How Is Enhanced Auditor Reporting Being Embraced In Australia?

Independence requirements

The idea behind emphasizing the need of an enhanced Auditor’s reporting came to IAASB in the year 2016, though many other countries across the globe had adopted the same long back before its recommendation by the IAASB.   Like the UK have had similar requirements in place since 2013, but after its recommendation by the IAASB it attracted the attention of various other countries which committed to adopt the same in future and this process of adoption is still going on. Our research work is primarily focused on the evaluation of the fact whether the annual report of the company being chosen meet the purpose of enhanced auditor’s report by incorporating the key audit matters or not (Alexander, 2016).

Independence requirements

 An Auditor is said to be independent when his or her expressed opinion is free from any influence from any party directly or indirectly having vested financial interest in the affairs of the entity for which the audit opinion is given. The principle of integrity along with the objectivity to make the correct professional judgment is needed to express an independent view by the auditor (Antle & Smith, 1985).

In our case the Lead statutory Auditor of ANZ Banking Group Limited is KPMG clearly declared that to the best of their knowledge and belief that there has not been any contravention of the Section 307C of the Corporation Act, 2001 in relation to Auditor independence requirement found and non contravention of professional code of conduct has been observed to ensure the Auditor independence requirement.

Non Audit Services provided

The Company has availed the non audit services of other assurance activities from the KPMG, the Audit Firm in a way to be compatible with the general standard of independence of auditor’s as imposed by corporation act, 2001, along with the sufficient arrangement to avoid their engagement in a role conflicting with the role as an external Auditor or influencing the status of their independence (Arnott, et al., 2017).

The broad areas of the non-audit services provided includes Controls related assessment, general market or regulatory insights, methodology and procedural reviews and training related services. The non audit services provided by the audit firm has been reviewed by the Audit committee of the Company in order to assure that these services don’t breach the policy formulated by the ANZ group known as Stakeholder engagement model for relation with the external auditor and the provisions of the general standards of independence of auditor under corporation Act, 2001 (Belton, 2017).

Analysis of Auditor’s Remuneration

Particulars	2016 $	2017 $	Increase (+)/Decrease (_)	Percentage (+/-)
(a)   Audit services
i)                   Audit Related Services	$4246000	$4760000	+$24000	+.57%
ii)                 Audit or review of financial reports	$8983000	$9418000	+$435000	+4.84%
b) Non-audit services
i)                   Methodology and Procedural reviews	$52000	$478000	+$426000	+819.2%
ii)                 General Market or Regulatory Insights	$0	$91000	+$91000	New Addition
iii)               Control related Assessments	$137000	$165000	$28000	+20.44%
iv)               Training related Services	$368000	$8000	-$360000	-97.83%
Total	$13786000	$14920000	$1134	+8.23%

The above table clearly reflects that though there has been a negligible increase in the remuneration percentage received by KPMG, Australian Firm, but a dynamic increase of 819.2% in terms of the remuneration for the methodology and procedural review services provided along with the sharp decline of 97.83% in the amount of compensation for the Training related services has been noticed (Coate & Mitschow, 2017). Whereas the overall nominal increase of 8.23% in the total amount of compensation received by the Audit Firm.

Key Audit matters and audit procedure performed

Non Audit Services provided

International Standards on Auditing (ISA 701) prescribes the incorporation of key audit matters (KAM) in an independent auditor’s report. KAM are the matters based on the auditor’s professional judgment to be communicated to those charged with the governance of the entity, which are summarized hereunder. 

1. Provision for credit impairment

Key audit matter

During the Audit period the audit firm noticed the significant credit exposures associated with the Group as it is dealing with the wide range of lending products across multiple industries and geographies, hence the group is expected to apply the high degree of professional judgments to estimate the provision for the credit impairment to reflect the correct value of these loans and advance related in the balance sheet of the Group (Gullet, et al., 2018).

Audit procedure adopted

For dealing with the above issue the tests of control are performed by testing the approval system of granting new loan against the policy prepared for it by the group, how the annual loan assessments are performed and monitoring the control over the credit quality of the counterparties associated with the loan, testing the system for recording the arrears of the credit and credit risk associated with the small amount of lending (Kim, et al., 2017).

For the smaller amount of lending analytical procedure is performed for the individuals provision calculations and performing the tests of control by over viewing capacity of the management of the portfolio and through the process of testing the change management controls, performing analytical procedure to challenge the group’s policy for risk grading, the certainty of group’s ability to recover the loan amount and the related impact of the same on the provisions made in this regard for all individual provisions.

For the collective provision tests of control like control over the IT systems in calculating the provision, management of data, completeness and accuracy of data are applied. Tests of balance like checking the history of payments and balance of general ledger applied.

1. Valuation of financial instruments held at fair value

Key audit matter

The factors on the basis of which the valuation of financial instruments at fair value is considered as key audit matter are their significance in the total amount of assets and liabilities of the group, the volume and variety of these financial instruments and increased amount of risk associated with the inconsistencies noticed in the management of transaction process. Valuation of financial instruments like derivatives that demand highly significant judgment that also contributed to incorporate as a key audit matter (Sithole, et al., 2017).

Audit procedure adopted

 The audit procedure applied in this case are testing of control by checking the accessing rights and change management controls  for key valuations, checking the control over interface like completeness and accuracy of data, data validation control management’s review and approval procedure for the purpose of model construction and validation together with governance and approval control.

Further performing the analytical procedure by reperforming the level 1 and level 2 valuations relating to trading securities and sale assets. The audit firm performed the testing of details too by using independent models for recalculating the sample valuations of derivatives either presenting assets or liabilities etc.

• IT systems and controls

Analysis of Auditor’s Remuneration

Key audit matter

 Being a bank the nature and volume of complexities in the use of IT system to transact the large volume of data made the IT systems and control a critical factor for the true and fair view of the financial statement which call for the need to mark it as a key audit matter (Trieu, 2017).

Audit procedure adopted

The audit procedure applied to deal with the issue includes the testing of controls like giving a check to the governance policy relating to IT governance to ensure the integrity aspect of the system and operation, checking the automated control’s effectiveness access right controls.

Audit Committee

Yes ANZ has had an Audit Committee in place. Yes the audit committee comprised of three non-executive director’s naming John macfarlane, Graeme liebelt,and  Ilana atlas. Yes the company has an Audit charter. The Audit committee comprises of the independent directors only.

The charter of the Audit committee has specifically prescribed the following guidelines:

1. The member of the Audit committee should be financially literate
2. It is being expected from the audit committee that jointly the committee possesses the adequate knowledge, skills and experience to ensure the discharge of their duties effectively.

The audit committee of the ANZ is expected to perform the following functions and responsibilities:

1. Reviewing the principles, policies, controls and procedure relating to the reported financial information.
2. Conducting the review of the risk management framework along with internal control system

• Reviewing the due diligence procedures

1. Reviewing the reports received from the various major subsidiary audit committees
2. To ensure the review of the independence of the audit and integrity of the financial statement and their compliance with the relevant regulatory requirements.
3. Reviewing the Internal audit function

• Other responsibilities include fixing up the compensation of the external auditor, replacing the external auditor et.

Audit Opinion

The Audit opinion given in the instant case is an unqualified one, which clearly states that the financial statement for the year ending 30th September, 2017 provides a true and fair view of the financial position of the group complying with the provisions of the corporation Act, 2001, Australian Accounting standard and corporation regulations, 2001.

How do the Directors’ and Management’s responsibilities differ from the Auditor’s responsibilities in relation to the financial report?

Director’s responsibility to the financial report includes preparation of financial statement in accordance with the Australian Accounting Standards and Corporations Act 2001 and implementation of an effective system of internal control so as to provide assurance about the true and fair view of the financial position of the entity by eliminating the probability of fraud, error or material misstatement in such financial statement together with the determination of ability of the entity to continue as a going concern with the assistance of a realistic assumption (Werner, 2017).

Auditor’s responsibility is confined to express his opinion with a reasonable assurance on the financial statement prepared by the management of the organization whether it is free from fraud, error or material misstatement, but his opinion on such financial statement cannot be treated as a guarantee that his audit performed in accordance with the Australian Accounting standards will detect all of the material misstatement found if any. 

Events occurring after the balance sheet date

The following significant events occurred between the date of the state of affairs and the date of the approval of the state of affairs by the Board.

1. An announcement is made as on 17^th day of October,2017 to that the group has agreed to offer for selling its one path P &I along with ADG group business to IOOF holdings limited valuing $975 million.
2. The second major event came into the picture through the announcement made on 18^th day of October, 2017 for the joint venture agreement entered into with the Metropolitan Bank & Trust by selling its 40% share in the Philippines based Metrobank Card Corporation (MCC) at a value of US$144 million.

• The announcement made on 23^rd October,2017 for reaching to confidential in-principle agreement with ASIC so that the issue relating to interbanking trading together with the bank bill swap rate can be settled as per the instruction of the court which is intimated on the 30^th october,2017 to the court.

As an interested third party stakeholder, make an assessment of the effectiveness of the material information reported by the Auditor in your conclusion.

In case of the Annual report of the ANZ banking Limited certain other important relevant material information like  Chairman’s Report, Managing Director and CEO Report, , Map and Review of Operations, Sustainability Report, Financial History, other have not been read by the Audit firm KPMG and this is clearly mentioned in the auditor’s report that somewhere provided a wide area of thought to the prospective stakeholders to make an effective decision making. Hence effectiveness of this report still see expects further improvement (Arnott, et al., 2017).

Material information which could be missing, under-reported and/or not fully explained or disclosed in an effective way for the intended users. 

The material information which are found absolutely missing in this Annual report were  Chairman’s Report, Managing Director and CEO Report, Map and Review of Operations, Sustainability Report, Financial History, and missing of the above referred reports may have significant effect on the disclosure of the significant material information or providing audit assurance without sufficient documentary  additional evidence supporting the same. 

Follow-up questions to the Auditor at the company’s annual General Meeting

The following set of follow-up questions may be asked to the auditor’s at the Annual general meeting.

1. Whether sufficient appropriate efforts were made by the Audit firm to ensure the receipt of other information that may have significant contribution to disclose any material misstatement hidden in the financial affairs of the ANZ Banking limited. If not, then what were the factors that prevented them from taking such steps?
2. Has the Group disclosed the information about the transactions with other parties who enjoy transaction terms that are not available to independent third parties? Has the significance of these types of transaction, if any, been clearly reported and explained? 

Conclusion

The above study and analysis of the Annual report of the ANZ Banking Group Limited that the dedication and commitment of the Audit firm, KPMG towards meeting the reporting requirements in relation the Audit Report as per the Corporation Act and Australian Accounting standards has been clearly reflected so that to serve the decision making of the direct and indirect stakeholders associated with the above referred company and the group with the tool of enhanced Auditor’s reporting.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Antle, R. & Smith, A., 1985. Measuring Executive Compensation: Methods and an Application. Journal of Accounting Research , 23(1), pp. 296-325.

Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, Volume 97, pp. 58-68.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. s.l.:s.n.

Gullet, N., Kilgore, R. & Geddie, M., 2018. USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).

Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.

Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.