Audit Planning Memorandum For Conducting The Audit Of Sustainability Bank Ltd

Part (a):

An audit is conducted to provide an independent verification of the financial statements of an entity and expression of opinion on such statements as to their true and fair nature. Corporations Act 2001 provides that a reporting entity must adhere to the requirement of the act to present true and fair picture of it in its financial reports. An auditor simply verifies the financial reports to express an opinion on these statements. In case of banks operating in the country in addition to the provisions of Corporation Act 2001, the Banking Act, 1959 and the Reserve act, 1959 must be complied with while conducting the audit of such banks. Auditor not only independently verifies the financial reports of a bank but also verifies the operations and processes of the banks. The audit planning memorandum is provided here to evaluate the standard procedures to be followed to conduct the audit of Sustainable Bank Limited efficiently (Goria, 2014).   

Considering the legal implications while accepting a new audit engagement is of paramount importance to comply with the professional code of ethics. Auditors and professional accountants in Australia are governed by the APES 110 code of ethics. The professional accountants must follow the ethical standards and code to discharge his duties professionally and ethically. The auditor of Sustainable Bank Limited (SBL) before accepting the engagement and starting the audit of the bank, following shall be taken into considerations (Albeksh, 2016).

Communication with the previous auditor: The new auditor before accepting the engagement must communicate with the previous auditor. This would help the auditor to acquire important information about the client as the previous auditor will disclose important information about the client. In case there has been any wrong doing on the part of SBL towards the previous auditor, then the same will be communicated to the new auditor. This might induce the auditor to not take such audit engagement (Bierstaker, Janvrin and Lowe, 2014).

Remuneration dispute: In case the previous auditor was not paid his remuneration on time and such remuneration is still due the new auditor shall not accept the audit engagement.

Applicable rules and regulations that apply to the banking industry: The auditor must assess and evaluate the rules and regulations that specifically apply to an audit of bank.

Specific banking regulations: Specific banking regulations as enumerated in the Banking Act, 1959 and the Reserve Bank Act, 1959 shall be considered before starting the audit of the bank.

Audit planning memorandum:

Internal controls and securities within the bank: The internal controls and securities within the bank must be evaluated properly to assess their strengths and efficiency. Based on the evaluation results the audit plan shall be developed (Carcello et. al. 2017).

Statutory and time deposit: Banks are required to maintain minimum statutory balance with Reserve Bank of Australia as per the Reserve Bank Act 1959 to carry on its banking operations. The auditor must verify that whether SBL has complied with the requirements of minimum statutory balance maintenance as per the provisions of Reserve Bank Act 1959.

An auditor while conducting audit of an entity are subjected to the guidelines provided in the Australia Standards on Auditing (ASA) issued by the Auditing and Assurance Standards Board (AUASB). ASA 315 guides an auditor to assess the risk of material misstatements in financial statements of an entity by understanding the entity and its environment. A thorough knowledge of the entity will help the auditor to understand the kind of transactions that the client generally involves in and its environment. On the basis of his understanding he will be able to formulate an effective audit plan to conduct the audit effectively (Christ et. al. 2015).

SBL is a bank that provides financial assistance and services in relation to banking mainly to small and medium business organizations. The objective of the bank is to help the small and medium businesses to arrange funds for running their business affairs. With more than 100 retail branches and numerous Automated Teller Machines (ATMs) in different parts of the country the bank has an extended network to serve its customers. However, the extended network of retail branches and ATMs also creates a logistic nightmare and significant amount of risk for the bank. Especially considering the fact that most of its ATMs and retail branches are located in remote areas of the country. Conducting substantive audit procedures on the standard system followed by the bank to refill ATMs will help the auditor to make an appropriate assertion as to the extent of risk involve in the standard procedure. Apart from that the disbursement and collection of cash from more than 100 retail branches also have significant risk involved. A thorough investigation of the processes and procedures followed by the bank shall be conducted to identify any possible area improvement to reduce the risk in such operations (Pedrosa and Costa, 2014).

Legal implication considerations

One of the primary functions of SBL include providing loans and financial assistance to the small and medium size businesses. The auditor will have to evaluate the existing procedure followed by the bank to provide loans to small and medium business. There must be a standard procedure that the management should follow to minimize the amount of bad loan and non-performing assets. Checking the profile of loan applicants and verifying their profile to evaluate the ability of the loan applicant to repay the loan shall be the primary consideration for approving the loan applications of such applicants. Auditor must carry out a detailed investigation of the loan approving and disbursement procedure to report on its strengths and weaknesses (Trotman, Bauer and Humphreys, 2015).

The increasing reliance of entities including banking entities on information and technology also create challenges for the auditor. Auditors are now expected to have significant knowledge on dealing with modern day technologies including computers. The bank has experienced a technological malfunction that has certainly hampered its reputation in the banking sector. The financial losses might be minor but such issues generally damage the reputation of a banks which is often beyond repair. Using the help of an expert in the field of information and technology the auditor should evaluate the existing information and technology practices within the bank. On the basis of evolution of existing technology the auditor should report on its findings in the audit report along with vulnerable areas in the existing system and control that must be improved in the future. The technological malfunction of February 29, 2018 shall be used a reference point to ensure no such malfunction in the system of the bank ever takes place. All necessary measures and controls shall be instituted by the bank to improve the efficiency and effectiveness of the existing system (Ettredge, Xu and Yi, 2014).      

Test check shall be conducted on the time and statutory demand liabilities maintained by the bank on different fortnights to ensure that the bank has complied with the requirements of maintaining minimum statutory and time deposit with Reserve Bank of Australia (RBA). It is of utmost importance for a bank to maintain the minimum statutory balance with RBA to avoid any risk of liquidity arising from business operations. The statutory time and demand deposits maintained with RBA on different fortnights shall be evaluated against the actual amount of deposits taken from customers on those fortnights shall help the bank to determine whether the bank has complied with the requirements of maintenance of  minimum balance of RBA (Tamas-Szora and Socol, 2015).

Communication with the previous auditor

The auditor must conduct an independent verification of the financial reports of SBL with the underlying books of accounts and supporting documents to come to a particular assertion about nature and quality of financial reports. The Auditor must opined whether the financial reports are reflecting the true and correct picture of the bank’s performance and position. In order to identify the possible area material misstatement in financial reports an auditor often uses analytical procedures. On the basis of results of analytical procedures an auditor decides the extent of substantive procedure to be used to conduct the audit. These are in addition to the standard auditing procedures and practices that an auditor must conduct as per the auditing standards in the country (Zhang, 2017).

On the basis of the financial information provided about the performance and position of the bank in its financial statements let us conduct an extensive analytical procedures on these information. On the basis of the findings of analytical procedures the auditor shall decide about the substantive procedures to be conducted to complete the audit effectively.

The financial statements of the banks contain its income statement, statement of financial position, and other specific transaction sheets. In order to identify the unusual fluctuations in profitability and different items of revenue and expenditures of the bank in last three years different profitability and other ratios shall be very helpful.

	2018	2017	2016
Income	$m	$m	$m
Interest income	1,056.6	1,029.3	984.7
Interest expense	660.7	636.8	572.9
Net interest income	395.9	392.5	411.8
Net interest income % to total interest income	37.47	38.13	41.82
Interest expense percentage to gross interest revenue	62.53	61.87	58.18

The gross interest revenue of SBL in 2018 is $1,056.60 million has increased by $71.90 million from 2016 when the bank posted a gross interest revenue of $987.70 million. However, despite the significant increase in revenue within 2 years, i.e. by almost 8% increase in gross interest revenue of the bank the net interest income of the bank has reduced by $15.90 million in 2018. This clearly indicates that the interest expenditure of the bank has increased significantly. The auditor must use substantive audit procedures to evaluate the reason for increase in interest expenditures (Ettredge, Xu and Yi, 2014).

The interest expenditure ratio to gross interest revenue in 2018 has increased significantly to 62.53% compared to 58.18% in 2016. This is the main reason for reduction in net interest income of the bank. Use of substantive procedures shall be directed towards assessing reason for such significant increase in interest expenditures to evaluate whether the interest expenditures have been correctly reported and recorded in the books of accounts. Based on the results of substantive audit procedures the auditor would be able to conclude whether there is any material misstatement in reporting interest expenditures in the books of accounts of the bank (Cameran and Perotti, 2014).

Remuneration dispute

The reduction in net interest revenue to 37.47% in 2018 from 41.82% in 2016 is due to the increase in amount of interest expenditures thus, the substantive procedure shall be designed to evaluate that the accountants have correctly recorded interest expenditures in the books of accounts of the bank and there is no misstatement in the financial reports in disclosing interest expenditures in the income statement (Masli, Porter and Scholz, 2018).  

In order to assess the liquidity position of the bank generally current ratio and acid test ratio are calculated. Current ratio is calculated by using the total amount of current assets divided by the total amount of current liabilities as on a particular date.

In case of SBL the liquidity position of the bank over the years will help the auditor to identity any unusual fluctuation in the items of current assets and current liabilities. In cases such unusual fluctuation is not justified then it might be an indication of possible area of risk in financial statements. Accordingly, an auditor shall extend his substantive procedures in the possible area of material misstatement to collect necessary audit evidence to conclude whether the financial statements in relation to that particular risk is materially misstated or not (Bailey, Collins and Abbott, 2017).

	2,018.00	2,017.00	2,016.00
	$m	$m	$m
Current assets
Cash and cash equivalents	208.50	270.50	258.90
Due from other financial institutions	107.40	98.50	71.90
Derivatives	53.40	66.30	71.40
Financial assets available for sale – securities	374.00	413.20	428.50
Financial assets available for sale – share investments	121.60	116.10	113.90
Financial assets held to maturity	1,243.90	1,496.80	1,392.40
Loans and other receivables	15,463.60	14,902.30	13,042.60
Total current assets	17,572.40	17,363.70	15,379.60
Current liabilities
Due to other financial institutions	880.00	638.00	550.00
Deposits	14,847.30	15,224.60	13,236.90
Derivatives	32.50	22.00	27.90
Other payables	147.30	110.60	135.90
Income tax payable	61.10	61.30	81.10
Provisions	143.40	30.40	32.50
Total current liabilities	16,111.60	16,086.90	14,064.30
Current ratio (total Current Assets / Total Current Liabilities)	1.09	1.08	1.09

The current ratio of the bank throughout the last three years have remained more or less constant at 1.09; 1. Thus, there is no unusual fluctuation in the current assets and liabilities position of the bank in any of the last three years. Thus, standard substantive procedures shall be conducted to verify the existence and valuation of such assets and liabilities of the bank (Carcello et. al. 2017).   

In order to analyse the long term solvency position of the bank, an auditor can use capital gearing ratio as well as debt to equity ratio. Unusual fluctuation in debt and equity position of an entity is reflected in capital gearing as well in debt to equity ratio of an organization. Taking into consideration the total equity of SBL and its debt the capital gearing ratio analysis of the bank will be helpful in evaluating the possible area of material misstatement in financial statements in reporting the items under equity and long term debt (Yao, Percy and Hu, 2015).

Capital gearing ratio
	2018	2017	2016
	$m	$m	$m
Total equity	1,902.70	1,794.70	1,707.00
Debt	880.00	638.00	550.00
Capital gearing ratio	2.16	2.81	3.10

The capital gearing ratio of the bank has deteriorated with passing of each year. In 2016 the company had a capital gearing ratio of 3.10 times that reduced to 2.81 times in 2017 and further to 2.16 times in 2018. Increased amount of debt in the overall equity of the bank is the main reason behind the deterioration in debt to equity position. Auditor must verify the financial documents to assess the new borrowings and long term debt of the bank that it has taken in last two years.

Applicable rules and regulations

On the basis of the identified areas in financial statements where the risk of misstatements is quite high the following audit procedures shall be used by the auditor:

Disbursement of cash to Automated Teller Machines: 

SBL has an extended network of ATMs. The auditor should verify the procedure used by the bank to refill cash in these ATMs. Whether all necessary security measures have been instituted including providing security guards at the ATMs must be evaluated.

Cash management of retail branches: 

The bank has more than 100 retail branches. The standard procedure followed by the bank for disbursement and collection of cash to and from these branches have to be evaluated properly. Whether the disbursement and collection of cash is immediately recorded in the books of accounts shall be checked with the vouchers.

Evolution of IT system: 

The existing IT system shall be evaluated by using the help of IT experts. The finding of the IT expert shall be documented and used for references while verifying the efficiency and effectiveness of these systems.

Financial reporting: 

The internal controls within the accounting department and the effectiveness of these controls shall be evaluated. It is impotent to assess that such internal controls were in place throughout the period and ensure no transaction is unrecorded. The audit should carryout demo transaction to evaluate the effectiveness of accounting department to correctly record transactions in the books of accounts. The financial reports prepared from the books of accounts must be prepared in accordance with the applicable accounting standards (AASBs). The auditor must verify the financial statements to conclude whether these have been prepared accordingly or not.

The auditor needs to first understand the standard loan processing procedure of the bank. After that the auditor needs to check the loan applications that have been approved over the years. The profile of the loan applicant shall be cheeked to evaluate whether they met the loan approval requirements. The auditor shall report on his findings in the audit report.

The auditor shall evaluate the statutory and demand reserve maintained by the bank with RBA to verify whether the bank has complied with the requirements of maintaining minimum statutory reserve as per the Reserve Bank Act 1959 (Mahzan and Lymer, 2014).

The internal controls and securities within the bank shall be evaluated by the auditor to decide whether he can rely on these controls and securities. Depending on the assessment of the strengths and effectiveness of internal controls and securities the auditor shall modify his audit procedures.

Specific banking regulations

Computer Assisted Auditing tools and techniques to conduct data analysis:

Spreadsheet helps in conducting number of numerical testing on the financial data. For example the following analysis shows the changes in value of assets and liabilities from 2016 to 2018:

The far right column highlights the changes in the value of different assets and liabilities of the bank in 2018 compared to the figures of 2016. Spreadsheets help to conduct such analysis to make necessary assertion in an audit (Bierstaker, Janvrin and Lowe, 2014).

The tools such as minimum and maximum functions are helpful in identifying maximum amount of a customer or minimum amount of a customer from large pool of customer balances. As can be seen in above the maximum and minimum amount of customers’ overdraft balance has been calculated with a simple function in spreadsheet.

There are readymade software available in the market which can be used to conduct data analysis in an audit of financial statements. Use of artificial experts to observe different aspects of an organization can be helpful in conducting an audit.

The bank conducts banking operations with specific attention to small and medium sized businesses. Use of specialized software tool will be helpful in specifically testing the efficiency of different systems within the bank. The ATMs should be checked by using such software to ensure these are working effectively (Shamsuddin et. al. 2015).

Statistical analysis by use of CAATs would help to identify different areas in financial statement that may require to be audited with substantial care. The following statistical analysis would for example help an auditor to identify fluctuations in profitability of the bank (Shamsuddin et. al. 2015).

References:

Albeksh, H.M.A., 2016. The Crisis of the Ethics of Audit Profession: Collapse of Enron Company and the Lessons Learned. Open Access Library Journal, 3(11), p.1.

Bailey, C., Collins, D.L. and Abbott, L.J., 2017. The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), pp.25-46.

Bierstaker, J., Janvrin, D. and Lowe, D.J., 2014. What factors influence auditors’ use of computer-assisted audit techniques?. Advances in Accounting, 30(1), pp.67-74. [Online] Available from: https://www.sciencedirect.com/science/article/pii/S0882611013000631 [Accessed 30 September 2018]

Bierstaker, J., Janvrin, D. and Lowe, D.J., 2014. What factors influence auditors’ use of computer-assisted audit techniques?. Advances in Accounting, 30(1), pp.67-74.

Cameran, M. and Perotti, P., 2014. Audit fees and IAS/IFRS adoption: Evidence from the banking industry. International Journal of Auditing, 18(2), pp.155-169.

Carcello, J.V., Eulerich, M., Masli, A. and Wood, D.A., 2017. Are Internal Audits Associated with Reductions in Operating, Financial Reporting, and Compliance Risk?. [Online] Available from: https://papers.ssrn.com/soL3/papers.cfm?abstract_id=2970045 [Accessed 30 September 2018]

Carcello, J.V., Neal, T.L., Reid, L.C. and Shipman, J.E., 2017. Auditor Independence and Fair Value Accounting: An Examination of Non-Audit Fees and Goodwill Impairments.

Christ, M.H., Masli, A., Sharp, N.Y. and Wood, D.A., 2015. Rotational internal audit programs and financial reporting quality: Do compensating controls help?. Accounting, Organizations and Society, 44, pp.37-59.

Ettredge, M.L., Xu, Y. and Yi, H.S., 2014. Fair value measurements and audit fees: Evidence from the banking industry. Auditing: A Journal of Practice & Theory, 33(3), pp.33-58.

Ettredge, M.L., Xu, Y. and Yi, H.S., 2014. Fair value measurements and audit fees: Evidence from the banking industry. Auditing: A Journal of Practice & Theory, 33(3), pp.33-58.

Goria, E., 2014. Ethics made easier: How to use the revised AICPA Code of Professional Conduct. Journal of Accountancy, 217(6), p.30.

Mahzan, N. and Lymer, A., 2014. Examining the adoption of computer-assisted audit tools and techniques: Cases of generalized audit software use by internal auditors. Managerial Auditing Journal, 29(4), pp.327-349.

Masli, A., Porter, C. and Scholz, S., 2018. Determinants of Auditor Going Concern Reporting in the Banking Industry. Auditing: A Journal of Practice and Theory.

Pedrosa, I. and Costa, C.J., 2014, May. Statutory auditor’s profile and computer assisted audit tools and techniques’ acceptance: indicators on firms and peers’ influence. In Proceedings of the International Conference on Information Systems and Design of Communication (pp. 20-26). ACM. [Online] Available from: https://dl.acm.org/citation.cfm?id=2618172 [Accessed 30 September 2018]

Shamsuddin, A., Logenthiran, A., Rajasharen, L., Dhinesh, A., Maran, L., Ameer, M.F.M., Punnir, A. and Muthu, L.M., 2015, April. Factors Influencing Usage Level of Computer Assisted Audit Techniques (CAATs) by Internal Auditors in Malaysia. In Kuala Lumpur International Business, Economics and Law Conference (Vol. 6, pp. 18-19).

Tamas-Szora, A. and Socol, A., 2015. Exploring Corporate Social Responsibility in Foreign Bank Branches from Romania: An Empirical Analysis of Public Disclosure of Financial Statements and Banking Audit Reports. Finance: Challenges of the Future, (17).

Trotman, K.T., Bauer, T.D. and Humphreys, K.A., 2015. Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society, 47, pp.56-72.

Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.

Zhang, Y., 2017. Client importance and audit quality, office level evidence from the banking industry: a pitch. Accounting Research Journal, 30(2), pp.147-152.

Zhang, Y., 2017. Client importance and audit quality, office level evidence from the banking industry: a pitch. Accounting Research Journal, 30(2), pp.147-152.