Materiality concept, as covered by ASA 320 is very crucial for the Auditors to plan and perform the audit of the financial statements. Any kind of misstatement, error or judgement that can change the financial statement of the company, then it would be consider to be material. (Farmer, 2018). Materiality, a measure of professional judgement differs from individual to individual and from company to company. As recommended in ASA 320 and IASB there are some common materiality levels which have been prescribed some of which are 0.5% to 1% of sales revenue, 2-5% of the shareholders equity, 5-10% of net profit of the company, 1-2% of the total assets of the company or the gross profit being made by the company (Grenier, 2017)
Australia And New Zealand Banking Group Limited
Quantitative estimate of materiality
Australia and New Zealand Banking Group Limited which has been chosen here for analysis is listed on the New Zealand Stock Exchange. It is third largest bank by Market capitalisation in Australia and the largest bank in New Zealand. The company was founded on 2 March 1835. The company has its domination in the commercial and retail banking sector in both these countries. The quantitative materiality level of the given company has been derived using the parameters mentioned above but the auditors have mentioned in the auditor’s report that they have considered the materiality to be which is slightly above the levels shown in the below table. Hence, the calculation of materiality is justified.
The drafts and the notes of the financial statements includes disclosure regarding the relevant accounting policies and standards followed by the company. In case there is any change in the policy the same has been mentioned. The going concern ability of the company is also mentioned in the draft notes of the financial statements (Choy, 2018).
Preliminary analytical review of the company
Two types of procedures can be applied for the conduction of the audit- substantive test and the analytical review procedures. Substantive Test is the vouching of income and expenses and Verification is the checking of completeness, valuation, appropriateness and change in the values of the assets and liabilities (Trieu, 2017). The Auditor performs preliminary analytical procedures if he is not able to give any opinion based on substantive test. Preliminary analytical procedures includes understanding the business environment and his business as whole based on the financial performance of the entity over the past, the relevant industry and the comparison groups (Alexander, 2016). The Auditor sets the audit planning based on trend analysis, variance analysis and many such procedures and assesses the risk of material misstatement in the entity and understands the nature, timing and extent of the audit procedures (Werner, 2017). In the given case, the preliminary analytical testing has been using the basic ratios of the profit and loss account and balance sheet and analysing the same using the trend over the year 2014 to 2017 (Erik & Jan, 2017).
Australia And New Zealand Banking Group Limited
Form the above analysis, it can be seen that the net income of the Bank has increased in comparison to 2016 but it is still lower than 2014 and 2015. The payout ratio of the Bank has increased considerably for the years 2016 and 2017 in comparison to previous years 2014 and 2015. This shows that the profits of the company has increased in last 2 years. The financial leverage of the bank is almost the same throughout the analysed period showing the consistency in the financing of the bank through debt capital (Werner, 2017). The return on equity of the firm has seen a reverse path when compared ti the payout ratio. It has declined considerably in 2016 with aminor increase in 2017 effecting an overall fall in comparison to 2014 and 2015. The Return on Assets also had the same faith as that of Return on equity, Thus the Bank profitability is falling in comparison to the total assets held by it. The Return on Assets of the bank is very low which indicates that the bank is not able to recover the appropriate return on assets held by it..
Audit assertions are the claims that the auditors can make to be sure that the financials of the company are correct and there are no misstatement. There are three kinds of audit risk which includes Inherent risk, detention risk and control risk (Jefferson, 2017). The auditor needs to check all the risk associated areas and make an assertion on the company and its financials. Some key matters of the given company are highlighted below :
The company has large amount of credit exposure to large number of counterparties and hence provision for credit impairment becomes an important area for the auditors.
The relevant assertion by the company includes transparent credit policies and also addressing the risk around overall recoverability of loans and related elements.
The significant audit procedures would include:
To check the key controls over the counter parties with rgeards to wholesale loans. Doing sample assessment of the loans that are given and for the retail loans checking the system that records the loans and all the arrears needs to be studied.
The other important element would include valuation of the financial assessts at the fair market value. It is important as they are a significant part of the financial statements including 24% of the total assets and 13% of the total liabilities.
The relevant assertions made by the company would include valuation of the various financial instruments of the company. Keeping in mind the market rate and the significance that it helds for the company (Sithole, Chandler, Abeysekera, & Paas, 2017).
The relevant audit procedures would include :
Testing the various access controls and management controls, testing the group’s data and validating the same (Kim, Schmidgall, & Damitio, 2017).Testing management review and interface government and control.
Review of the cash flow statement of the company
In this section of the report, the cash flow statement of the company has been analysed.
From the above statement it can be seen that the highest amount of cash inflow is generated from the deposits from customers and other borrowings $29131 million and from issue of debts amounting to $16210 million (Arnott, Lizama, & Song, 2017). Since the company is a Bank the major inflows is from the operating and financing activities. Redemption of the issued debts and the loans and advances made by the bank forms the reason for the majority of cash outflows for the bank. The negative cash flow from investing and financing activities is the result of such redemption and advances (Belton, 2017).
Among the operating activities the net deposits and other borrowings forms the majority of inflows compensated by the net loans and advances which forms the majority of outflows. The deposits for the bank have increased considerably from the previous year which indicates the increase in the goodwill of the bank. The increase in loans and advances indicates the increase in profitability of the bank (Das, 2017).
The financing activities involve the highest increase in outflows when compared to the previous year and is the main reason for the negative cash outflow of the bank. Though the redemption of debt has reduced, the reduction in the issue proceeds has a higher magnitude. The company has also bought back shares which show that the bank has huge amount of reserves and is in a favourable position to continue its business.
Thus finally we can conclude that the Bank is having a very good profitability and also having a great liquidity position. The financial statement analysis shows that the bank has grown considerably when compared to the previous year. The only major concern being the huge loss due to the changes in the exchange rates, the bank should make reserves for such losses as the bank cannot control such changes in exchange rates (Grenier, 2017).
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