Inherent Risks

Commonwealth Bank of Australia

Commonwealth Bank of Australia is a financial institution operating in Australia, the United States, New Zealand and the United Kingdom. The multinational bank has experienced significant growth over the years due to factors such as its ability to meet consumer needs and its unique business model. Commonwealth Bank is headquartered in Sydney, Australia and it has over 1,100 branches worldwide. The organization’s product offerings include investment management, corporate and consumer banking, private equity and global common wealth management.

Inherent Risks

Inherent risks refer to the risks that occur as a result of errors in an organization’s financial statement, and this may be driven by factors such as selfish interests from employees or failures in an organization’s internal control. Some examples of inherent risk factors include fraud, misstatement of figures in a financial statement, going concern risks and estimates. In the given paper, an analysis is conducted on the inherent risk factors that would impact the Commonwealth Bank as well as the effect the risks have on the evidence mix for the planning of the financial institution’s audit.

Question 1: Inherent Risk Factors that would Impact Commonwealth Bank audit

Inherent risk factors tend to have a direct effect on the audit conducted in a given organization. The ultimate risk that is posed to a given organization is always depended on the financial exposure that is created in by inherent risks as a result of limited accounting controls. In the section, some of the inherent risk factors that have an impact on the audit of the Commonwealth Bank.

Fraud

One of the inherent risks factors that the Commonwealth Bank is exposed to is fraud. As a financial organization, it may be subjected to fraudulent activities from its top management or employees. Top management employees in any given company have the ability to falsify the accounting entries or make adjustments in the financial statements that would end up being beneficial to them. The company’s cash and cash equivalents may serve as a loophole that may be used by some of the employees in promoting fraudulent activities. Commonwealth’s cash at the end of the period increased from $14,447 million Australian dollars to $23,117 million in the year ending 2017, and this makes it easier for any top management to make adjustments on the financial statements (Commbank.com.au. 2017, n.p.).In 2016, the organization was involved in a Ponzi scheme fraud that amounted to $76 million (Commbank.com.au. 2017, n.p.).The corporate scandal was spearheaded by the company’s accountant Robert Zaia. An investigation on the money laundering scandal also began in August 2017 pointing to the company irregularities in the use of its intelligent deposit machines.

Bearing in mind that there is a possibility of more fraudulent activities in the country, the auditor will have to pay attention to both the tangible and intangible assets balances of the organization for the year ending 2016 and 2017. According to AASB 136, auditors are required to ensure that they focus on the balance objectives and ensuring that all assets are reflected on the company’s financial statements. The most appropriate audit objective, under this inherent risk factor, will be to identify some of those financial transactions that may expose the organization to fraudulent activities (Kelly 2017, n.p.). It will be necessary for the auditors to uncover any inconsistencies in the revenues, net income or cash flow operations by the company. Past scandals such as the Ponzi scheme fraud of 2016 and the money laundering scheme of 2017 will serve as evidence in the audit process. The audit team will also have to obtain all the financial receipts used in the acquisition of assets, purchase of inventory and the sale of products and services. In so doing, this will be easier for the audit team to identify any fraudulent activities currently or may in the future be fueled by the top management employees of the company.

Estimates and Going Concern

Estimates are considered as inherent risk factors due to the impact that they have on an audit. Audit evidence, in this case, comprises of the financial transactions that are conducted by an organization. The increase in the total liabilities of the organization in the past three years from $821,015 in 2015 million to $913,204 million is a primary going concern and inherent risk issue, and this may have an impact on the audit process (Commbank.com.au. 2017, n.p.). The changes in the firm’s liabilities provide an ambient environment within the organization where accounting teams can easily manipulate financial statements (Kelly 2017, n.p.). According to the AASB 101, companies are supposed to ensure that when presenting their financial statements it is done in accordance with the set accounting standards (Legislation.gov.au. 2017, n.p.). In the case of the management of the Commonwealth Bank, they may decide to increase their reliance on debt financing, but in the process, facilitate misstatement of financial figures with the aim of diverting the funds aimed at running the operations of the organization in meeting their personal needs. In so doing, this leads to an increase in the risk of material misstatement and this may further complicate the audit team’s goal in identifying the accounting issues faced by the CommBank. The audit objective, in this case, is to determine the possible inherent risk issues that may come along with the increase in the firm’s liabilities and advice it on the most appropriate measures that can be embraced in dealing with the accounting challenge.

Cash and Cash Equivalent

The rise in the cash and cash equivalents for the CommBank from $14,447 million in 2016 to $23,117 million is another inherent risk factor that may have a direct impact on the firm’s financial statement (Commbank.com.au. 2017, n.p.). An increase in the bank’s cash and cash equivalents is considered a risk issue because it makes the organization susceptible to heightened cases of fraud and material misstatement. During the preparation of financial statements, organizations are supposed to ensure that they utilize AASB 108 which focuses on accounting policies, estimation, and errors (Legislation.gov.au. 2017, n.p.). Failure by an organization to embrace the accounting standard exposes it to issues of manipulation and material misstatement. With the rise in the cash and cash equivalent, the top management and accounting team at the Commonwealth Bank can easily swindle the money and cook the accounting books to make it appear that the organization is enjoying financial sustainability, which in reality may not be the case (Commonwealth Bank, 2017, pp.1-210). Under the inherent risk factor, the primary audit objective will be to identify all the financial transactions that were carried out by the organization using cash and expose any sorts of inconsistencies. The nature of the evidence that will be vital to the audit team includes financial receipts for all inventory purchases and acquisition of equipment and property. The auditors will also have their focus on whether the CommBank abided by the AASB 116 (property, equipment, and plants) and AASB 138 (intangible assets) during the preparation of its financial statements.

Rapid Expansion

The Commonwealth Bank has, in the past three years, enjoyed rapid expansion, and this has exposed it to inherent risk of complex transactions. The total assets for the organization, for instance, increased significantly from $933,078 million in 2016 to $976,374 million in the year ending 2018, and this was a clear indication of the massive expansion and advancement in the levels of technology it witnessed across the two years (Commonwealth Bank, 2017, pp.1-210). However, it exposed the company to complex transactions that make the organization susceptible to inherent risks. The complexity of the transactions due to rapid growth and technological advancement is a major risk issue because it makes the financial statement vulnerable to material misstatement and manipulation. AASB 101 emphasizes the essence of preparing and presenting financial statements in accordance with the stipulated accounting regulation. However, complex financial transactions may make it hard for the company to abide by the accounting standard. The auditor will be required to ensure that inventory, loans, and total equity amounts are included in those amounts that are estimated to be realized (Britton and Waterston 2013, pp.87-98). Those amounts that are inappropriately assigned will be considered as either manipulated or misstated. Additionally, the audit team will also have to pay particular attention to the reasons behind the decline in the acquisition of premises and equipment from $3,940 million in 2016 to $3,873 in 2017, despite the rapid growth experienced by the company over the two years. In the event of any impairment of intangible assets during the period, it will be necessary for the auditors to note it for further interpretations and coming up with a concrete audit report.

Question 2: Impacts of the Inherent Risk Factors on the Audit Evidence Mix

Audit evidence refers to that information used by auditors in coming up with a conclusive report in their entire financial audit processes. Some of the audit evidence includes inquiries of the clients, analytical procedures, documentation, and confirmation among others. In this section, the impacts of the inherent risk factors on the audit evidence mix are assessed.

Fraud

Fraud is one of the inherent risks faced by the Commonwealth Bank. It is complex to conduct an assessment of the control risks, and this implies that risk levels analysis will be instrumental (Cosserat and Rodda 2009, pp.65-67). Under the audit evidence mix, the risk is categorized as extensive in a sense that it may have devastating effects on the reputation of the brand as well as its financial performance. In the quest for conducting an audit process on the fraud risk, some of the audit evidence that will be instrumental to the auditors includes the financial receipts of the recent transactions conducted by the organization and a range of physical examinations on the tangible assets within the company (Cosserat and Rodda 2009, pp.65-67). The audit team will then be required to come up with a comprehensive audit report on the findings as well as measures that can be essential in dealing with the inherent risk factor.

Estimates and Going Concern

The company, as a part of its accounting issues, is subjected to inherent risk factors such as estimates and going concerns that promote material misstatement. The level of risk that is posed by errors in estimates and going concern is moderate but may have a negative impact on the entire audit process and the organization’s financial performance in a bigger picture (Saxena, Srinivas, Rai and Rai 2010, p.18). The audit evidence mix, under this inherent risk factor, will entail a critical assessment of the internal controls and operations, financial transactions and forecasts, and a thorough investigation of any form of manipulation on the company’s current and previous annual financial statements (Arens, Elder and Beasley 2014, p.76). The audit team will then compile all their findings on the accounting issues and sort for appropriate solutions.

Cash and Cash Equivalent

Cash and cash equivalent is categorized as a high/extensive inherent risk factor to an organization, and this is attributed to its vulnerability when it comes to the promotion of corporate fraud and financial scandals. The risk is considered extensive because it may be challenging for auditors to identify its effect on materiality and misstatements in the Commonwealth bank’s books of accounting. Regarding performance, it may end up lowering the net income generated by the bank over a given period (Wong, Ho and Yu 2012, p.87). Audit evidence mix in the case of this inherent risk factor will include testing of procedures and operational efficiencies, in-depth investigations on the company’s cash flows and cash transactions applicable to the acquisition of premises and equipment, and a critical view of the organization’s capital structure. The auditor will also be required to carry out both positive and negative confirmation from a third party respondent within the firm on the accounting balances (Fan and Wong 2005, p.16).

Rapid Expansion

Rapid expansion and technological advancement are inherent risk factors whose risk level is moderate. Its impact on the audit process and financial performance is not as severe as fraud and cash and cash equivalent. The audit team, as part of the audit evidence mix, will be required to carry out analytic procedures on the operational efficiencies, make assessments on whether the presentation of the financial statement of the company is in line with accounting standards, and conduct asset impairment tests in line with IAS 36 (Saxena, Srinivas, Rai and Rai 2010, p.87). All the supporting evidence in the bank’s files will also be instrumental in facilitating the audit process. Conclusions on the risk issues by the audit team will then be done based on the audit evidence.

Conclusion

Commonwealth Bank has over the years enjoyed immense growth, and this has been contributed to its large consumer base and diversification in its productivity. Some of the inherent risk factors that it, however, faces include fraud, estimates, and going concern, cash and cash equivalent, and rapid expansion and technological advancement. The audit evidence mix will include physical examination, analytic procedures, confirmation, and documentation among others. It is thus clear that for the bank to continue enjoying sustainability in the market, it will have to deal with the various risks at hand.

Bibliography

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Cosserat, G. and Rodda, N., 2009. Modern auditing. Chichester: John Wiley & Sons

Fan, J. And Wong, T., 2005. Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia, Journal of Accounting Research, vol. 43, no. 1, pp.35-72.

Kelly, P., 2017. Examples of inherent risk factors that are pervasive in financial statements. [Online] Available at: https://bizfluent.com/info-12105927-examples-inherent-risk-factors-pervasive-financial-statements.html [Accessed 25 Oct. 2017].

Legislation.gov.au., 2017. AASB 101 - presentation of financial statements. [Online] Available at: https://www.legislation.gov.au/Details/F2015L01626 [Accessed 25 Oct. 2017].

Saxena, R., Srinivas, K., Rai, U. and Rai, S., 2010. Auditing. 1st ed. Mumbai: Himalaya Pub. House.

Wong, L. S., Ho, T. M. and Yu, W., 2012. Auditing. Hong Kong: Hong Kong Association of Accounting Technicians.