HA3032 Auditing and Assurance Services: National Australian Bank

Project tasks:

Part 1 – Understanding Nature of the entity

Matters that you may consider when obtaining an understanding of the nature of the entity include:

• Business operations

• Investments and investment activities

• Financing and financing activities

• Financial reporting practices

Part 2 - Understanding the Industry

1. Industry size
2. Industry growth
3. Industry supply chain
4. Major players
5. Market shares of Industry players
6. Critical success factorsMajor threats

Part 3 – Understanding the legal environment

Relevant regulatory factors include the regulatory environment. The regulatory environment encompasses, among other matters, the applicable financial reporting framework and the legal and political environment.

Part 4 – Understanding external environmental factors

1. PEST analysis
2. SWOT analysis
3. Porter’s five forces analysis
4. other external factors affecting the entity that you may consider include the general economic conditions, interest rates and availability of financing, and inflation or currency revaluation.

Part 5 – Understand objectives, strategies and Assessing Business Risks

1. Industry developments (a potential related business risk might be, for example, that the entity does not have the personnel or expertise to deal with the changes in the industry).
2. New products and services (a potential related business risk might be, for example, that there is increased product liability).
3. Expansion of the business (a potential related business risk might be, for example, that the demand has not been accurately estimated).
4. New accounting requirements (a potential related business risk might be, for example, incomplete or improper implementation, or increased costs).
5. Regulatory requirements (a potential related business risk might be, for example, that there is increased legal exposure).
6. Current and prospective financing requirements (a potential related business risk might be, for example, the loss of financing due to the entity’s inability to meet requirements).
7. Use of IT (a potential related business risk might be, for example, that systems and processes are incompatible).
8. The effects of implementing a strategy, particularly any effects that will lead to new accounting requirements (a potential related business risk might be, for example, incomplete or improper implementation).

Part 6 – Performing Analytical Procedures to understand Entity’s Performance

You are also required to perform analytical procedures (ratio analysis) on the selected company for 3 years and compare those ratios across time, and to industry data or a major competitor.

Part 7 – Understand management and Governance

1. Communication and enforcement of integrity and ethical values– These are essential elements that influence the effectiveness of the design, administration and monitoring of controls.
2. Commitment to competence– Matters such as management’s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge.
3. Participation by those charged with governance– Attributes of those charged with governance such as:

• Their independence from management.

• Their experience and stature.

• The extent of their involvement and the information they receive, and the scrutiny of activities.

• The appropriateness of their actions, including the degree to which difficult questions are raised and pursued with management, and their interaction with internal and external auditors.

1. Management’s philosophy and operating style– Characteristics such as management’s:

• Approach to taking and managing business risks.

• Attitudes and actions toward financial reporting.

• Attitudes toward information processing and accounting functions and personnel.

1. Organisational structure– The framework within which an entity’s activities for achieving its objectives are planned, executed, controlled, and reviewed.
2. Assignment of authority and responsibility– Matters such as how authority and responsibility for operating activities are assigned and how reporting relationships and authorisation hierarchies are established.
3. Human resource policies and practices– Policies and practices that relate to, for example, recruitment, orientation, training, evaluation, counselling, promotion, compensation, and remedial actions.

Introduction

The overall report is based upon the assessment of the bank namely National Australian Bank (NAB) that assess the every aspect of the organization at several criteria’s like nature of the entity, industry regulations and external factors that influence the organization. Similarly, it also assesses the business risks and strategies arise in the operations. Furthermore, it also explains the performance measures and monitoring of the activities of the board members. Lastly, this reports depict the corporate governance structure is followed by the NAB in a precise manner.     

Part 1- Nature of Entity

Business Operations

The operations of the business deals in financial services that operate in Australia and New Zealand, the business operations are also spread into the Asia, the UK, and the US. The products of the business committed to the customers with quality product and services with fair fees and charges (NAB, 2017).

Investment and Investment activities

The bank invests in diverse sectors and investment activities. Presently the firm invests in communities $48.8M in 2016 to the Australian communities and 1.8million in CSR activities. Apart from that the business invests in Technological sectors to provide effective services to their clients (Knechel and Salterio, 2016) 

Financing and financing activities

The firm undertakes finance activities of A$18bn over the seven years to September 2022 to address the climate change requirements in future and environmental activities. The bank fairly supports the transition to a low-carbon economy in 2016 (NAB, 2017).

Financial reporting practices

The bank's financial reports were shown in the proper format and it discloses the clear information to their shareholders. The firm makes the report under Banking Act 1959.Accounting standards and interpretations according to Australian Accounting Standards Board (AASB) (Admati and Hellwig, 2014). 

Part 2- Understanding the Industry

1. A) Industry Size

The present banking industry of Australia consists of a number of banks licensed to carry on the business under the Banking Act 1959.The banking industry has grown at the rate of 13 percent in the last decade. It indicates that a major number of players in the banking industry, holding the major portion of financial assets.

1. B) Industry Growth

The strong growth in assets of the banking system has occurred at the same time the stock of the household savings in banks increased significantly. The growth of the banking sector is 27% in 2016 as compared to previous year, due to increase in foreign funding and assets ownership (Cohn, Fehr and Maréchal, 2014).

1. C) Industry Supply Chain

Due to increase in competition in the banking industry, the supply chain is strong and diverse for Australian Banking system. The reduction proportion of wholesale deposits, the capital adequacy is maintained and major players focus on selected credit opportunities and reduce unsecured retail portfolio.

1. D) Major players

Currently, the major banking players in the Australian market are Westpac Bank, Bendigo Bank, ANZ Bank, Sun Corp Bank and AMP Bank Ltd which holds the major financial market (Taleghani, Gilaninia and Mousavian, 2011).

1. E) Market Shares of Industry players          

(Source: Australian Broker, 2017)

There are four leading players in the financial market in Australia. The growth of these firms is indicates according to the financial years. It seems that ANZ bank share is increased from $1600m to $2600m from the past years. Similarly, the growth of the CBA and NAB is not seen such improvement in past years.WBC has grown significantly from the past recent years and reach to $3000m (Goyal and Joshi, 2011).

1. f) Critical success factors

The critical success factors of NAB are product attributes, competitive capabilities, resources competencies, technological advancement and low cost. These factors help firm to become competitive in the long run.

1. g) Major Threats

The banking industry is under ‘oligopoly’ situation. As per the analysis of the Moody’s report, there are new threats that can be faced by the banks i.e. longer period of low-interest rates, home price risks, improper wage rate and unwinding global commodity cycle.

Part-3 Understanding legal environment

Banking regulations in Australia are beneficial for the housing market it provides low collateral security on home loans. The regulations are split between the Australia Securities and Investment Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) played an important role in regulating market conduct. The firm is regulated by APRA. The current accounting standards are followed by the NAB under The Australian Accounting Standards Board (AASB) and IFRS. The IFRS standards are beneficial for the banks to meet the international financial requirements of the clients (Beatty and Liao, 2014). Moreover, the political stability of the country is good that supports the policies of the government.

Part 4- Understanding external environmental factors

PEST analysis- As per the analysis, it depicts that banking industry is accountable by the government. It provides good offer and services to the customers are the example of good political systems and regulations. Proper systems reduce the risk of fraud and illegal activities in the companies. Additionally, it can also analyze from the economic point of view banks are at the whim of economy because inflation rates can be devastate banking prospects as it influences the value of the currency. Technology is helping customers regarding spending and save money with help of applications and online services that reduce the chances of illegal transactions, fraud and risk in daily transactions due to digital records (Bhasin, 2015). Social factors indicate that changing behavior and necessities influence how people use banking options that reduce the risk of misstatement in their accounts and it will increase the trust between consumers and banks.

SWOT analysis

(Source: Dechow, 2011)

As per the above SWOT analysis, it summarizes that key strengths of the bank are the strong brand name and leading financial player in the Australian banking that reduces the chances of risk from the consumer point of view. Similarly, opportunities depict that bank has expanded in other countries with a large number of portfolios. Similarly, weakness and threats increase the chances of the risk of low revenues and government regulations that impact the operations of the business.

Porter’s Five Forces Analysis

(Source: Dechow, et al., 2011)

As per the above picture, it can be analyzed from the factor ‘Rivalry among existing firms’ indicated that competition is high in the market due to other players i.e. Westpac, Sun Corp Financials and ANZ Bank. As per level of high competition, the risk of material misstatement is high to attract customers through low-interest rates with hidden terms and conditions. The threat of new entrants is low because of trust and brand name among the customers (Haiss, 2013). Similarly, the power of customers is low as a bank as large no of customers due to their quality services and pricing strategies.

Other External Factors

Economic conditions: The economy of the country is strong and it is increased from last decade 2001-2011.It can be forecasted that Australian economy is grown by 1.93 trillion by 2017.The banking sector contributes the major role in Australian economy that will be the positive signs of development. The interest rate is competitive in the Australia for home loans. Below given figure indicated the interest rates of the banks and financial institutions in Australia.

(Source: Munro and Stewart, 2011)

Above given picture indicated the interest rates application fees, maximum finance and EMI’s for the different banks. It is identified that interest rate is 3.69% which is low as compared to other banks that will positively impact on the business. The current inflation rate in the Australia is 1.9% as it is increased from last year (Lau, et al., 2013).

(Source: Ongena, Popov and Udell, 2013)

The above given indicated the trend of inflation from last years, it identified that inflation rate influence the spending and income of the consumers that will impact the transactions of the business that reduce the cash flow in the economy.

Part 5 – Objectives, strategies, and business risks

Industry developments- The Australian financial sector is the major contributor to the country’s GDP. The objective of the firm to attract 20% customers in the next quarter but there are risks related to credit is high due to counterparty fail to meet its obligations according to the current terms and conditions. The current human resources are not able to handle these types of risks effectively (Uddin, and Suzuki, 2011).

New Products and Services

The firm introduces the new product and services that increase the risk of payments and borrowings from the customers. Interbank transactions, swaps, and superannuation plans meet the objectives of the customers but there are certain products increase the financial risk caused by the loans, swaps derivatives, foreign exchange transactions and the settlement of transactions. If any person borrows money, product or service from bank and unable to pay due to any worst reasons the bank faces financial risks.

Business risk: The bank can face the risk of business expansion in other countries or segments. The risks related to the failure of long term strategy regarding the revenues and profitability of the business into other countries. The profits and revenues can be influenced by the inflation rate, interest rate and currency rate of the nation increase the risk related to expansion (Hoehle, Scornavacca, and Huff, 2012).

New accounting requirements

The possible risks related to the improper information processing, leaking or hacking of information and inaccuracy of data processing due to new accounting standards adapt by the banks in long run. The current accounting standards might not be met with new standards in future that will increase the chances of fraud and misstatement in records.

Regulatory requirements

The current regulatory requirements support the policy of banking and met the objectives of the firm. But there is a risk of changes in regulations in future likes terms and conditions on investments, mergers and joint ventures impact the profitability of the business operations. Compliance procedures impact the transaction costs and cash flow of the business.

Current and Prospective financing requirements

 The current financing requirements are analyzed the financial records of the banks which indicate from the income statement of the bank below. The below-given figure indicates that the new revenue of the company is decreased in 2016 i.e. $26,369 to 18,122 as compared to its previous years. It means that the current financing capacity of the bank is low due to fewer revenues generated from its securities and services. It can be analyzed from the balance sheet that total assets of the banks are increased that indicated that the current financial condition is good 

(Source: Lou and Wang, 2011)

and the bank can borrow the money from the central bank to meet their current obligations. Similarly, on the other side, it can be analyzed that liabilities of the bank are high as compared to the previous year which increases the debt level that would be riskier for the profitability of the business (Pérez and Rodríguez del Bosque, 2014).

IT Risks

In banking industry data and information is a very crucial element for the organization. It is stored in the computer systems with high-security passwords and firewalls. But still, there is the risk of leaking data and information related to the consumers is the major risk for the banks to protect the information from hackers. Similarly, another risk for the bank due to system failures and server down problems during peak hours of operations results in a significant loss of the system failures and programming errors might hamper the work.

Implementation of strategy

The bank needs to implement the proper strategy in their process and its operations to reduce the gaps in the system that will impact the business in a long run. The banks will need to train their employees regarding changing requirements of the business. Moreover, the firm needs to adopt the new systems that will improve the process of the business (Coulbeck, 2012). From this implementation, there will be a positive impact on organization performance.  

Part 6- Ratio analysis for entity performance

(Source: Czerney, Schmidt and Thompson, 2014)

As per the above-given table, the profitability ratio of the company i.e. return on assets ratio is low as compared to the previous years it means that the company cannot generates an effective return from the assets. As compared to industry average the return on assets ratio would be low that indicated that the other competitors generate good revenues from assets. Similarly, dividend growth ratio of the company is reduced from 2.81% from 2.83% which indicates that the company can effectively get the returns from the investments and gives good returns to the investors (Moshirian and Wu, 2012). As compared to the industry average the dividend growth rate is low it indicates that other banks give sufficient returns to the shareholders on their investments.

Moreover, compared to competitor firm i.e. Westpact the dividend growth rate is good as compared to NAB. Lastly, Asset turnover ratio of the NAB is 0.03 in 2016 that is high from last year. It indicates that company is effectively deployed its assets in generating revenue. As compared to industry average growth the asset turnover ratio is low it means that the bank needs to effectively utilize their assets to generate good returns to remain competitive in the industry. As per their competitor analysis, it finds that Asser turnover ratio of Westpac is good as compared to the NAB (Bryant, 2012).

Part-7 Understand management and Governance         

1. a) Communication and enforcement of integrity and ethical values

The NAB develops the robust frameworks in its business operations which clearly indicate the code of ethics and internal communication policies helps management to take effective decisions. Similarly, the board provides a strong compliance culture that is disseminated at all hierarchical levels and is based on the sound laws, regulations and best practices. The bank has effectively designed, developed and implemented an integrated compliance framework set by compliance policy and supported by compliance plans, processes and assurance (Kiliç, Kuzey, and Uyar, 2015).

1. b) Commitment to competence

Both are an integral part of the NAB and bank simultaneously develops their employees’ skills according to the objectives of the bank. The skills and attitudes of the employees are good to perform the tasks effectively and efficiently. The commitment of the people is sincerely towards the purpose of the tasks. Effective training modules and programs help employees to remain positive in their tasks.

1. C) Participation by those charged with governance

• Their Independence from management: The level of ‘Independence’ of the directors of the company is based upon the following conditions below:

1. The director is substantial shareholder of the company or if he or she represents or officer of the substantial shareholder of the company.
2. The director has within the past five years been affiliated with the company
3. The director received any remuneration from the company apart from the fees in the form of cash and shares and whether or not the director participates in any of the company’s executive share option performance pay schemes(Staikouras and Wood, 2011).

• Experience and Stature of Board members: Currently there are 9 members of the board with more than 30 years of experience in their services.7 members are non executive director and one is group chief executive officer and chairman.
• The extent of involvement: The involvement of board is to represent shareholders and serve the interest of the company by evaluating its policies, strategies, and performance. Moreover, the board also monitors the company’s performance and build sustainable value for shareholders in accordance with duties with any duties and obligation by the law of board and company(Ariff and Iqbal, 2011)
• Interactions with internal and external auditors:The board of directors properly analyze the reports before present to the external auditors. The director analyses and approves the complete report before present to the auditors and takes appropriate response during any issue.

1. d) Management Philosophy and operating style: Every board of member has different mindset and operating style in the

• Approach to taking and managing business risks-Managing business risk is an important part of the business. It comprises into two categories i.e. financial risk which is handled by the finance team efficiently, it may arise sometimes due inefficient cash flow to continue its operations. Secondly, operational risk is arising due to decline in sales and profitability. The director's approach is towards these risks has obvious ramifications on company’s financial statements
• Attitudes and actions toward financial reporting- Financial reporting standards facilitates in fairness, consistency, and transparency of the financial reporting. There are some issues like valuation of profits and depreciation measures in financial reporting is an issue to the subjective judgment of management. The auditor gains an understanding regarding the issues and behavior of the directors in financial issues.
• Attitude towards information processing and accounting functions and personnel-Properly financed and equipped with sufficient numbers of appropriately qualified staff and information technology is important for the company for its ongoing operations. It is connected with third parties, administration and control systems that help directors to take strategic decisions(Cao, Chychyla and Stewart, 2015).

1. E) Organizational structure – The bank structure is accordance with ISA 315 standards. It depicts that the framework of the bank activities for achieving its objectives is planned, executed, controlled and reviewed. In this company document, it is also mentioned that NAB has located in many countries and its diverging operations and number of branches in the many countries.
2. F) Assignment of authority and responsibility – The Company’s operations are diversified into various countries and the size of the workforce is large which exhibits the larger amount of assignment of authority and responsibility. The bank maintains the clear authority and responsibility structure that indicates the actions, objectives, and responsibilities of the individuals that help in decision making.
3. G) Human Resource policies and practices – According to ISA 315 human resources is an important matter in the company regarding the control standards. The recruitment and policies are framed in that manner, which ensures that only competent individuals with integrity are employed by the company(Ettredge, Xu and Yi, 2014). The company conducts induction program for new employees and gives appropriate training to the employees according to their roles and positions. The senior members of the team counsel the employees regarding their tasks and compare the performance according to the standards. Moreover, the company has the open grievance procedures where an employee can file the issues and management take decisions.    

Conclusion

As per the above analysis of the report, it concludes that chances of material misstatement are less due to strict regulations and compliances followed by the bank. Moreover, it is also concluded that management follows the proper standards and corporate governance measures to reduce the risks of material misstatement in their financial reports.

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