ASA315 Auditing and Assurance in Australia
Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
Comparative corporate governance: A functional and international analysis.
Effects of tone at the top and coordination with external auditors on internal auditors.
Answer:
Introduction
It is a major responsibility of the auditors for the management of different dimensions of the governance mechanism of client’s organization. ASA 315 has been incorporated with the intention to detect and analyze the risks of material misstatements due to the fraud or errors in the financial statements of the companies. The auditors are needed to comply with the standards of ASA 315 in order to gain clear understanding of the organizational environment and its internal control (auasb.gov.au, 2018). In addition, this assists the auditors to develop a basis of design so that responses can be evaluated for the risks of material misstatements. Different sections of ASA 315 provide the auditors with mechanism for gaining understanding of the governance aspects of the client organizations and they are discussed below:
Integrity and Ethical Values communication and Implementation: “Paragraph A70
(a) of ASA 315” states that it is needed for the company’s management to develop and maintain ethical, legal and honest culture and required to communicate the standards of ethics and behavior to their employees with the help of codes of conduct and policy statement (Fleckner & Hopt, 2013).
Competence Commitment:
As per “Paragraph A70 (b) of ASA 315”, it is needed for the auditors to obtain sufficient knowledge about the level of competence of the employees for a specific job and the process in which these competencies can be converted needed knowledge and skills (auasb.gov.au, 2018).
Participation by the Staffs Responsible for Governance: “Paragraph A70 (c) of ASA 315” indicates towards the fact that staffs responsible for governance can affect he control consciousness of the business entities. This imposes the responsibility on the auditors in evaluating their independence from management, involvement degree, experience as well as stature along with the sustainability of their actions (Rahman, 2013).
Operation Style and Philosophy of Management: It can be seen in “Paragraph A70 (d) of ASA 315” that the components of operation style and philosophy of the management are management’s attitude towards the business risks, processing of information, financial reporting as well as accounting employees and functions. It is needed for the auditors to evaluate whether the earnings are realistic and whether there is availability of alternative accounting policy, estimates and principles. This aspect helps the auditors in understanding the management’s attitude towards internal control (Wang & Fargher, 2017).
Structure of the Organization: As per “Paragraph A70 (e) of ASA 315”, the provided structure helps in the aspects to plan, implement, control and review the organizational activities (auasb.gov.au, 2018).
Authority and Responsibly Allocation: As per “Paragraph A70 (f) of ASA 315”, it become easy for the auditors in identifying the lines of major authority and areas of authority in the presence of established framework. Moreover, the auditors can gain understanding about the implementation of internal control (auasb.gov.au, 2018).
Policies and Practices for Human Resource: The policies and practices of “Paragraph A70 (g) of ASA 315” consider account orientation, training, recruitment, compensation, promotion along with the remedial measures. This information is helpful for the auditors to fairly understand the governance mechanism of the clients (Rahman, 2013).
Issues of Commonwealth Bank
|
Issue |
Impact on raising audit risk |
Recommendation |
Reduction in audit risk because of the recommendation |
|
The first issue is related with inadequate and inconsistent management due to the lack of face-to-face meetings between the former CEO and the Chairman for developing the targeted agenda. Moreover, lack of oversight from the senior management was evident in the bank (apra.gov.au, 2018) |
This issue can lead to the development of financial frauds and manipulations that can increase the overall audit risks |
For addressing this issue, the requirement is the development of efficient independent committee for maintaining the required oversight. In addition, this can lead to the minimization of the possibilities of manipulations while increase the internal control mechanism (Louwers et al., 2015) |
In the presence of the recommended strategy, the auditors can ensure effective governance as well as control on financial reporting related issues along with controlling the audit risk of the bank. In addition, it will lead to maintain the tone at the top of the bank’s senior management |
|
The second issue can be identifies in the lack of urgency from the board of CAB to resolve different issues and escalations. The audit members of CAB have not obtained audit report on timely manner and the owners did not come in front of the board members (apra.gov.au, 2018) |
This insufficient follow-ups as well as major negligence from the owners and the senior management can contribute towards the increase in audit risk as the bank will not be accountable for the illegal activities in the process of financial reporting (Griffiths, 2016) |
For the purpose of addressing this issue, the bank is needed to ensure that all the processes and practices of the board are in line with the internal control mechanism for better risk management processes |
The implementation of this strategy will make the senior management of the bank accountable as well as responsible for all the financial reporting activities. |
|
Another major issue can be seen in the lack of sufficient commendation between the members and committees of the board (apra.gov.au, 2018) |
This aspect can lead to the development of significant audit risk due to trouble of the bank to detect fraud. Thus, lack of collaboration can be seen among the board |
For minimizing this issue, there is a needed for the implementation of direct involvement with the business units and owners for gaining support on the significant issue. In this way, the timely closure of issue will be possible (Knechel & Salterio, 2016) |
With this strategy, it is possible to eliminate major errors and issues in financial reporting and auditing |
|
Another major issue can be seen in the risk management framework of the bank as there is a lack of proper working processes. The lack of confidence and benchmarking can also be observed (apra.gov.au, 2018) |
This issue can bring major troubles for the auditors in conducting the audit procedures that can lead to the increase in audit risk |
The recommendation is the enhancement of authorities and capabilities of the management of CAB related to risk management framework |
The presence of effective risk management framework will ensure the effective management of audit risk in the bank (Griffiths, 2016) |
Conclusion
It can be seen from the above discussion that the auditors are needed to comply with the principles as well as standards of ASA 315 in order to gain understanding and information about the governance system of the client, business nature of the client, level of internal control of the client, operation style and philosophy, policies and practices and others. At the same time, it can be seen that CAB has some major issues related to governance like ineffective risk management framework, lack of coordination and others. The recommendation for CAB is to establish an effective governance mechanism to eliminate these issues.
References
Apra.gov.au. (2018). APRA releases CBA Prudential Inquiry Final Report and accepts Enforceable Undertaking from CBA | APRA. Retrieved 17 August 2018, from https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu
Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. (2018). Retrieved from https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
Fleckner, A. M., & Hopt, K. J. (Eds.). (2013). Comparative corporate governance: A functional and international analysis. Cambridge University Press.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.
Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of its Participative Review Process. Routledge.
Wang, I. Z., & Fargher, N. (2017). The effects of tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments. Accounting & Finance, 57(4), 1177-1202.
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