Legal Considerations And Major Risk Areas For The Audit Of SBL Ltd

Auditing Standards for SBL

This report is developed for generating practical understanding/ knowledge about auditing and finance concepts. Main purpose of this report is to construct a draft of an audit planning memorandum for SBL (i.e. Sustainable Bank Ltd). It will facilitate the details related to legal considerations that are needed by an auditor who is gong this company/ bank. It will also cover the analysis of major risk areas that should be addressed within the audit report of company. Further the report will emphasize on outlining six step audit procedure that will be required for any of the risk areas being identified. Final section of this report will provide the analysis and implications of different transactions provided in financial documents of SBL.

Australian Auditing Standards ASA 250 provides the legal and other considerations of audit process that can be conducted in context of SBL. In this context, IAASB has provided the legislative regulations in context of audit of the financial statements of companies. According to Para A1 to A8 of the standard, it is responsibility of the auditor team to review the individuals that have been charged with the governance in business entity (Gov AU, 2018). The management auditing team should ensure that different operations of the business entity have been performed in accordance to provisions of regulations and laws. In addition to this, the different disclosures in financial reports and the reported amounts must also be in compliance to the laws and regulations.

It is the duty of auditor to overview and check material misstatements, if exist in the financial reports and business reports as a result of failure to comply with laws and regulations. It is also provided in the standards that auditor cannot be stated as responsible for prevention of such types of non-compliance. In addition to this, an auditor can also not be expected to explore the non-compliance of banking entity from all the laws and legislations (Leow, 2010). An auditor will be responsible for the reasonable assurance for accuracy of financial reports of a company or banking firm. Example of these assurance includes the assurance against fraudulent or error-full transactions, assurance against material misstatements.

According to para A6(a), it is duty of auditor to collect sufficient amount of data from the company or business entity in accordance to different laws and provisions. According to ASA 200, the auditors should also maintain the professional scepticism throughout the whole audit process (Gov AU, 2018). Apart from these, the team of auditing process should communicate to other auditors if any suspected non-compliance issue is identified in the financial documents of business firm. Proper documentation should be created with regards to the non-compliance of company financial records to laws and regulations.

Responsibilities of the Auditor

As per the reference to Para A13-A14, the auditing team has the responsibility to recognize non-compliance instances with regards to laws ad regulations that may create any impact on the financial reports or financial statements of company. This includes different activities like enquiry of management specially those members of management that are charged with the governance of company like compliance to legislations and regulations (Leow, 2010). They should also conduct the investigation of correspondences or incidents with regards to regulatory authorities and licensing requirements and permissions.

According to Para A15, the auditor needs to stay attentive of instances if the audit process taken into account brings to non-compliance to the laws and regulations to its own attention. At the same time, para A16 states that it is also responsibility of the auditor to take written representation from management charged with the governance in company that they have disclosed all the known non-compliance from laws and regulations to the auditor, if it is in their knowledge prior to the audit process. In situation of non-identification of the instances of non-compliance from laws and regulation, the Auditor will not need to perform the audit procedure of company’s own compliance to different laws and regulations (Gov AU, 2018). In contrast to this, if the auditor has found any incident of non-compliance issue or suspected issue, the auditor has to develop knowledge about nature of the instance or act. According to Para A19, the auditor should provide the further information on this instance in terms of impact of the issue on financial reports of the organization.

According to Para A20-A22 of Australian Auditing Standards, the auditor has to discuss the matter of non-compliance with the management of company (i.e. charged with governance), if it is not prohibited by law of nation. In this situation, if the management of company do not support auditor and do not facilitate information for supporting company’s compliance towards the indicated laws and regulations, then the suspected non-compliance issue might have the adverse impact on financial reports of organization (Gay & Simnett, 2018). In this case, the auditor should take into consideration the requirement for seeking legal advice. In contrast to this, in case if the information with regards to non-compliance is not easy to obtain, then auditor shou9ld critically evaluate the impact of such situation on the final judgment that can be given in context of the company.

Objectives of Audit

As per the analysis of Para A23-A25, it is duty of auditor to carry out the evaluation of potential and current implications of suspected or identified non-compliance issue with regards to other aspects of the auditing process. Example of such aspects includes reliability of the written representations, and risk assessment by auditor. It is also duty of auditor to take appropriate actions against the company and management of company charged with governance of company. In accordance to Para A23, if the issue of non-compliance seems intentional, and material error then immediate communication of same should be made with the management of company charged with governance (Gov AU, 2018). In the instance, if auditor has observed that the management charged with governance power is responsible or involved in the occurrence of non-compliance issue, then auditor will approach and make communication of same to the upper level of management or authority within the company. Example of such upper authority may include the supervisory board of company or the audit committee. At the same time, if the organization does not have any upper level of authority above this level of management (charged with governance), or it is doubtful task for auditor to find out appropriate person to report for the same, then he or she should seek the legal advice.

According to Para A35 to A36, it is also the responsibility of auditor to include documentation of audit with the report of suspected or identified non-compliance in the organization. This documentation will include the document containing detailed audit procedure that is taken into consideration along with the final judgment that is concluded in context of audited company (Gay & Simnett, 2018). There should also present documentation of different matters that have been ascertained with regards to non-compliance issue in the organization. It should also include the description about how the management of company has responded towards identified non-compliance issue in company.

This audit plan is mainly designed for purpose of enhancing the effectiveness and efficiency of audit process. This report of memorandum planning needs to be approved and completed in context of SBL for effectiveness of auditing planning process.

Following are different aims or objectives of the audit activity/ process in SBL:

1. To ensure that there is no any major material misstatements, or material errors in the financial statements of company. The purpose of audit process is also to provide assurance to stakeholders of financial statements with regards to accuracy
2. To ensure that no any issues of ghost employees exist in the organization
3. To ensure that there is no any issues of intentional manipulation in amounts of different transactions of organization
4. To ensure that there is no any issues of breach of compliance to legal/ regulatory considerations and accounting standards
5. To ensure that there is no any presence of inherent risk or risk of internal frauds in the organization

In sustainable bank ltd of SBL, the new auditor has to work for audit of different business areas in bank, the details of which are as below:

• Assessment of different external regulatory factors and industry relevant policies that is applicable in the financial reporting responsibilities of SBL
• Audit of the nature of business operations of the business firm, governance and ownership structure and the investments made by it
• Cross checking of human resource records of SBL for ensuring that there is any issue of ghost employees in any branch of SBL
• Evaluation of different accounting policies that is applicable on the organization
• Analysis of key business objectives and strategies of the organization along with the business risks prevailing in organization like inherent risk, risk of misstatements etc
• Evaluation and review of the financial performance of company through assessment of its financial statements

Following are details of other important components, which needs to be evaluated in the company for performing audit process in effective manner:

• Management letters of Bank
• Statutory or legal accounts of Bank
• Background analysis of the company or bank
• Different personnel or employees that are engaged in facilitation of information
• Location of the bank
• Information about different types of engagements of bank

Background of SBL

Background of SBL:

Sustainable Bank Ltd (i.e. SBL) is a retail bank of Australia. It provides the retail banking products and services to both household customers and the small business firms. It offers the high quality of banking services at minimum charges levied from the customers. Different types of products and services of this banking entity are fund management, commercial lending, mortgage insurance facilities, financial planning services, consumer lending and the property lending etc. This bank is operating across Australia with 100 retail branches and agencies across different parts of Australia.

Statutory Accounts:

Different financial accounts are prepared by SBL in accordance to the compliance with Australian Accounting standards. Example of these statements includes financial statement of income and loss, statement of financial position, cash flow statement and the statement of change in equity. The new auditor will require reviewing these all statements of the SBL.

Management Letters:

It is also the duty of auditor to review different management letters that are issues by organization for different types of business purposes. This can help the auditor in recognizing different emerging business issues and control issues faced by the organization. In addition to this, the new auditor may also need to evaluate letters issues by internal auditors to management their report of findings from audit of the SBL.

Key Personnel Involved:

Under this component, the new auditor should focus on identify that what are different employees in organization that are involved in the flow of information. In this context, he or she should evaluate the roles and responsibilities of different personnel involved in such tasks. The directors of company should ensure the independence of auditor from any external or internal influence in the organization for different audit operations and final decision. So, in context of SBL, the new auditor should search for different employees in SBL that are involved in dispersion of information along with their roles and responsibilities.

The outcomes of SWOT analysis of SBL are as below (Sarsby, 2016):

Political: Under this factor, the political environment of a country is studied in context of an organization. The political environment of Australia is stable in nature. This will be a supportive factor for Sustainable Bank Ltd (or SBL). In addition to this, the political environment of Australia is supportive for the companies and industries (Perera, 2017). The ranking of Australia on Global Corruption index is recorded as 79 in 2018. This means, there is low level of corruption in Australia. In this context, it will be quite easy for management of SBL to obtain license and legal permission for selling different types of banking products and services across different geographical regions of Australia.

Statutory Accounts

Economic: The economic situation of Australia for recent two years is favorable for companies operating in it. It is caused due to different factors like increasing inflation rate, increasing rate of unemployment in country (Berg and Pietersma, 2014). In 2017, the rate of inflation of Australia has increased from 1.3% (in 2016) to 1.9%. at the same time, in June 2018, it is recorded as 2.1%. 

Social: There are different social issues that are faced by management of SBL such as the loss of consumer confidence (Perera, 2017). This may affect the financial performance of SBL. 

Technological: SBL has faced the computer malfunction issue as on 29 February 2018 at a branch of SBL at Victoria. In this malpractice, the access of branch was retail banking services and customer records were blocked. This affected the performance of bank. In addition to this, automatic loan payments were debited in customer accounts twice. But this malfunction was fixed by the management of bank be end of the day (Miller et al., 2011). But this incident indicates the technical risk or risk of cyber security threat for bank at its premises.

In context of a banking firm, there are some limited ratios that are calculated and interpreted in order to evaluate financial performance of bank. Example of these ratios includes Return on Assets, Return on Equity and the Net Interest Margin ratio. The findings of different types of ratios are as below:

(Source: See Exhibit 1)

On the basis of above table, it can be analyzed that the financial ratios of SBL are showing normal financial performance of the banking firm. There is any major fluctuation in the financial ratios like Return on Assets, Return on Equity and Net Interest Margin. In this context, there does not seem any risk of material misstatements in the financial reports of banking firm. The return on assets ratio of SBL has declined from 1.178 in 2016 to 0.69 in 2018. It means, the profitability of company has declined significantly in 2018 as compared to 2016. Similar to this, the return on equity ratio of SBL has also decline from 10.90 in 2016 to 6.55 in 2018 (Birchall, 2014). This means the profitability of company in relation of shareholder’s capital invested in business has also declined in 2018. Interest margin ratio helps to evaluate the interest income of a banking firm as compared to interest paid to other banks or financial institutions. The positive value of this ratio indicates the SBL is in profitability position in all the years. But the profitability has slightly declined in 2018 as compared to 2016. In this context, it can be said that management of SBL should focus on achieving extra ordinary growth through investment in marketing and promotional practices.

Management Letters

The technological knowledge of SBL is very strong, as it is evidential from the incident when computer malfunction was faced by branch of Victoria and the management fixed this issue by end of the day. At the same time, SBL has hired 125 highly trained IT staff. But there was lack of proactive business approach at SBL, which could be adopted by branch to avoid any cyber security threats in business.

Simple Comparison and Other Analytical Procedures:

From the simple analysis of income statement of SBL, it is observed that the amount of staff and related cost is very high as compared to other business expenses of bank. It is negatively affecting the profitability position of bank. There should be audit of this expense by getting further details of expenses included under this category (Zisman, 2018). The other expenses also seem the normal. In this context, from the simple comparison, there does not seem any major risk of material misstatements in the financial reports of SBL.

One of the limitations of ratio analysis technique is that it does not take into account the subjectivity knowledge about the incidents and events taking place in organization. This is totally based on the figures provided in financial statements of company. The numerical data does not seem sufficient to recognize the risk of misstatements or fraud that occurs in the organization (Birchall, 2014). In this context, it would be appropriate to also use some qualitative research techniques for accomplishing their audit process in more effective manner.

Identification of Main Risk Areas:

Business Risks: The business risk has been faced by SBL due to increasing competition in the market (Sadgrove, 2015). 

Inherent Risk: Inherent risk can be defined as the risk of omission or error in core financial reports of company/ bank (Loughran, 2010).

Fraud Risk: SBL is also exposed to fraud risk in its business. For example, one of employees of SBL was found involved in fraudulent activities. In October, Joe Blogg that is one of the employees of SBL was charged with fraudulent activities in the Bank. Joe Blogg had used the fictitious names and customer identify for obtaining loan amounting to $2 million. In addition to this, two other employees have also been recognized with similar type of scams (Loughran, 2010).

Control Risk: Control risk exists in the financial statements of SBL. Control risk can be defined as the risk of occurrence of material misstatements and risk of failure of existing control measures of company to detect such errors.

Detection Risk: Detection risk can be defined as the probability of failure of auditor or other relevant staff to detect any misstatements or errors existing in different amounts or transactions in the financial reports of company. This risk also prevails in SBL, as it runs business through network of 100 retail branches and agencies. So, it is not easy to review and cross check every transaction of every branch.

Audit Risk: Audit risk can be defined as risk that any material misstatements or error exist in the financial reports of company, and the auditor has failed to recognize this risk. This may be caused due to different factors like failure of detection or the fraud. This likelihood of audit risk is higher with the internal auditors, as these auditors are selected from the internal staff of company. This risk can be mitigated by ensuring independence of auditor and auditor’s decision making. The companies and banks should hire external auditors for audit of key financial documents in business.

There are different types of audit procedures like inspection, observation, external confirmation, recalculation, re-performance, the analytical procedures and inquiry (Aquino, 2018). The detailed discussion of these methods in context of SBL is as below:

Inspection: Under inspection, the auditors have responsibility to cross check the compliance of organizational financial records to different accounting standards and regulations (Brown et al., 2016). In this context, the new auditor will conduct inspection of compliance of financial statements of SBL with the Australian Accounting standards.

Observation: Observation can be defined as the process of looking the way, in which particular task is performed or financial report is developed. Under this technique, the new auditor can look at different financial reporting operations of SBL by going into live operations of bank (Day, 2016). The meetings with relevant staff can also be arranged for performing this audit test.

Re-performance: Re-performance is an important step in the auditing process. Under this step, the auditor can focus on independent execution of the internal controls adopted by organization (Appelbaum, 2016). This will help to evaluate whether these measures are effective enough or not for development of fair financial statements in SBL or not.

Re-calculation: Under this technique, the auditor will need to make re-calculation of random values and items in the financial statements of SBL (Appelbaum, 2016). This will help to ensure accuracy of all data and values shown in the financial statements of SBL.

Re-performance: Under this technique, the auditor can direct the respective staff of company to re-develop a particular financial statement or particular financial value on SBL. This will help to cross check matching of both values and the accuracy of data in key financial records of SBL.

Analytical Procedure and Inquiry: Under this approach, the independent auditor needs to make comparison of different financial items and financial statements for different business years (Appelbaum, 2016). A major deviation in a particular financial item can attract the attention of auditors, which is tested for accuracy. This way, the inaccuracies and misstatements in financial statements of SBL can be recognized by auditor.

Conclusion: 

On the basis of above analysis, it can be concluded that there are financial statements of SBL are fair and presents the true value about financial performance of business entity. It is so because there is no any issue recognized from the entire audit process related to material misstatements or inaccuracies. From the analysis of given case, it is observed that SBL is exposed to different types of risks under its business like business risk and the inherent risk. Example of business risks faced by SBL includes the technological risk, cyber security threat and the business risk resulting from increasing competition. In addition to this, there is risk of internal fraud in SBL. For instance, an employee of the bank (Joe Blogg) is already found suspected of obtaining loan in an unethical manner by presenting fictitious name and identity details. The future occurrence of such type of incidents can be stopped through strict control mechanism in the organization.

References

Appelbaum, D. (2016) Securing Big Data provenance for auditors: The Big Data provenance black box as reliable evidence. Journal of Emerging Technologies in Accounting, 13(1), pp. 17-36.

Aquino, C.E. (2018) Six Steps to an Effective Continuous Audit Process. [Online]. Available at: https://iaonline.theiia.org/six-steps-to-an-effective-continuous-audit-process (Accessed: 16 September 2018).

Berg, G.V. and Pietersma, P. (2014) The 8 Steps to Strategic Success: Unleashing the Power of Engagement. UK: Kogan Page Publishers.

Birchall, A. (2014) Financial Analysis and Control: Financial Awareness for Students and Managers. UK: Butterworth-Heinemann.

Brown, B., Balatsoukas, P., Williams, R., Sperrin, M. and Buchan, I. (2016) Interface design recommendations for computerised clinical audit and feedback: hybrid usability evidence from a research-led system. International journal of medical informatics, 94, pp. 191-206.

Day, K. (2016) Built environmental correlates of physical activity in China: a review. Preventive medicine reports, 3, pp. 303-316.

Gay, G. and Simnett, R. (2018) Auditing and Assurance Services in Australia, Seventh Edition. Australia: McGraw-Hill Education Australia.

Gov AU (2018) Auditing Standard ASA 250: Consideration of Laws and Regulations in an Audit of a Financial Report. [Online]. Available at: https://www.legislation.gov.au/Details/F2017L01172 (Accessed: 16 September 2018).

Leow, J. (2010) Australian Master Superannuation Guide 2010/11. Australia: CCH Australia Limited.

Loughran, M. (2010) Auditing For Dummies. USA: John Wiley & Sons.

Miller, F.P., Vandome, A.F. and McBrewster, J. (2011) Pest Analysis. Germany: VDM Publishing.

Perera, R. (2017) The PESTLE Analysis. Ireland: Nerdynaut.

Sadgrove, K. (2015) The Complete Guide to Business Risk Management. UK: Gower Publishing, Ltd.

Sarsby, A. (2016) SWOT Analysis. USA: Lulu.com.

Zisman, B.S. (2018) Banks and Thrifts: Government Enforcement and Receivership. USA: LexisNexis.

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