Assessing Major Auditing Risk Areas - Case Study Example

Major Auditing Risk Areas Name Code & Course Professor University City Date Contents 1.0 Introduction…………………………………………………………………………3 2.0 Executive summary…………………………………………………………………3 3.0 Bank reporting………………………………………………………………………3 4.0 Auditor report……………………………………………………………………….3 5.0 Dialogue with supervisors…………………………………………………………..4 6.0 Major risks…………………………………………………………………………..4 6.1 Liquidity ……………………………………………………………….4 6.2 Credit …………………………………………………………………...4 6.3 Inherent ………………………………………………………………...4 6.4 Control ………………………………………………………………….4 6.5 Detection ………………………………………………………………5 7.0 Increase in present value of revenue………………………………………………...5 8.0 Proper implementation and execution of bank goals and objectives………………..5 9.0 Auditor approach………………………………………………………………….....6 10.0 Transaction and events…………………………………………………………..6 10.1 Completeness……………………………………………………………...........6 10.2 Occurrence………………………………………………………………………6 10.3 Valuation and allocation………………………………………………..........6 10.4 Classification and understandability………………………………………..6 11.0 Conclusion …………………………………………………………………....7 Reference list Major Auditing Risk Areas 1.0 Introduction This paper first tries to define exactly what an audit risk is as it will help in understanding some of the major audit risk areas that are found in the Commonwealth Bank of Australia. An audit risk can be understood as the risk that any auditor can articulate inappropriately as an opinion in the financial bank statements. Some examples of audit risks in general are: i. Issuing of an audit report that is not considered qualified in areas where the qualification can be justified reasonably. ii. Any failure to emphasize on a very significant issue found within the audit report and iii. Issuing out a significant audit report or opinion in a case where the significance of that opinion is not necessary. Audit risks can be regarded as a product of the various risks that can be brought up during the performance of an audit. For the Commonwealth bank of Australia to keep the audit risks of engagements within the accepted limit, its auditors need to assess the risk levels that pertains each element found within the audit risk (Tysiac, 2015). 2.0 EXECUTIVE SUMMARRY The Commonwealth Bank of Australia audit risks can take lessons from the audit bank crisis project which tried to define the importance of bank auditors to the market confidence and how they can actually be enhanced in the wake of the credit crunch and of any resulting banking crisis. Interviews carried on to different stakeholders showed that there are various challenges like working with experienced auditors and the overall financial services department. The following are some of the summarized proposals on how to deal with the various audit risks that occurs within the Commonwealth Bank of Australia (Anderson, 2012). 3.0 Bank reporting Information about risks is usually presented during the annual banking reports, these reports are normally spread between the audited financial reports and the unaudited financial report. The Commonwealth bank needs to focus on very clear presentations that can allow its customers to be familiar with the bigger picture that is normally obstructed by the large volumes of detailed information available. The summary risk reports are a good way of providing the big picture, the bank auditors should be asked to give assurance on the new summary risk report in order to provide the necessary confidence to the bank customers and their financial statements. The audit committee of the bank has a very important role to play by supporting better reporting and it is the duty of the auditors to provide these committees with sufficient reports that makes them well equipped in making financial decisions. 4.0 Auditor report According to Anderson, (2012) Insufficient or irrelevant information can be provided under a certain framework about any job that underpins an audit. This can make it hard for the investors and the customers of the Commonwealth bank of Australia to assess any performance of their bank auditors or understand any main challenging areas. To address this problem, the Commonwealth bank needs to ensure that any key judgment areas that are discussed between the bank and the auditors are considered in the critical accounting estimates in their financial reports. Financial services can help in setting up forums to ensure that both the auditors and the investors make the audit to be more transparent. 5.0 Dialogue with Supervisors Regular communication between the bank supervisors and the auditors can enable both parties to do their jobs more effectively and efficiently. The auditors and other experts can have skills that support banking managers in performing their jobs (ICAEW, Financial Services Faculty, 2010). Professional skepticism together with the internal control over the financial reporting are some of the main areas that the auditors have put more focus in relation to the regulators in recent years. 6.0 Major risks 6.1 Liquidity risk According to Cohen, (2015) Liquidity risk has been a crucial issue that continues to affect the operations of common wealth bank of Australia. It’s therefore important that financial institutions such as banks which are mostly associated with it have a good understanding of the term, its causes, impact as well as how it can be managed. Liquidity risk refers to a situation in which a party interested in trading stocks is unable to do so at reasonable cost and within a reasonable time because there are no buyers willing to trade at the current or spot prices resulting in financial losses. Another factor which greatly undermined bank liquidity was the mark-to-market accounting treatment of their assets which contributed to their failure. This was attributed to the decreased demand for debt instruments due to holding back of the banking institutions of these instruments. Therefore, the sale of the instruments at lower prices forced a write-down of other securities adding illiquidity to the market. The failure was further pushed upward by lack of adequate communication with the banking institutions regarding the structuring of the products they sold. This resulted in their inability to protect themselves from correlated and counterparty risk (Cai et al., 2015). 6.2 Credit Risk Credit risks arise from the loss that arises from collapse of the defaulters to meet their contractual debt. At a group level, credit risks include application risks that arise from inter-dependencies between large credit disclosure and focus of exposé to nations and business sectors. The common wealth bank of Australia credit risks procedures have been developed as a material of sound risk management practices and in accord with the outlook of supervisory body standards. The level of credit risk is supported on an internal audit risk-rating structure, which uses analytical apparatus to calculate probable and sudden losses for the credit portfolios. Despite the bank carrying out portfolio diversification and the credit and liquidity enhancement following the global financial crisis, there has been reduced securitization due to external and internal financial issues such as increased mortgage rates and deterioration of loan-to-value ratios (Miyajima, et al.,2015)) 6.3 Inherent risk This is the inclination of a statement about a category of transaction, account balance, or discovery to a misstatement that could be material, either separately or when combined by other misstatements, prior to reflection of any correlated control system. Thus, the intricate estimates are more likely to be misstated than simple estimates. Cash is more at risk to fraud than a stock of coal. 6.4 Control risk This is the risk that financial misstatements take place in a statement of a transaction account balance and that the misstatement. They could be material when combined with other misstatements, and will not be discovered and approved, on a suitable basis, by the entity’s internal audit system. That risk is a utility to the efficiency of the plan and process of internal control system in achieving the entity's objectives related to arrange the bank’s statements. These risks will constantly be present due to inherent limits of banks audit structure. (Cohen et al., 2015) 6.5 Detention risk This type of risk happens when the measures executed by the auditor to reduce audit risk will not discover a misstatement that exist and that could be material, when combined with other misstatements. The interrelation of the three mechanisms of audit risk is outside the range of this current article. This risk provides understanding to the auditors when identifying appropriate risk assessment procedures. Detection risk recount audit measures controlled by the auditor's reply to risk of material misstatement. For a given level of audit risks, detection risks ought to allow an opposite association to the risk of material misstatement at the applicable statement altitude. Conversely, if there was a lower risk of material misstatement then the detection risks will be and can be accepted by the auditor. Though, the auditor should carry out inclusive measures for all relevant assertions linked to material modules of account balances, transactions and disclosure. (Cohen et al., 2014) 7.0 Increase in present value of revenue The increase in value of revenue streams from asset earnings. As a result, the prices of housing and stock prices rose tremendously. Additionally, investors assumed more risk by undervaluing the cost of the risk in order to generate increased returns to create supernormal profits. These developments led to a large boom whose management was beyond the scope of macroeconomic policy and audit managers who found it difficult to control the high growth rates with unstable foundation. As such, bubbles were created especially in technology and finance sectors (Lewis, 2015)). 8.0 Proper execution and implementation of bank goal and purpose Preferably, the function of common wealth bank of Australia auditors is to manage proper discharge and effecting of bank’s goals and purpose. Additionally, the auditors to present published guidelines that shall observe the organization employ to achieve the objectives. These auditors offer a broad-spectrum service to the directors of their particular organizations. The environment and excellence of services provided by Common Wealth Bank of Australia auditing firm has no link with the approach represented by the organization manager towards the internal audit Unit. The all-purpose objective and aim of any business is to set a chance of being met expeditiously and to carry out the functions with Accountability. An organization without a functional internal audit unit is not successful little in terms of excellence and growth ( Sadgrove et al., 2015). 9.0 Audit approach Internal audit provides a Suitable framework for the management of funds to enable the bank to achieve the objectives in place (Länsiluoto, 2015). The framework provides a check and balance verification that offer guidelines to the management when need arises. Audit approach must be enacted in banks to ensure a lucrative financial system that delivers a quality service to both the customers and also when audits are done. The Board of the organization must emphasize the assessment of the report done by the Auditors within their organization. According to Sadgrove, (2015) the organization has the responsibility to implement the guidelines in a suitable way. This embraces outstanding mode of setting and proper strategies to exploit odds of achieving the banks objectives and devising means to counter the calamity that could obstruct the achievement of the set objectives. It is certainly true that a manager cannot carry responsibilities without a helping hand from the internal auditor. The auditing unit have qualified persona that are capable of approach issues with high integrity. Internal auditors are capable of handling the delay and other system risks related to organization, operations and Finances. Internal auditing is a self-sufficient activity that offers discussion and assertion services to any company. This helps in growth and in valuation of the organization and working of the organization. Furthermore, it allows the bank to influence its actions and ensure that proper methods are pursued to attain the set objectives. Essentially, it provides as a focus to express the board of organization in daily activities (Lewis, 2015). 10. Transactions and events 10.1 Completeness This is where all transactions are accounted in the financial system of the bank. These transactions include asset, liability, capital, reserves and other disclosures that are in the financial control system. (Cai et al., 2015) 10.2 Occurrence This assertion means that events, transactions and other issues that have been verified essentially took place and concerns the financial statements of the organization. 10.3 Valuation and allocation This describes how allocations are integrated in financial statements at accurate amount and with accord to the bank strategy and the interrelated financial reports structure. Additionally, valuation adjustments are required and financial information is revealed moderately and at proper amount. 10.4 Classification and understandability In this assertion monetary information and disclosures are accessible and disclosed visibly for users understand. As a result disclosures use simple language to state issues clearly and concisely. 11.0 Conclusion The major risk areas which many banks face can be dealt with through restoring of investor confidence in the banking operations especially with regard to securitization of debt instruments. This is however a challenge whose solvency depends on economic recovery following the global financial crisis. It is this recovery that will help ensure that bank's assets are liquid enough; there is reduction in non-performing loans and the level of uncertainties in the supply of credit ends (Strong, 2014). Reference list Abernathy, J., Hackenbrack, K.E., Joe, J.R., Pevzner, M. and Wu, Y.J., 2015. Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Staff Consultation Paper, Auditing Accounting Estimates and Fair Value Measurements: Participating Committee Members. Current Issues in Auditing, 9(1), pp.C1-C11. Anderson, A. (2012). Understanding Audit Risks and Discussing them with your Client: Anderson Audit Express. Self Study 3. Pages 1-4 Cai, Y., Kim, Y., Park, J.C. and White, H.D., 2015. Common auditors in M&A transactions. Journal of Accounting and Economics. University of Pennsylvania. Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons Cohen, J.R., Krishnamoorthy, G. and Wright, A., 2014. Enterprise risk management and the financial reporting process: the experiences of audit committee members, CFOs, and external auditors. CFOs, and External Auditors (May 30, 2014). ICAEW, Financial Services Faculty (2010), Audit Banks: Lessons From the Crisis. June 2010. ISBN 978-0-85760-051-6. Lewis, I., 2015. The role of internal auditing in providing combined Assurance: assessing internal financial controls. Länsiluoto, A., Jokipii, A. and Eklund, T., 2015. Internal control effectiveness–a clustering approach. Managerial Auditing Journal, 31(1). Miyajima, K., Mohanty, M.S. and Chan, T., 2015. Emerging market local currency bonds: diversification and stability. Emerging Markets Review, 22, pp.126-139. Sadgrove, M.K., 2015. The complete guide to business risk management. Ashgate Publishing, Ltd.. Strong, B., Cater-Steel, A. and Lane, M., 2014. Prudential regulatory risk governance of IT multi-sourcing strategies within the Australian banking sector. ACIS. Strong, B., 2014. Prudential regulatory governance of the risks associated with IT multi-sourcing strategies within the Australian banking sector(Doctoral dissertation, University of Southern Queensland Tysiac, K. (2015). Key Areas of Risk in the 2015 Audit Cycle: Journal of Accountancy. www.journalofaccountancy.com/news/2015/oct/2015-audit-issues-201513174.html Read More