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HI6026 Audit, Assurance and Compliance

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HI6026 Audit, Assurance and Compliance

Introduction

Commonwealth bank is based in Australia with a business interest in other countries like New Zealand or the United Kingdom. It provides varieties of financial services to its customers like retail banking, institutional banking or fund management (Schlagwein &Thorogood & Willcocks, 2014). It has around 51,800 employees working with this group. Total operating income of the group is $25,907 million on the cash basis and the return on equity is 14.1% in the financial year 2018. The scope of the report is limited to the independent auditor report for the financial year 2018 of Commonwealth bank and different matters related to it will be discussed.

The report contains the summary of the researcher understanding and analysis about different matters related to independent auditor’s report of Commonwealth Bank and independent auditing work process and remuneration structure of the group.  The major topic of the discussion will be key auditing matters and the auditing procedures used in each matter and the detailed analysis of the material subsequent events of the group in a reported financial year. In addition, the material information missing or underreported in the report will be identified and the point of difference in the responsibilities defined in the independent auditor report in relation to the financial report of the directors and management and the independent auditors of the group will be evaluated. Then the auditor opinion type and its compliance with independent requirements, nature of non-audit services, audit committee and audit committee charter and percentage change in the auditor remuneration component will be discussed. At last, a list of follow-up questions will be made in the report which should be asked to the independent auditor of Commonwealth Bank and the effectiveness of the material information given by the auditors will be evaluated as a user. Therefore, the overall view of the independent auditor report will be summarised in this report.

1.  Auditor compliance with independent requirements

The independent auditor’s of Commonwealth Bank has all independent requirements. This opinion was formed on the basis of the fact that it is written in the Independent auditor’s report, that the report was made keeping in mind the independent requirements of the Corporation Act 2001 and other ethical requirements regarding the auditing of the financial reports in Australia described in The Accounting Professional and Ethical Standards Board’s APES 110 code of Ethics for professional accountants (Commbank.com.au.,2018). 

 2.  The name and nature of the non-audit services

The name of the non-audit services given by the Pricewaterhouse Coopers auditors and its network firm’s auditors who are also acting as the independent auditors of Commonwealth Bank are taxation services, services related to risk management, control and compliance matters of the group and other services which are defined as benchmarking and review processes in the independent auditor’s report. The nature of the taxation service is to check in an independent investigation whether the amount, which is recorded as tax expense or differed assets or liabilities, is accurate or not and assistance in the tax return calculation and filling of the group. The risk management, compliance, and controls related non-audit service is the independent investigation of the working processes of the group were the effectiveness of the existing control and other regulatory measures are evaluated and any areas needing improvement noticed by the auditor are communicated to the management and board of director and the suggestion are also given for how to improve those areas performance regarding risk management. In the benchmarking process the process reviews and benchmarking of the Bank responses related to security of the IT system and APRA and the royal commission (Commbank.com.au.,2018). 

3. Auditor’s remuneration and its changes in two consecutive years

 

The auditor’s remuneration has four main components. The first component is the audit service in, which the percentage change of 27.93% and 14.94 % is recorded in the amount of remuneration of the PWC auditor’s and auditors of the network firms of PWC respectively. This component of remuneration is given for auditing of the financial report of Commonwealth Bank. The second component is audit-related services, which involves services like attestation review process and assurance for examining the financing programmes and checking of the working processes and system, and checking of internal control reports. There is a negative change of -23.4% and positive change of 117.43% in the amount of remuneration of the PWC auditor’s and auditors of the network firms of PWC respectively. The non–audit service remuneration includes remuneration for the services like assistance in a tax return and filling or other services like assurance or benchmarking of the bank response. There is a positive change of 22.69% and a negative change of -5.81% in the amount of remuneration of the PWC auditor’s and auditors of the network firms of PWC respectively. The other non-audit service recorded a positive 152.01% and a negative change of -87.64%. The table containing the percentage of the auditor remuneration has been given in the appendices Table 1.

 4. Identification of key auditing matter and audit procedure to provide assurance

 

Loan impairment provision- For this key auditing matter, the audit procedures performed are analytical procedures and test of control was used. In this procedure, the Expected Credit Loss (ECL) model was analyzed by examining the cash flow forecasted amount, assumptions made in the model, the weighting of probability used in the model and comparing a sample of the supporting evidence. This procedure was done to check whether the financial reporting of Commonwealth Bank had followed AASB 9 related to the financial instrument. In addition, the auditing procedure of test of control was used to check the accuracy of the information of the credit information recorded in the Commonwealth Bank.

Judgemental valuation of financial instruments – for this key auditing matter the audit procedures of a test of control, a substantive test of detail and analytical procedure were performed. In the analytical procedure, the model used to measure the fair value of the financial instruments of the Commonwealth Bank. In the analytical procedure, the accuracy of the classification of a financial instrument under Australian accounting standards in either level 1 or in level 2 or level 3 had been assessed. The method used to measure the fair value of the financial instrument had been assessed. In the substantive test of detail, the accuracy and the completeness of the information used in the valuation of the financial instrument and the ways of sourcing of information were assessed.  In the test of control, the governance control framework of valuation model was examined and checked to see proper control measure are in place to minimize error and fraud in the valuation process (Commbank.com.au.,2018). 

Provision for conduct risk and regulator action – For this key auditing matter, the auditing procedure of test of control were used. In this auditing procedure, the identification of the conduct risks and the legal and regulatory matter of the group were done. In addition, key governance meeting minute was analyzed and the discussion with key personnel of the group about the legal and regulatory matter was also conducted.  The influence of each financial instrument performance in the overall financial performance of the group was examined and it was checked whether the proper provision was made according to it (Commbank.com.au.,2018). 

Valuation of insurance policyholder liabilities – For this key auditing matter, the auditing procedure of analytical procedure and a substantive test of detail were used. In the analytical procedure, the valuation model and the methods and procedures used in key auditing matter were compared with standards used and recognized in the industry. In the analytical procedure of the group, the key input regarding the assumptions and methodology used in this valuation process by the group and their different impact were analyzed in this procedure (Commbank.com.au.,2018). 

Operation of financial reporting information technology (IT) systems and controls – in this key auditing matter, the test of control procedure was used. In this procedure, the effectiveness of the certain operating control of the IT system for the continuity integrity which is related to the financial reporting was analyzed. In addition, the design of the IT system was examined to check its comparability with the financial reporting of the group. For examining the effectiveness of the certain control and compatibility of the existing IT system, a direct test was conducted on the sample of system functionality was done and the accuracy of the calculation or certain report made by the system was measured (Commbank.com.au.,2018). 

5. Audit committee and audit committee charter

There is Audit committee in Commonwealth Bank. There are four non executives in the audit committee. The names of the non-executive directors in the audit committee are Shirish Apte, Brian Long, Wendy Stops, and Anne Templeman-Jones. There is an audit committee charter. The structure of the audit committee charter includes members and chair of the committee, who are appointed by the board members. The structure of the audit committee also had a minimum requirement of four non-executive directors in its composition.

The functions of the audit committee are to oversee the external financial information reporting of the group, manage the group internal control system, ensure that the all the responsibilities of the audit committee regarding the external auditor and internal auditors and auditing process are fulfilled.

The main responsibilities of this committee are a review of the financial and accounting reporting which are of high significance, checking and recommending regarding the half and full year financial statements of the group to its board and checking the level of consistency in the application of each accounting standards. In addition, the accuracy and completeness of the disclosures given are assessed by this committee, the effectiveness of the internal control system and reviewing and recommendations regarding the auditor’s response are given. The different responsibilities regarding group internal auditor and internal audit like appointment or removal of the group internal auditor or approval of internal audit plan. The different responsibilities regarding risk management like summarising the finding of the investigation regarding group policy like group whistleblower policy or reviewing the finding of the internal auditor (Commbank.com.au.,2018). 

6. Audit Opinion and its type

The conclusion was made by the facts that the indephe independent auditor of Commonwealth Bank had given an unmodified opinion type. Thiendent auditor report states that the group has complied with all the rules and regulation of Corporation Act 2001 and all accounting standards of Australian accounting standards related to the financial report preparation. In addition, it was also stated in the independent auditor report that the financial statements prepared by the group are the giving the accurate and real view of the financial position of the group (Commbank.com.au.,2018). 

7. Point of difference between directors’ and management responsibilities and auditor’s responsibilities in relation to the financial report

The main responsibility of the director’s and management regarding the financial report is to prepare a financial report which show the real and accurate of the financial position and the main responsibility of the auditor’s responsibilities is to make an opinion about the accuracy of financial statements and the overall view of the financial position of the group it is creating. There the point of difference in the two responsibilities is that directors and management is creating the financial report and auditors are examining those financial reports in an independent way. Another responsibility of the director’s and management is to make a financial report is such way that it is free of any type of error and fraud and the responsibility of the auditor’s is check that financial statements of the group is  free of frauds and errors or not by performing different audit procedures. Therefore, another point of difference is that the one has make sure no fraud and errors are included in the financial report in time of preparation and another is check whether any frauds and errors are there in the already prepared financial statements (Commbank.com.au.,2018). 

8.  Identification of Material subsequent events and its treatment in the accounting system of Commonwealth Bank.

There are three subsequent events in the annual report of Commonwealth Bank for the financial year 2018. The first subsequent event involves the completion of the process of the sale of the New Zealand Life insurance business for the amount of $3.8 billion to the AIA group limited. It consists of selling of 100% business interest of the Commonwealth Bank to AIA group limited. The sale also includes the agreement of 20 years of partnership with AIA for life insurance products provisioning to the customers in the Australian and New Zealand market. The sale was completed on 2nd July 2018 and its accounting treatment involves the recording of the total gain of $102 million in the financial accounting system after deducting all expenses including tax expense and making all adjustments like purchase price adjustment (Commbank.com.au.,2018). 

Another material subsequent event involves approval of the sale of commonwealth bank South Africa Limited to the non-controlling interest, African Rainbow Capital by the CBA board. The sale cannot be accounted for or treated in the accounting system as it is still waiting for the approval of regulatory bodies and calculation regarding the adjustment of the potential sales price. Therefore, it cannot be recorded in the accounting system for lack of accurate sale price of this transaction. The third material subsequent event is the new issue of new shares of around $622 million value for the purpose of DRP for the final dividend payment for the year ending 30th June 2018. This value of $622 million was added to the total value of equity of the group and the same amount has been appropriated in the income statement for the dividend payment purpose (Commbank.com.au.,2018). 

9. The identification of the material information which is either missing or not fully explained or disclosed in the report in an effective way for the user.

The material information relating to the hedging activities of Commonwealth Bank were not fully disclosed as it should have been added in the list of key auditing matters of the group as its performance has a high significance in the overall financial performance of the group. The measurement and valuation model of the hedging activities should be evaluated and included in the auditing procedure of the key auditing matters. In addition, the fluctuation of the currency translation reserve of the group and measure or control taken to minimize its negative effect should had been evaluated.

10. The follow-up questions to the auditor of the Commonwealth Bank.

 Some of the follow-up questions to the auditors of the Commonwealth Bank are mentioned below.

 Why are there are high fluctuation in the amount of auditor remuneration of this current year with previous year?

Why the hedging activities of Commonwealth Bank are not included in the key auditing matters?

Why are new shares are issued of the group and do find the action justified?

Are there any areas of improvement, which you find in time reviewing of the internal control system of the group?

Do you find any significant risk of the group, which is currently having in its work processes and how will it impact the group financial performance?

Are you satisfied with the investigation process conducted by you in the completion of the auditing and non-auditing services to the group or you had done something different if you had more time?

How find you select the sample in the auditing procedure of different key auditing matters?

Do you have a suggestion regarding any financial matters of the group and if the answer is yes, then what is the suggestion?

Conclusion

 

From the analysis of the independent auditor’s report of Commonwealth Bank for the financial year ending 30th June 2018 by the above mentioned points, it can be concluded that the auditors have mentioned in detail for majority of the material information but missed out to mention some of the material information sufficiently like the mention of hedging activities in the key auditing matters and auditing procedures performed on it. In addition, the fluctuation in the amount of the auditor remuneration in the reported year and the prior year should have been discussed. The auditors should have also commented more on the material subsequent and its effect on the future performance of the group should have been discussed. Overall the effectiveness of the material information given by the auditor is satisfying for the some of the users but can be found lacking by the user looking for all detail material information of the group in the report.

List of References

Commbank.com.au. (2018). Commbank.com.au. [online] Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/fy18/cba-annual-report-2018.pdf [Accessed 17 Sep. 2018].

Schlagwein, D., Thorogood, A., & Willcocks, L. P. (2014). How Commonwealth Bank of Australia Gained Benefits Using a Standards-Based, Multi-Provider Cloud Model. MIS Quarterly Executive13(4).

 



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