditor of Commonwealth Bank, PWC , the lead auditor had made an independent declaration . The declaration suggested that the audit  contained  no discrepancies regarding the independence requirements of the auditor of the  Corporaton Act, 2001 . There was also no discrepancies regarding any breach of professional conduct rules in respect of the audit(Tepalagul  and Lin 2015).

Independent auditor’s report

The auditor’s report , after auditing all the relevant financial statements of a company  came to an unqualified opinion. The opinion  stated was that  all the  financial stattements of the company is in fact done as per the Corporations Act 2001 . The auditor was also of the opinion that  a  true and fair view of the company  was provided. The audit also revealed that the  financial positions of the Group was provided.. The financial report also complies with the Australian Accounting standards and the Corporations Regulations 2001.( Griffiths, Mendoza and Arthur 2015)so

Non Audit Services performed by the auditor

In addition to the audit  related services provided by he auditors at pwc, there were some non audit services that were payable to the auditor  that includes:

• Project assurance services- this is a service that is provided by the auditor . This relates to providing an independent and objective oversight of he likely financial performance  of the many projects that the bank plans to finance and undertake in  the future(Bell, Causholli and Knechel 2015).
• Taxation services- the auditor also performs taxation services to the company. This includes on mainly advising the company on efficient tax planning measures and providing tax compliance advice.
• Risk management, compliance and controls related works-The auditor also provides risk management services to the bank. The bank , while financing new projects or during their operations may get exposed to many risks like credit risk, liquidity risk, market risk etc. Risk management helps in the identification and evaluation of risks involved ad suggests out a course of action that helps in minimising the impact of those risks(Bell, Causholli and Knechel 2015). The auditor also performs internal control and compliance services which means ensuring that the company has complied with corporate laws and procedures or not.

A further independent declaration by the auditor in terms of providing non audit  services to clients has been discussed. This states that the non audit services provided by PWC  had no bearing  to the requirements of the auditor independence of the Corporations Act 2001.According to the audit committee,  the non audit services was provided in  conformance to the generals standard of independence as levied by the Corporations Act 2001(Commbank.com.au 2018).

Auditor’s remuneration

The remuneration that is payable to an auditor is comprised of both  audit and non audit services that is  provided to the bank. The audit services include providing statutory auditing to the company and forming an independent opinon  on the financial statements of a company. The non audit services on the other hand include, as mentioned above providing project assurance services, taxation  services and risk management services (Chang and Lim 2016). The  fees of non audit services has been found to be compatible with the level of maintaining auditor’s independence. The audit related services mainly includes  the reviews of assurance and attestation of the foreign disclosures of the Group.Other audit services include internal control review  systems and providing financial or supervisory data(Chang and Lim 2016). The taxation services also included training and assistance facilities . (Commbank.com.au 2018).

The percentage changes of the auditors remuneration with prior year has been given below: 

Role, composition and functions of the Audit committee

An independent audit committee is  very vital  constituent in reflecting a  good corporate governance of the company. The audit committee is normally set up by the board of directors as a subcommittee . The powers of this committee are set up by the Board itself. The audit committee helps in supporting the board  to fulfil its oversight responsibilities. These responsibilies relate to areas that include an entity’s financial reporting  and  systems of internal control .  The committee also helps in risk management services and the external and internal audit functions(Badolato, Donelson and Ege 2014). In case of commonwealth bank , the audit committee  provides functions like facilitating maintenance of the. independence  of auditor, providing internal control system and making sure that the applicable laws, regulations and standards have been best complied with. The audit committee of the Commonwealth Bank has a very important role to play in maintaining that all the relevant audit and non audit services that have been provided by the auditor have been duly complied with according to the auditing standards and requirements.

The audit committee should be  structured in such a way that it contains at least three members. All of these members   should be non executive directors(Samaha, Khlif and Hussainey 2015) . Also  the majority of them should also be independent directors. This committee should also  be chaired by an independent director . That director  however cannot be the chairman of the board. The members also need to possess a mix of accounting and financial expertise, coupled with industry knowledge and skills in order to enable them to perform their duties in this regard. The audit committee of Commonwealth Bank includes:

• Catherine Livingstone – the chairman of the bank
• Shirish Apte-  non executive director
• Launa Inman- non executive director
• Harrison Young- non executive director 

The auditor charter, as set out by the Commonwealth bank  sets out the authority of the audit committee to help in carrying out the responsibilities of the members of the audit committee. This charter empowers the  audit committee members to have unrestricted access to information and any management personnel. It gives them the degree of freedom that is necessary for the audit committee to keep  a strict check on overseeing all audit and non audit function .  These services are however performed by the external auditor . The charter also  pre approves all auditing and non audit services performed by external auditors. Further it also resolves any disagreement between the management and the auditor(Böhm, Bollen and Hassink 2016).

Independent Auditor’s report to the shareholders

The opinion  of the auditor, after reviewing the financial statemets suggested that the  company has presented a true and fair view of the financial statements . It  has also followed the relevant proviosions of  the Australian  accounting standards. The financial reports comprises of  

• The balance sheets of the company as on 30^thjune 2017.
• The income statements of the company The statement of comprehensive income
• The statement of changes in equity
• The statement of cash flows

Basis for opinion

The company also asserted that they obtained enough audit evidence so as to form a basis for an audit opinion . They also asserted that they have conducted their audit according to the Australian Accounting Standards. The auditor has expressed an unqualified opinion on the financial statements . He has come to this opinion after being presented with all relevant financial statements(Chan and Vasarhelyi 2018).

Independence

As per the audit report, the auditor asserts that the audit has been accomplished  in a manner that is independent..  The auditor  had followed the requirements of the Corporations Act as per the  auditor independence requirements. In addition the auditor  also successfully met the ethical requirements of the APES 110 Code of ethics for Professional Accountants. This code of ethics is pertinent  to the financial  audit  in Australia. The auditor has also satisfied all the ethical responsibilities . These responsibilies  were  put in place with the code of ethics ( Páez and Liu 2017.).

Audit approach

The auditor asserts that the scope of the audit is to make sure that the audit has been done in a way so as to ensure that the auditor can formulate an audit opinion on the financial reports. He can best undertake the scope of his audit if he takes into account the geographical and management structure of the company. A further understanding of the  accounting process and controls will help him in formulating a better and more thorough review of his opinion. (Sirois, Bédard and Bera  2018). They have also taken steps that the audit team has the necessary skills and expertise to undertake an audit of such a  complex banking company.

Key audit matters

According to the professional opinion of the auditors , key audit matters represent  those matters  that are most significant in the auditing function of a company. The key audit matters included are:

• Provision of impairment of lending assets- This was considered to be a key audit matter because the managements made subjective judgements in determining whether the impairment provisions were made against lending assets  or not. There was also a difficulty in approximating the size of such provisions(Commbank.com.au 2018). The provisions were recognized on the basis of  expected future cash  repayments. (Gunn,  Khurana and Stein 2018).

The audit procedures performed in this case are:

• Comparing the key assumptions of management to support  evidence  and market practices.it is an analytical audit procedure
• Testing the completeness and accuracy of the important data. This data is being reassigned between the company’s  systems and the management models.. It is a  substantive  audit procedure(Commbank.com.au 2018).
• Compared key inputs in management’s estimate , like for example the valuation of securities held(Chan and Vasarhelyi 2018).
• Determination of fair value for financial instruments-  most of the financial statements of the company are non complex in nature. This is because the fair value is based on prices and rates . Such rates can be  analysed in the relevant financial statements. ( Barker and Schulte 2017). These were found to be financially significant. The audit procedures performed in this case are:
• The fair value  calculation of the group was compared  to the  calculation of the auditors. This is an analytical audit procedure .
• The group also procured independent units from market data providers .They used  their own valuation models to implement whether there was any systematic error in the calculation of fair value or not
• Provisions relating to conduct risk, litigation and regulatory action, including related disclosures- this was considered to be a key audit matter as the company. The company is  expected to conduct key risky matters and solve various  legal cases in numerous jurisdictions. These disputes could give rise to significant liabilities of the company(Kunkel , Dennis and Garner 2014).

The audit procedures undertaken in this issue include are :

• Making an assessment of the processes of the company that can be used for classifying and measuring the impact of conduct risk This is considered to be  a test of control
• The management’s judgements were considered . This was done  to find out if  there is possible material financial exposure for the company. It was also done to find out if there was any provision required. This is considered  to be an analytical procedure.  

Difference of management and auditor’s responsibilities in relation to the financial report 

• The management is accountable for preparaing the financial statements. The management is liable  to implement sound accounting policies and practices that will help them in  preparing  the financial statements. The main function of the auditor is to express an opinion on the financial statements. these statements  are prepared by management(DeZoort and Harrison 2018).
• It is the primary responsibility of management to uncover material errors and omissions while preparing the financial statements. The auditor’s responsibility is to conduct the audit as well as report the results. This neds to be done keeping in mind the generally accepted auditing standards(Commbank.com.au 2018)

Material Subsequent events

The material subsequent events that are included are:

AUSTRAC civil proceedings- on 3^rd August, AUSTRAC started civil penalty proceedings  against the bank. The bank , after taking these allegations seriously has filed a defence in relation to  the matter. The actual outcome will be determined by an Australian court of law in relation to the legal principles that have been established(Commbank.com.au 2018).

Aussie Home Loan Acquisition- A shareholder named John Symond exercised his put option.This exercise of put option willl require the comapny to acquire a 20 per cent interest in AHL. The bought price for the leftover 20 per cent interest will be assessed. It will be computed  in accordance  with the conditions that were previosly agreed in 2012. 

Effectiveness of the material information

The material information that is reported by the auditor contain a true and fair view of the financial statement . The information provided by the auditor was material .The audit was clearly performed in accordance with the audit procedures involved. The material information is effective in presenting an accurate version of financial statements(Stewart 2015). This information will help the users of financial statements to make informed decisions.

 Lack of Material information

A couple of material informant that is missing from the auditors report include:

• The percentage change in audit remuneration has not been disclosed in the annual report
• The financial report did not consider the supplementary information. As a result   it did not expect any form of assurance about them.
• It did not confirm the audit procedures that were undertaken  for verifying the existence and certification of certain items in the financial statements.

Conclusion 

After a thorough analysis of the auditors report , it is evident that the company Commonwealth Bank has applied all the relevant audit procedures and inspected the financial statements in a fair and responsible way. The resulting opinion  has  also been illustrated. The auditors and non auditors services provided by the auditor has been evidently discussed in the report , including  a detailed remuneration chart  showing the percentage changes in the remuneration chart between the year 2016 and 2017. The company has  many new key audit matters , including impairment of lending assets, determination of fair value for financial matters. The report shows how these matters have been dealt with by the company.  It has made an assessment as to how the auditor has complied with independence requirements and what audit procedures were implemented on the review of these key audit matters. It also evaluates the performance of the audit committee and their roles and their performances, including the charter which states what their responsibility will be. Based on a final analysis of the audit report, it is evident that the financial statements continue  to have a true and fair view and the audit has been conducted on accordance with the relevant  audit standards. The audit procedures that were followed were appropriate for the preparation of the financial statements. The audit opinion  expressed was an unqualified one, which suggested that the auditor had verified that all the financial statements  and that they reflected a true and fair view. 

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