CHAPTER 56
REVIEW OF THE 1985, 1986 AND 1987
EXTERNAL AUDITS OF BENEFICIAL FINANCE
TABLE OF CONTENTS
56.1 PURPOSE OF CHAPTER
56.2 PLAN OF CHAPTER
56.3 BUSINESS OF BENEFICIAL FINANCE CORPORATION LIMITED
56.3.1 BENEFICIAL FINANCE CORPORATION LIMITED AND SUBSIDIARIES
56.3.2 OFF-BALANCE SHEET ENTITIES
56.4 ACCOUNTS OF BENEFICIAL FINANCE CORPORATION LIMITED AND SUBSIDIARIES
56.5 INVESTIGATION OF THE AUDIT PROCESS YEAR ENDED 30 JUNE 1985
56.5.1 PLANNING OF THE AUDIT
56.5.1.1 Preamble
56.5.1.2 Matters Noted
56.5.1.3 Professional Standards and Practices
56.5.1.4 Opinion - Planning of the Audit
56.5.2 EXECUTION OF THE AUDIT
56.5.2.1 Preamble
56.5.2.2 Matters Noted
56.5.2.3 Opinion - Execution of the Audit.
56.5.3 CONCLUDING PROCEDURES
56.5.3.1 Preamble
56.5.3.2 Professional Standards and Practices
56.5.3.3 Opinion - Concluding Procedures
56.6 INVESTIGATION OF THE AUDIT PROCESS YEAR ENDED 30 JUNE 1986
56.6.1 PLANNING OF THE AUDIT
56.6.1.1 Matters Noted
56.6.1.2 Professional Standards and Practices
56.6.1.3 Opinion - Planning of the Audit
56.6.2 EXECUTION OF THE AUDIT
56.6.2.1 Matters Noted
56.6.2.2 Opinion - Execution of the Audit
56.6.3 CONCLUDING PROCEDURES
56.6.3.1 Professional Standards and Practices
56.6.3.2 Opinion - Concluding Procedures
56.7 INVESTIGATION OF THE AUDIT PROCESS YEAR ENDED 30 JUNE 1987
56.7.1 PLANNING OF THE AUDIT
56.7.1.1 Matters Noted
56.7.1.2 Professional Standards and Practices
56.7.1.3 Opinion - Planning of the Audit
56.7.2 EXECUTION OF THE AUDIT
56.7.2.1 Matters Noted
56.7.2.2 Opinion - Execution of the Audit
56.7.3 CONCLUDING PROCEDURES
56.7.3.1 Professional Standards and Practices
56.7.3.2 Opinion - Concluding Procedures
56.8 CONCLUSION
56.1 PURPOSE OF CHAPTER
Chapter 55 - "The External Audits of Beneficial Finance: Background Information" presented background information regarding the statutory obligations, of Beneficial Finance, and of the auditor of Beneficial Finance, in relation to the preparation and audit of the accounting records and annual accounts of Beneficial Finance. That Chapter also outlined in general terms the elements of an audit process that would characterise an appropriate and adequate audit, governed principally by standards and requirements of the Professional Accounting Bodies.
This Chapter provides some introductory comments concerning important events in the business operations of Beneficial Finance during the period 1 July 1984 to 30 June 1987, and significant features of the statutory accounts in respect of each of the three financial years ended 30 June 1985, 1986, and 1987. The Chapter then reports on matters arising from the assessment of the audit process applied by the External Auditor in the audit of the accounting records and accounts of Beneficial Finance and its Subsidiaries for the three years ended 30 June 1985, 1986, and 1987. The Chapter also concludes as to the appropriateness and adequacy or otherwise of the audit process undertaken.
56.2 PLAN OF CHAPTER
The Chapter comprises the following principal segments:
(a) Business of Beneficial Finance;
(b) Accounts of Beneficial Finance and Subsidiaries;
(i) Profit and Loss Statement; and
(ii) Balance Sheet;
(c) Investigation of the Audit Process; and
(d) Conclusion.
56.3 BUSINESS OF BENEFICIAL FINANCE CORPORATION LIMITED
56.3.1 BENEFICIAL FINANCE CORPORATION LIMITED AND SUBSIDIARIES
The 1984-85 financial year saw Beneficial Finance complete its first year as a wholly owned subsidiary of the State Bank of South Australia. During the period 1 July 1984 to 30 June 1987, Beneficial Finance operated as a finance company with an Australia wide network of branches and representative offices. Over that period of time, it provided a broad range of traditional finance services, including real estate financing, commercial leasing, and hire purchase, and commenced, in the latter part of the period, its growth path in corporate and commercial lending.
Throughout the period 1 July 1984 to 30 June 1987, the Beneficial Finance Group was required to operate under the requirements of the following Trust Deeds:
(a) the First Charge Debenture Stock Trust Deed (of 10 June 1960 and 1 June 1968);
(b) the Unsecured Deposit Note Trust Deed of 19 July 1974; and
(c) the 1985 Trust Deed for Debenture Stock and Unsecured Notes which replaced the aforementioned Deeds for new issues made from 1 April 1985.
While the 1985 Trust Deed replaced the earlier Trust Deeds, the Beneficial Finance Group was still obligated to operate under the requirements of those Deeds, in recognition that Debentures and Unsecured Notes were still outstanding under the previous Deeds.
To satisfy the requirements of the Trust Deeds, the External Auditor was required to provide to the Trustee various certificates, on a monthly and quarterly basis, stating that various specific requirements of the Trust Deeds had been met. In addition, on a six monthly basis, the External Auditor was required, under the 1985 Trust Deed, to report whether the company and its guarantors had observed and complied in all respects with the company's obligations under the 1985 Trust Deed for Debenture Stock and Unsecured Notes. Price Waterhouse signed unqualified six monthly reports in respect of the financial years ended 30 June 1985, 1986 and 1987.
56.3.2 OFF-BALANCE SHEET ENTITIES
During the period 1 July 1984 to 30 June 1987, four so-called off-balance sheet holding company entities were established to pursue various business activities. These entities were:
| Name |
Date Acquired |
|
Kabani Pty Ltd |
27 June 1985 |
|
Lagan Pty Ltd |
28 June 1985 |
|
Malary Pty Ltd |
6 May 1986 |
|
Fortina Pty Ltd |
12 June 1986 |
The off-balance sheet companies were formed to avoid the restrictions imposed on Beneficial Finance as a borrowing corporation by the provisions of the Beneficial Finance Trust Deeds. The companies named above were substantially funded over time by Beneficial Finance to enable the establishment or acquisition of a variety of investment vehicles, including single purpose companies and joint ventures, and to give effect to certain structured finance transactions. Significant growth, in both the number and size of off-balance sheet entities, occurred in the years ended 30 June 1988 to 30 June 1990.
During the year ended 30 June 1986, a joint venture was formed, "Pegasus Leasing", to trade as a financier in the bloodstock industry, including specialising in the leasing of thoroughbred horses for either racing or breeding. Certain of the activities of Pegasus Leasing, which involved fifty per cent participation by Malary Pty Ltd and an external party, are examined in detail in Chapter 33 -"Case Study in Credit Management: Pegasus Leasing".
56.4 ACCOUNTS OF BENEFICIAL FINANCE CORPORATION LIMITED AND SUBSIDIARIES
In respect of the period 1 July 1984 to 30 June 1987, unqualified Audit Reports were signed by Price Waterhouse in respect of the accounts of Beneficial Finance and the accounts of the Beneficial Finance Group. The following Table extracted from the audited accounts provides key information relative to the financial results of operations and the financial position of the Beneficial Finance Group.
|
Beneficial Finance Group |
||||||||||
|
|
1985 |
1986 |
1987 |
|||||||
|
Revenue |
96.7 |
147.0 |
185.6 |
|||||||
|
Operating Profit |
||||||||||
|
Pre Tax |
8.7 |
12.4 |
16.3 |
|||||||
|
After Extraordinary Item |
||||||||||
|
and Tax |
7.0 |
8.2 |
9.8 |
|||||||
|
Balance Sheet |
||||||||||
|
Assets |
||||||||||
|
Receivables |
696.2 |
944.8 |
1049.8 |
|||||||
|
Other |
51.2 |
98.2 |
79.2 |
|||||||
|
747.4 |
1043.0 |
1129.0 |
||||||||
|
Liabilities |
||||||||||
|
Borrowings |
645.8 |
899.1 |
980.6 |
|||||||
|
Other |
36.5 |
63.5 |
64.4 |
|||||||
|
682.3 |
962.6 |
1045.0 |
||||||||
|
Net Assets |
65.1 |
80.4 |
84.0 |
|||||||
|
Shareholders Equity |
||||||||||
|
Share Capital |
41.5 |
50.0 |
50.0 |
|||||||
|
Reserves |
23.6 |
30.4 |
34.0 |
|||||||
|
65.1 |
80.4 |
84.0 |
||||||||
|
Doubtful Debts |
||||||||||
|
Expense for the Year |
5.0 |
7.6 |
12.4 |
|||||||
|
Provision at Balance Date |
8.8 |
11.2 |
13.1 |
|||||||
56.5 INVESTIGATION OF THE AUDIT PROCESS YEAR ENDED 30 JUNE 1985
56.5.1 PLANNING OF THE AUDIT
56.5.1.1 Preamble
Adequate audit planning helps to ensure that appropriate attention is devoted to important areas of audit, and that potential risk areas and problems are identified and adequately addressed. An integral part of the audit planning process, therefore, includes gaining an understanding of a company's business, its accounting systems, its internal control environment, and an assessment of identified risks.
56.5.1.2 Matters Noted
Two planning documents were prepared by Price Waterhouse for the December 1984 and June 1985 audits:
(a) An audit planning memorandum was approved in October 1984 by Mr A H Giles (engagement partner), Mr A H Herald (second partner), Mr J R Le Lievre (manager) and Mr W Soper (assistant manager). This is the planning document for the December 1984 audit.
(b) An "APM [Audit Planning Memorandum] - amendment for the period 1 January 1985 to 30 June 1985" was approved by Mr Giles, Mr Herald, and Mr Soper, in May 1985.
The audit planning documentation contains a discussion of relevant planning issues, including risk assessment, changes in Beneficial Finance's business activities, the business environment in which it operated, and the EDP control environment.
The planning documentation notes that extensive reliance was to be placed on the work performed by the Internal Audit department of Beneficial Finance, particularly in relation to systems documentation, compliance testing, and loan initiation procedures. The reasons supporting this decision are documented in the planning documentation.
56.5.1.3 Professional Standards and Practices
The statements of the Professional Accounting Bodies require auditors to identify risks, including the adequacy of internal control and the reliability of internal audit work, to assess their impact on the audit of the accounts, and to take them into account in developing the audit programme.()
56.5.1.4 Opinion - Planning of the Audit
Based on the evidence examined by this Investigation and having regard to the applicable professional standards and practices, I have formed the opinion that the planning phase of the 1985 external audit of Beneficial Finance was appropriate and adequate.
56.5.2 EXECUTION OF THE AUDIT
56.5.2.1 Preamble
During the execution phase of the audit, the auditor should obtain sufficient appropriate audit evidence, through the performance of compliance and substantive procedures, to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial statements.
56.5.2.2 Matters Noted
(a) General Observations
The Investigation noted the following matters during the examination of the audit working papers:
(i) tailored audit programmes were prepared specifying the audit work to be performed for significant account balances;
(ii) all audit programmes were signed off as having been completed, and were supported by detailed audit working papers;
(iii) working papers were reviewed by the audit manager, and all review points were satisfactorily cleared; and
(iv) significant issues arising from the detailed audit tests were included in schedules summarising the points for partner consideration and settlement.
(b) Provision for Doubtful Debts
The audited consolidated accounts of Beneficial Finance for the year ended 30 June 1985 disclose a provision for doubtful debts of $8.8M. The audit working papers() note that this provision comprises two elements, namely, an allocated provision and an unallocated provision:
|
$’M |
|
|
Allocated provision |
5,009 |
|
Unallocated provision |
3,749 |
|
8,758 |
In accordance with Beneficial Finance's policy, allocated provisions represent provisions raised by management against specific accounts where full recovery is considered doubtful. Unallocated, or general provisions as they are more commonly referred to in the finance industry, are maintained to cover the risk of loss inherent in any loan portfolio which had not, at balance date, been specifically identified.
(i) Allocated Provision for Doubtful Debts
On a regular basis Beneficial Finance prepared "Non-Performing Loans Review" reports which provided certain information in respect of non- performing loans. These reports were manually prepared and used by Beneficial Finance as a basis for determining the level of allocated provisions for non performing loans, and included information such as:
. description of the security held by Beneficial Finance;
. estimated value of the security and date of valuation;
. amounts due to Beneficial Finance;
. a commentary on the action proposed, or being taken, to maximise Beneficial Finance's recovery on the account; and
. recommended provision.
Price Waterhouse performed audit procedures to satisfy themselves as to the reliability of the Non Performing Loans Review reports.
In my opinion, having regard to the evidence examined by this Investigation, the audit procedures carried out by Price Waterhouse on the allocated provision for doubtful debts in the year ended 30 June 1985 were appropriate and adequate.
(ii) Unallocated Provision for Doubtful Debts
As previously discussed, the total provision for doubtful debts included an unallocated provision of $3.7M. The unallocated provision represents 0.54 per cent of net receivables at 30 June 1985.
There is no evidence in the audit working papers that the unallocated provision was established by Beneficial Finance in accordance with a predetermined policy. The audit working papers(), however, do record that it was the intention of the Beneficial Finance Board to increase the unallocated provision to 1 per cent of net receivables. The working papers do not specify over what time period it was intended to increase the provision to 1 per cent. I understand, on the basis of expert advice received by the Investigation, that such a level of provision would, in 1985, have been regarded as high by industry standards. I accept that Beneficial Finance's adoption of the policy to increase the unallocated provision to that level did not indicate an under provision at 30 June 1985.
The audit programme prepared by Price Waterhouse to evaluate the unallocated provision for doubtful debts included the following tests:
. comparing the level of the unallocated provision with prior years, both in dollar terms and expressed as a percentage of net receivables; and
. comparing the Beneficial Finance total provisions with those of similar financial institutions.
The Investigation could find no evidence in the audit working papers that the unallocated provision had been compared with those of similar financial institutions. Although this comparative analysis was not performed, I have formed the opinion that there was sufficient evidence in the audit working papers to support the conclusion reached by Price Waterhouse that the unallocated provision for doubtful debts was adequate.
(c) Establishment of the Off-balance sheet Entities
As discussed in Chapter 41 - "Management and Financial Information Reporting", off-balance entities operated and controlled through "Kabani type trust structures" were not consolidated into the accounts of Beneficial Finance. The applicable off-balance sheet entities, as at 30 June 1985, were Kabani Pty Ltd and Lagan Pty Ltd, and they were joined by Malary Pty Ltd and Fortina Pty Ltd at subsequent balance dates in the period under review.
Beneficial Finance formed the view that those companies were not subsidiaries, and that no disclosure in relation to them was required in order for the accounts to give a true and fair view of the results and affairs of Beneficial Finance and the Beneficial Finance Group.
That treatment was supported by a legal opinion obtained by Beneficial Finance from its solicitors, Thomson Simmons and Co, dated 7 April 1985, prior to the structures being established.
Following the advice of Thomson Simmons & Co on 7 April 1985, the proposal to establish the first off-balance sheet structure, which became known as Kabani, was brought before the Beneficial Finance Board at its meeting on 15 April 1985. The proposal was approved, subject to a number of matters being satisfied, including:
"(a) The proposed company structure to be submitted to Price Waterhouse to ensure they are satisfied from the point of view of the auditors. Price Waterhouse to be appointed auditors of the new company." ()
The next meeting of the Beneficial Finance Board was held on 30 April 1985. It is recorded in the minutes that the conditions laid down in the minutes of 15 April 1985 for the formation of the off-balance sheet company had been met.()
On 26 June 1985, in the course of the 1985 audit, Price Waterhouse staff noted the above minute to the effect that Price Waterhouse were to "review the new set up and to be appointed auditors". It does not appear from the working paper that any action was taken other than to note the contents of the minute.()
I observe that the Beneficial Finance Board, on 30 April 1985, approved the establishment of the Kabani type structure and the immediate entering into of heads of agreement regarding the Centrelease transaction, with a view to settlement on 1 July 1985.
Price Waterhouse were appointed auditors of Kabani and Lagan, respectively, on 27 and 28 June 1985 (with effect from 1 July 1985), and, in later years, were appointed auditors of Malary (with effect from 1 July 1985) and Fortina (with effect from 1 July 1986).
Price Waterhouse have submitted that their staff member who had access to the Board minute of 13 April 1985, and recorded his review in the working papers quoted above, was entitled to assume that what had been recorded had occurred, and there was no reason for him to follow up the matter to see if Price Waterhouse had been consulted.() Price Waterhouse have also submitted that, even if they had been consulted, they would have accepted the earlier legal advice which Beneficial Finance had obtained.()
I accept that the off-balance sheet entities of Beneficial Finance were not material for the year ended 30 June 1985. I accept that Price Waterhouse had no cause to doubt that the matters noted in the Board minute of 13 April 1985 would be duly attended to.
In my opinion the off-balance sheet entities did not become material in relation to the accounts of Beneficial Finance until the year ended 30 June 1988. Accordingly, I discuss this matter in Chapter 57 - "Review of the 1988 External Audit of Beneficial Finance".
56.5.2.3 Opinion - Execution of the Audit.
Based on the evidence examined by this Investigation and having regard to the applicable professional standards and practices, I have formed the opinion that the execution of the 1985 external audit of Beneficial Finance was appropriate and adequate.
56.5.3 CONCLUDING PROCEDURES
56.5.3.1 Preamble
Concluding procedures are those procedures adopted by an auditor of an entity to identify, resolve, and document, his conclusions concerning significant parts of his audit, including how exceptions and contentious or unusual matters, if any, are to be dealt with.
It is vital that:
(a) These procedures ensure that all significant matters are identified, and brought to the attention of the person responsible for signing the auditor's report.
(b) The resolution of each significant matter is given the necessary degree of attention to ensure the accounts of the entity show a true and fair view in accordance with applicable law, and to ensure that other significant matters that do not affect truth and fairness of the accounts are brought to the attention of the proper level of authority within the entity. In the case of certain matters, this may oblige the person responsible for signing the auditor's report to consult with some of his partners or peers.
56.5.3.2 Professional Standards and Practices
The statements of the Professional Accounting Bodies require that the auditor should perform concluding procedures to address significant issues arising from the execution phase of the audit, and to provide the basis for his audit opinion.()
56.5.3.3 Opinion - Concluding Procedures
Based on the evidence examined by this Investigation, I have formed the opinion that the concluding procedures adopted by Price Waterhouse on the 1985 external audit of Beneficial Finance were appropriate and adequate.
My overall opinion on the 1985 External Audit is set out under Section 56.8 below.
56.6 INVESTIGATION OF THE AUDIT PROCESS YEAR ENDED 30 JUNE 1986
56.6.1 PLANNING OF THE AUDIT
56.6.1.1 Matters Noted
Two planning documents were prepared by Price Waterhouse for the December 1985 and June 1986 audits:
(a) An audit planning memorandum was approved in November 1985 by Mr Giles (engagement partner), Mr Herald (second partner), Mr D R Clark (manager), and Ms T Loizou (audit senior). This is the planning document for the December 1985 audit.
(b) An "APM [Audit Planning Memorandum] - amendment for the period 1 January 1986 to 30 June 1986" was approved by Mr Giles, Mr Herald, Mr Clark, and Ms Loizou, in April 1986.
The audit planning documentation contains a discussion of relevant planning issues, including risk assessment, changes in Beneficial Finance's business activities, the business environment in which it operated, and the EDP control environment.
The planning documentation states that extensive reliance was to be placed on the work performed by the Internal Audit department of Beneficial Finance, particularly in relation to systems documentation, compliance testing, and loan initiation procedures. The reasons supporting this decision are documented in the planning documentation.
56.6.1.2 Professional Standards and Practices
The statements of the Professional Accounting Bodies require auditors to identify risks, including the adequacy of internal control and the reliability of internal audit work, to assess their impact on the audit of the accounts, and to take them into account in developing the audit programme.()
56.6.1.3 Opinion - Planning of the Audit
Based on the evidence examined by this Investigation, I have formed the opinion that the planning phase of the 1986 external audit of Beneficial Finance was appropriate and adequate.
56.6.2 EXECUTION OF THE AUDIT
56.6.2.1 Matters Noted
(a) General Observations
The Investigation observed, during the examination of the audit working papers, that:
(i) Tailored audit programmes were prepared specifying the audit work to be performed for significant account balances.
(ii) All audit programmes were signed off as having been completed and were supported by detailed audit working papers.
(iii) Working papers were reviewed by the audit manager and all review points were satisfactorily cleared.
(iv) Significant issues arising from the detailed audit tests were included in schedules summarising the points for partner consideration and settlement.
(b) Provision for Doubtful Debts
The audited consolidated accounts of Beneficial Finance for the year ended 30 June 1986 disclose a provision for doubtful debts of $11.2M (1985 - $8.8M). The audit working papers() state that this provision comprises two elements, namely, an allocated provision and an unallocated provision as follows:
|
30 June 1986 |
30 June 1985 |
|||||
|
Allocated provision |
5,588 |
5,009 |
||||
|
Unallocated provision |
5,648 |
3,749 |
||||
|
11,236 |
8,758 |
|||||
The unallocated provision expressed as a percentage of net receivables was:
30 June 1986 0.61 per cent
30 June 1985 0.54 per cent
(i) Allocated Provision for Doubtful Debts
On a regular basis Beneficial Finance prepared "Non-Performing Loans Review" reports, which provided certain information in respect of non- performing loans. These reports were manually prepared and used by Beneficial Finance as a basis for determining the level of allocated provisions for non-performing loans and included information such as:
. description of the security held by Beneficial Finance;
. estimated value of the security and date of valuation;
. amounts due to Beneficial Finance;
. a commentary on the action proposed, or being taken, to maximise Beneficial Finance's recovery on the account; and
. recommended provision.
Price Waterhouse performed audit procedures to satisfy themselves as to the reliability of the Non-Performing Loans Review reports.
In my opinion, having regard to the evidence examined by this Investigation, the audit procedures carried out by Price Waterhouse on the allocated provision for doubtful debts in the year ended 30 June 1986 were appropriate and adequate.
(ii) Unallocated Provision for Poubtful Debts
As previously discussed, the total provision for doubtful debts included an unallocated provision of $5.6M (1985 - $3.7M). The unallocated provision represents 0.61 per cent of net receivables at 30 June 1986 (1985 - 0.54 per cent).
There is no evidence in the audit working papers that the unallocated provision was established by Beneficial Finance in accordance with a predetermined policy. The audit working papers(), however, do mention that it was the intention of the Beneficial Finance Board to increase the unallocated provision to 1 per cent of net receivables. The working papers do not specify over what time period it was intended to increase the provision to 1 per cent. I understand, on the basis of expert advice received by the Investigation, that such a level of provision would in 1986 have been regarded as high by industry standards. I accept that Beneficial Finance's adoption of the policy to increase the unallocated provision to that level did not indicate an under provision at 30 June 1986.
The audit programme prepared by Price Waterhouse to evaluate the unallocated provision for doubtful debts included the following tests:
. comparing the level of the unallocated provision with prior years, both in dollar terms and expressed as a percentage of net receivables; and
. comparing the Beneficial Finance total provisions with those of similar financial institutions.
The Investigation could find no evidence in the audit working papers that the unallocated provision had been compared with those of similar financial institutions. Although this comparative analysis was not performed, I have formed the opinion that there was sufficient evidence in the audit working papers to support the conclusion reached by Price Waterhouse that the unallocated provision for doubtful debts was adequate.
56.6.2.2 Opinion - Execution of the Audit
Based on the evidence examined by this Investigation and having regard to the applicable professional standards and practices, I have formed the opinion that the execution of the 1986 external audit of Beneficial Finance was appropriate and adequate.
56.6.3 CONCLUDING PROCEDURES
56.6.3.1 Professional Standards and Practices
The statements of the Professional Accounting Bodies require that the auditor should perform concluding procedures to address significant issues arising from the execution phase of the audit and to provide the basis for his audit opinion.()
56.6.3.2 Opinion - Concluding Procedures
Based on the evidence examined by this Investigation, I have formed the opinion that the concluding procedures adopted by Price Waterhouse on the 1986 external audit of Beneficial Finance were appropriate and adequate.
My overall opinion on the 1986 External Audit is set out under Section 56.8 below.
56.7 INVESTIGATION OF THE AUDIT PROCESS YEAR ENDED 30 JUNE 1987
56.7.1 PLANNING OF THE AUDIT
56.7.1.1 Matters Noted
Two planning documents were prepared by Price Waterhouse for the December 1986 and June 1987 audits:
(a) An audit planning memorandum was approved in November 1986 by Mr Giles (engagement partner), Mr Herald (second partner), Mr G D Tully (tax partner), Mr Clark (manager), Mr G C Acutt (EDP manager), and Ms Loizou (assistant manager). This is the planning document for the December 1986 audit.
(b) An "APM [Audit Planning Memorandum] - amended for the period 1 January 1987 to 30 June 1987" was approved by Mr Giles, Mr Herald, Mr Tully, Mr Clark, Mr Acutt, and Ms Loizou in July 1987.
The audit planning documentation contains a discussion of relevant planning issues including risk assessment, changes in Beneficial Finance's business activities, the business environment in which it operated, and the EDP control environment.
The planning documentation notes that extensive reliance was to be placed on the work performed by the Internal Audit department of Beneficial Finance, particularly in relation to systems documentation, compliance testing, and loan initiation procedures. The reasons supporting this decision are documented in the planning documentation.
56.7.1.2 Professional Standards and Practices
The statements of the Professional Accounting Bodies require auditors to identify risks, including the adequacy of internal control and the reliability of internal audit work, to assess their impact on the audit of the accounts, and to take them into account in developing the audit programme.()
56.7.1.3 Opinion - Planning of the Audit
Based on the evidence examined by this Investigation, I have formed the opinion that the planning phase of the 1987 external audit of Beneficial Finance was appropriate and adequate.
56.7.2 EXECUTION OF THE AUDIT
56.7.2.1 Matters Noted
(a) General Observations
The Investigation observed, during the examination of the audit working papers, that:
(i) Tailored audit programmes were prepared specifying the audit work to be performed for significant account balances.
(ii) All audit programmes were signed off as having been completed and were supported by detailed audit working papers.
(iii) Working papers were reviewed by the audit manager and all review points were satisfactorily cleared.
(iv) Significant issues arising from the detailed audit tests were included in schedules summarising the points for partner consideration and settlement.
(b) Provision for Doubtful Debts
The audited consolidated accounts of Beneficial Finance for the year ended 30 June 1987 disclose a provision for doubtful debts of $13.1M (1986 - $11.2M). The audit working papers note that this provision comprises two elements, namely, an allocated provision and an unallocated provision as follows:
|
30 June 1987 |
30 June 1986 |
|||||
|
Allocated provision |
6,276 |
5,588 |
||||
|
Unallocated provision |
6,829 |
5,648 |
||||
|
13,105 |
11,236 |
|||||
The unallocated provision expressed as a percentage of net receivables was:
30 June 1987 0.61 per cent
30 June 1986 0.61 per cent
30 June 1985 0.54 per cent
(i) Allocated Provision for Doubtful Debts
On a regular basis, Beneficial Finance prepared "Non-Performing Loans Review" reports which provided certain information in respect of non- performing loans. These reports were manually prepared, and used by Beneficial Finance as a basis for determining the level of allocated provisions for non performing loans, and included information such as:
. description of the security held by Beneficial Finance;
. estimated value of the security and date of valuation;
. amounts due to Beneficial Finance;
. a commentary on the action proposed or being taken to maximise Beneficial Finance's recovery on the account; and
. recommended provision.
Price Waterhouse performed audit procedures to satisfy themselves as to the reliability of the Non-Performing Loans Review reports.
In my opinion, having regard to the evidence examined by this Investigation, the audit procedures carried out by Price Waterhouse on the allocated provision for doubtful debts in the year ended 30 June 1987 were appropriate and adequate.
(ii) Unallocated Provision for Doubtful Debts
As previously discussed, the total provision for doubtful debts included an unallocated provision of $6.8M (1986 - $5.6M). The unallocated provision represents 0.61 per cent of net receivables at 30 June 1987 (1986 - 0.61 per cent).
There is no evidence in the audit working papers that the unallocated provision was established by Beneficial Finance in accordance with a predetermined policy. The audit working papers(), however, do mention that it was the intention of the Beneficial Finance Board to increase the unallocated provision to 1 per cent of net receivables. The working papers do not specify over what time period it was intended to increase the provision to 1 per cent. I understand that such a level of provision would, in 1987, have been regarded as high by industry standards. I accept that Beneficial Finance's adoption of the policy to increase the unallocated provision to that level did not indicate an under provision at 30 June 1987.
The audit programme prepared by Price Waterhouse to evaluate the unallocated provision for doubtful debts included the following tests:
. comparing the level of the unallocated provision with prior years, both in dollar terms and expressed as a percentage of net receivables; and
. comparing the Beneficial Finance total provisions with those of similar financial institutions.
The Investigation could find no evidence in the audit working papers that the unallocated provision had been compared with those of similar financial institutions. Although this comparative analysis was not performed, this Investigation found that there was sufficient evidence in the audit working papers to support the conclusion reached by Price Waterhouse that the unallocated provision for doubtful debts was adequate.
56.7.2.2 Opinion - Execution of the Audit
Based on the evidence examined by this Investigation, and having regard to the applicable professional standards and practices, I have formed the opinion that the execution of the 1987 external audit of Beneficial Finance was appropriate and adequate.
56.7.3 CONCLUDING PROCEDURES
56.7.3.1 Professional Standards and Practices
The statements of the Professional Accounting Bodies require that the auditor should perform concluding procedures to address significant issues arising from the execution phase of the audit and to provide the basis for his audit opinion.
56.7.3.2 Opinion - Concluding Procedures
Based on the evidence examined by this Investigation, I have formed the opinion that the concluding procedures adopted by Price Waterhouse on the 1987 external audit of Beneficial Finance were appropriate and adequate.
My overall Opinion on the 1987 External Audit is set out under Section 56.8 below.
56.8 CONCLUSION
In my opinion, the external audit carried out by Price Waterhouse on the accounts for the years ended 30 June 1985 to 1987 was appropriate and adequate.