CHAPTER 47
REVIEW OF THE 1985 EXTERNAL AUDIT
OF THE STATE BANK
TABLE OF CONTENTS
47.1 PURPOSE OF CHAPTER
47.2 PLAN OF CHAPTER
47.3 BUSINESS OF BANK AND BANK GROUP
47.3.1 THE BANK
47.3.2 SUBSIDIARIES
47.4 ACCOUNTS OF BANK AND BANK GROUP
47.5 INVESTIGATION OF THE AUDIT PROCESS
47.5.1 PLANNING OF THE AUDIT
47.5.1.1 Matters noted
47.5.1.2 Conclusion
47.5.2 EXECUTION OF THE AUDIT
47.5.2.1 Preamble
47.5.2.2 Matters Noted - Investments
47.5.2.3 Matters Noted - Provision for Doubtful Debts
47.5.2.4 Matters Noted - Bank Acceptances of Customers
47.5.2.5 Matters Noted - Sub-ordinated Debt
47.5.2.6 Matters Noted - Concessional Housing Reserve
47.5.2.7 Matters Noted - Provision for Self Insurance
47.5.2.8 Matters Noted - Contingent Liabilities
47.5.3 CONCLUDING PROCEDURES
47.5.3.1 Preamble
47.5.3.2 Matters Noted - Settlement of Audit Issues
47.5.3.3 Matters Noted - Subsequent Events Review
47.5.3.4 Matters Noted - Management Representation Letter
47.6 CONCLUSION
47.1 PURPOSE OF CHAPTER
Chapter 46 - "The External Audits of the State Bank: Background Information" presented information regarding the statutory obligations of the Bank and the Bank's auditors respectively, in relation to the preparation and audit of the accounting records and annual accounts of the Bank. The Chapter also outlined in general terms the elements of an audit process that would characterise an appropriate and adequate audit, governed principally by standards promulgated by the Professional Accounting Bodies of Australia.
This Chapter provides some introductory comments concerning important events in the business operations of the Bank during 1984-85 and significant features of the statutory accounts in respect of the 1984-85 financial year. The Chapter then reports on matters arising from the assessment of the audit process applied by the external auditors in the audit of the accounting records and accounts of the Bank for the year ended 30 June 1985. The Chapter also concludes as to the appropriateness and adequacy or otherwise of the audit process undertaken.
47.2 PLAN OF CHAPTER
The Chapter comprises the following principal segments:
(a) Business of Bank and Bank Group;
(b) Accounts of the Bank and the Bank Group;
(i) Profit and Loss Statement; and
(ii) Balance Sheet.
(c) Investigation of the Audit Process;
(i) Planning of the Audit;
(ii) Execution of the Audit; and
(iii) Concluding Procedures.
(d) Conclusion.
47.3 BUSINESS OF BANK AND BANK GROUP
47.3.1 THE BANK
The 1984-85 financial year covered the first year of operations of the new State Bank which was formed as a result of the merger of the State Bank of South Australia and the Savings Bank of South Australia on 1 July 1984. The merger of the State Bank of South Australia and the Savings Bank of South Australia brought together the expertise and strengths of the two Banks. The State Bank of South Australia had been strong in the small country towns of South Australia and had expertise in rural lending while the Savings Bank of South Australia was strong in retail banking and home loan lending. During the year the new Bank expanded its retail network and became the market leader in the State in home finance. In addition, it commenced its significant growth path in corporate banking.
47.3.2 SUBSIDIARIES
Beneficial Finance Corporation Limited completed its first year as a wholly owned subsidiary of the Bank. The Beneficial Finance Group (Beneficial Finance Corporation Limited and Subsidiaries) increased its profit by $6.3M over the previous year to a record $7.0M.
In addition the Bank acquired a 100 per cent interest in Executor Trustee and Agency Company of South Australia Limited and a 50 per cent share in a stock broking firm SVB Day Porter Pty Ltd.
47.4 ACCOUNTS OF BANK AND BANK GROUP
On 22 August 1985 an unqualified Audit Report was signed by Peat Marwick Mitchell & Co and Touche Ross & Co in respect of the accounts of the Bank for the year ended 30 June 1985. The accounts presented comprised a Profit and Loss Statement, Balance Sheet and Notes to the Accounts, for both the Bank and the consolidated Bank Group.
The following table provides key information relative to the financial results of operations and the financial position of the Bank and consolidated Bank Group.
|
Bank |
Bank Group |
||||
| Profit And Loss Statement | |||||
|
Income |
356.0 |
455.4 |
|||
|
Operating Profit |
|||||
|
Before Tax |
28.1 |
37.0 |
|||
|
After Tax and Extraordinary Item |
15.2 |
22.4 |
|||
| Balance Sheet | |||||
|
Assets |
|||||
|
Loans, Advances, Receivables |
2,414.6 |
3,112.6 |
|||
|
Other |
1,015.3 |
1,017.8 |
|||
|
3,429.9 |
4,130.4 |
||||
|
Liabilities |
|||||
|
Deposits and Borrowings |
2,736.3 |
3,386.8 |
|||
|
Other |
338.6 |
373.4 |
|||
|
3,074.9 |
3,760.2 |
||||
|
Net Assets |
355.0 |
370.2 |
|||
|
Capital, Subordinated Debt, Reserves |
355.0 |
370.2 |
|||
| Doubtful Debts | |||||
|
Expenses for the Year |
7.6 |
11.7 |
|||
|
Provision at Balance Date |
9.1 |
17.9 |
|||
47.5 INVESTIGATION OF THE AUDIT PROCESS
47.5.1 PLANNING OF THE AUDIT
47.5.1.1 Matters noted
The Investigation reviewed the audit working papers to ascertain what procedures had been carried out by the joint auditors on:
(a) an overview of the Bank's systems of internal control and the approach to be taken to assess the adequacy of those systems on which reliance was placed; and
(b) an overview of the quality and reliability of the work of the Internal Audit department and the approach to be taken to assess the adequacy of that work.
Satisfactory conclusions in these two areas would be vital to any decision to be made by the joint auditors to rely on the Bank's system of internal control and on the work performed by the Internal Audit department and to assess audit risk.
The audit working papers prepared by the joint auditors evidence a degree of reliance on the Internal Audit department of the Bank. There is a reference to the significance of the internal audit function in the Audit Approach Memorandum for the year ended 30 June 1985 which states:
"Internal audit. The key factor in the Bank's internal control is the internal audit function. This department undertakes extensive audit procedures at branches and head office divisions, including the use of computer software and an integrated test facility.
The extent of our reliance on the internal audit function is expected to be considerable." ()
In their submission dated 21 December 1992 the joint auditors explained the procedures carried out by them in relation to internal controls, internal audit and computer controls:
"The overall approach to the audit of the State Bank of South Australia was substantive. This is demonstrated by the PMM Audit Approach Memorandum ... and the Joint Planning Memorandum ... [which states] that it was planned that "no" reliance was to be placed on internal controls to modify the extent of substantive audit work carried out in the significant audit areas ...
In planning the audit of the Bank for the year ended 30 June 1985, the areas considered to contain the greatest audit risk were those defined as significant audit areas in the PMM Audit Approach Memorandum ...
However, no areas were considered to pose such a level of audit risk as to represent "critical audit areas", (that is no areas involved a significant risk of material mis-statement, a considerable degree of judgement or difficulty in obtaining audit evidence or in applying audit procedures ...
The significant audit areas identified by the joint auditors and the audit approach taken in each area follows:
1. Computer Controls Review - Preliminary reviews indicated control reliance could not be placed on computer systems. Hence, substantive approach or reliance on manual controls required.
2. Audit Software - Work of DP auditors running substantive CAAT's was relied upon to support the joint auditors work in some areas as set out below.
3. Cheque Accounts (including corporate overdrafts) - Substantive approach featuring extensive confirmation procedures and some analytical procedures. Internal audit interest simulations provided additional assurance.
4. Instalment Loans - Substantive approach.
5. Mortgage Loans - Substantive approach featuring half yearly confirmation exercises. The Internal Audit Department planned each year to run an interest simulation model which was reviewed by the joint auditors to provide related evidence.
6. Bank Premises - Substantive approach.
Although not documented in the audit workpapers in this format, the following table summarises the audit risk assessment for major financial statement captions and the level of audit evidence that the joint auditors obtained from each of the three broad classifications of audit procedures.
|
Audit Risk |
Review of |
Review of Internal |
Substantive |
|
|
Cash |
L |
M |
M |
M |
|
Investments |
L |
L |
L |
H |
|
Corporate Receivables |
M |
L |
M |
H |
|
Provisions for Doubtful Debts |
M |
L |
M |
H |
|
Instalment Loans |
M |
L |
M |
H |
|
Mortgage Loans |
M |
L |
M |
H |
|
Bank Premises |
L |
L |
L |
H |
|
Capital and Reserves |
L |
L |
L |
H |
|
Deposits |
L |
M |
MM |
|
|
Other Liabilities |
L |
L |
L |
H |
|
Profit and Loss |
L |
M |
M |
L |
|
Treasury/International |
M |
M |
M |
M |
|
(L - Low, M - Moderate, H - High) |
||||
It will be appreciated that there are areas of variable risk within each of the bank's major operations which are identified in the above table. For example, in low risk areas such as deposits it was appropriate to place some reliance on internal control/internal audit in order to reduce the level of substantive audit testing required."()
"In order to rely on internal controls in an EDP environment, it is necessary for the auditor to satisfy himself that it is possible to rely on general controls within the EDP environment. Often, the cost/benefit of testing EDP controls is so prohibitive that it is inefficient to attempt to test those controls ... In many instances, weaknesses in general EDP controls and/or in EDP application controls may preclude audit reliance on those controls. In such instances, the auditor should seek to accomplish audit objectives through either reliance on manual user controls and/or the performance of substantive procedures. The joint auditors cite as authority for this view, Statement of Auditing Practice "The Effects of an EDP Environment on the Study and Evaluation of the Accounting System and Related Internal Controls" AUP 4-1, more particularly paragraphs 17 and 18. The fact that an auditor may choose not to rely on controls does not necessarily indicate that those controls are inadequate for the business. The auditor is under no obligation to form such an opinion.
The following summarises the approach adopted regarding computer controls:
. It was decided that no reliance would be placed on EDP application controls; and
. The audit approach was therefore either substantive or alternatively reliance placed on manual user controls on the basis that such manual user controls were subject to audit.
This approach is evident from the Audit Approach Memorandum." ()
The audit working papers were reviewed by the Investigation. I am satisfied that the approach set out in the submissions from the joint auditors noted above was not clearly set out in the workpapers, however, the above submissions clarify the joint auditors' planning in relation to reliance on internal controls, Internal Audit and computer controls.
47.5.1.2 Conclusion
Based on the evidence examined by the Investigation, I have formed the opinion that planning in relation to the audit was appropriate and adequate.
47.5.2 EXECUTION OF THE AUDIT
47.5.2.1 Preamble
Chapter 46 - "The External Audit of the State Bank: Background Information" sets out background information on appropriate audit procedures in this area.
47.5.2.2 Matters Noted - Investments
There is no evidence in the audit working papers that the joint auditors tested purchases and disposals of investments other than equities to achieve the objectives in relation to this area listed in Chapter 46 - "The External Audits of the State Bank: Background Information".
Total investments (other than equities) at 30 June 1985 were $572.7M.
In their submission () the joint auditors state that their audit procedures were directed towards testing the year end balance of investments, and in particular confirmations from relevant registrars was obtained. They believe that specific testing of purchases and disposals was not necessary to support the audit conclusion. In my opinion the procedures carried out were not adequate to address the audit objectives referred to in Chapter 46 - "The External Auditors of the State Bank: Background Information".
In addition the joint auditors state that purchases and disposals of investments were tested by Internal Audit and provide workpaper references in support. There is, however, no assessment by the joint auditors of the Internal Audit work.
Based on the evidence examined by the Investigation and for the reasons set out above I am not satisfied that the joint auditors performed appropriate and adequate audit procedures in relation to the Bank's purchases and disposals of investments during the year, however, I have no reason to believe any such failure to perform appropriate and adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.5.2.3 Matters Noted - Provision for Doubtful Debts
The Provision for Doubtful Debts at 30 June 1985 of $9.1M as calculated by the Bank comprised the following:
(a) Specific provision of $0.96M determined at 30 April 1985 relating to an assessment of individual loans.
(b) General provision of $7.9M determined at 31 May 1985 by applying risk percentages to balances outstanding and commitments for different categories of lending().
(c) An additional $0.24M which had the effect of rounding the provision to $9.1M.
The joint auditors prepared their own estimate of the provision for each of the following categories as detailed below:
|
|
Provision |
|
|
Instalment loans in arrears in excess of $2,000 at 19 June 1985 |
302 |
|
|
Cheque account more than $25,000 over limit |
2,755 |
|
|
Mortgage loans in arrears in excess of $2,000 at 10 July 1985 |
1,030 |
|
|
Bankcard |
563 |
|
|
Corporate loans |
564 |
|
|
Failed loans per the Bank’s legal department not considered elsewhere |
389 |
|
|
5,603 |
||
For instalment loans, cheque accounts and mortgage loans, the joint auditors accessed the arrears reports and monthly excess reports prepared by the Bank and, after discussion with Bank staff, they estimated the required provision.
For Bankcard, the joint auditors estimated the required provision by reference to trends in the balances outstanding and the Bank's debt loss experience in this area().
For corporate loans the joint auditors took the figure of $0.56M, being the amount derived in respect of each of the Corporate Managers from the Bank's "Corporate Customer Reports" dated 14 August 1985. It represented the total by which customers were over their limits.()
For failed loans the joint auditors took the figure advised by the Bank's legal department.
There is no evidence in the audit working papers that the joint auditors tested the completeness and accuracy of the loans arrears reports and monthly excess reports used by them in assessing the adequacy of the Provision for Doubtful Debts in respect of instalment loans, corporate loans, cheque accounts and mortgage loans.
One could infer from the audit working papers that, since the joint auditors' estimate of $5.6M was less than the Bank's estimate of $9.1M, the Bank's estimate was acceptable to the joint auditors.
In their submission on this matter the joint auditors stated() that the arrears reports were subject to testing by internal and external audit, however, no details of appropriate testing or relevant work paper references were supplied by the joint auditors in their submission.
Based on the evidence examined by the Investigation and for the reasons set out above I am not satisfied that the joint auditors performed appropriate and adequate audit procedures when auditing the provision for doubtful debts, however, I have no reason to believe any such failure to perform appropriate and adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.5.2.4 Matters Noted - Bank Acceptances of Customers
Chapter 46 - "The External Audits of the State Bank: Background Information" provides a discussion of this matter and a consideration of the joint auditors' submission on the subject. The conclusion which follows draws on that discussion.
There is no evidence in the audit working papers that the joint auditors performed any work to verify the figure of $144.4M appearing in assets and liabilities in the accounts of the Bank as at 30 June 1985 in relation to "Bank Acceptances of Customers", other than ensuring that the amount of the asset shown in the accounts was equal to the amount of the liability.
In their submission on this matter() the joint auditors stated that their audit procedure was to agree the acceptance balances to the general ledger, however, there is no indication given as to how these balances were tested for accuracy and completeness.
Based on the evidence examined by the Investigation and for the reasons set out above I am not satisfied that the joint auditors performed appropriate and adequate audit procedures in relation to Bank Acceptances of Customers, however, I have no reason to believe any such failure to perform appropriate and adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.5.2.5 Matters Noted - Sub-ordinated Debt
There is no evidence in the audit working papers that the joint auditors ascertained or confirmed (either by direct confirmation with Treasury or examination of relevant agreements) the terms of $156.0M of sub-ordinated debt classified as Loan Capital in the Bank's 1985 accounts, other than the fact that the State Government advised that it was "subordinated".()
In their submission on this matter() the joint auditors stated that the only evidence they saw in support of the sub-ordinated loan was a paper prepared by Bank management, and that the formal loan agreement was still to be executed.
Based on the evidence examined by the Investigation, and for the reasons set out above, I have formed the opinion that the joint auditors did not obtain sufficient appropriate audit evidence to support the Bank's treatment of the subordinated debt as capital, however, I have no reason to believe this failure to obtain appropriate and adequate audit evidence resulted in a material mis-statement in the Bank's accounts.
47.5.2.6 Matters Noted - Concessional Housing Reserve
Chapter 46 - "The External Audits of the State Bank: Background Information" provides a discussion of this matter and a consideration of the joint auditors' submissions on the subject. The conclusion which follows draws on that discussion.
The amount of the Equalisation of Interest - Housing Advances Reserve (known in other years as the Concessional Housing Reserve) appearing in the Bank's Balance Sheet as part of Capital and Reserves at 30 June 1985 was $30.6M. Neither the accounts nor the audit working papers provide any details of the nature of this Reserve or the method by which it was created. The increase in the Reserve during the year was $11.0M, but the accounts do not indicate the source of this increase. It was not shown in the Profit and Loss Statement as an appropriation.
Total Capital and Reserves at 30 June 1985 were $355.0M for the Bank and $364.2M for the Bank Group.
Based on the evidence examined by the Investigation, and for the reasons set out above, I have formed the opinion that the joint auditors did not carry out appropriate and adequate audit procedures concerning the "Equalisation of Interest - Housing Advances Reserve" and its presentation in the Bank's accounts and it was inappropriate for the joint auditors to accept management's treating this balance as a reserve forming part of the Bank's Capital and Reserves. The question of whether the accounts of the Bank and Bank Group at 30 June 1985 were as a result materially mis-stated is considered in the section headed "Conclusion" at the end of this Chapter.
47.5.2.7 Matters Noted - Provision for Self Insurance
Chapter 46 - "The External Audits of the State Bank: Background Information" provides a discussion of this provision and a consideration of the joint auditors' submissions on the subject. The conclusion with follows draws on that discussion.
In their letter dated 17 December 1985 and addressed to the Managing Director of the Bank, the joint auditors noted:
"...
|
|||||
|
1985 |
1984 |
||||
|
$4,600,000 |
$1,606,000 |
||||
The provision for self insurance was increased during the year by a transfer of $2,848,748 from the redundant concessional housing loan provision. As at 30th June 1985, support was lacking in regard to the basis for this provision ...".
To the extent that the provision did not relate to uninsured losses which had been incurred by 30 June 1985, then the provision should have been written back to profits. There is no evidence in the audit working papers that the joint auditors gave consideration to the appropriateness of the accounting treatment adopted by the Bank in forming their opinion on the accounts or that they tested the balance in any way.
Based on the evidence examined by the Investigation, and for the reasons set out above, I have formed the opinion that:
(a) the joint auditors did not obtain appropriate and adequate audit evidence to justify accepting management's assertion that the provision was not materially mis-stated.
(b) the balance was materially mis-stated.
The question of whether the accounts of the Bank at 30 June 1985 were as a result materially mis-stated is considered in the section headed "Conclusion" at the end of this Chapter.
47.5.2.8 Matters Noted - Contingent Liabilities
Contingent liabilities relating to items such as guarantees given, bill endorsements and liabilities under letters of credit were not disclosed in the accounts of the Bank for the year ended 30 June 1985. Further, there is no evidence in the audit working papers that contingent liabilities were tested by the joint auditors as at 30 June 1985.
In a letter dated 17 December 1985 and addressed to the Managing Director of the Bank, the joint auditors noted:
". . .
12. Disclosure of Contingent Liabilities
In completing the accounts for the year, we noted that funding commitments together with other contingent liabilities were not completely disclosed in the notes to the accounts."
The Bank's accounts for the year ended 30 June 1986 disclose, as comparative figures for contingent liabilities at 30 June 1985, the following:
|
Bank |
Group |
|||||
| Commercial bills endorsed |
89,683 |
89,683 |
||||
| Guarantees entered into in the normal course of business on behalf of and with indemnity from customers |
22,586 |
22,586 |
||||
| Letters of credit issued on behalf of customers |
48,207 |
48,207 |
||||
| Credit risk participation and other contingent liabilities |
559,415 |
563,916 |
||||
| Amounts uncalled on shares in subsidiary companies |
600 |
- |
||||
|
720,491 |
724,992 |
|||||
In their submission on this matter() the joint auditors observed that it was not Australian banking practice to disclose undrawn loan facilities, and concluded that this meant that the item above of "Credit risk participation and other contingent liabilities" need not have been disclosed. The joint auditors have not explained why they regard the whole of this item as relating to undrawn loan facilities, and there is nothing in their workpapers to indicate the nature of this item's content. I note that this information was disclosed by the Bank from 1986 onwards despite (according to the joint auditors) this not being Australian banking practice. I note also that it is apparent from the letter quoted above that the joint auditors in 1985 were under the impression that funding commitments ought to be disclosed in the accounts.
In the exhibit() which accompanied their oral submission on this subject the joint auditors effectively acknowledged that no work was done by them on establishing the level of contingent liabilities to be disclosed in the 1985 accounts of the Bank.
There is no evidence in the audit working papers that the joint auditors performed any audit work to ascertain any pending law suits or other legal action against the Bank, apart from reading the Bank Board minutes of directors' meetings and examining general representations from management to the Board.
In their submission on this matter() the joint auditors stated that all legal representations were obtained from the Bank's internal legal department, although there was no evidence in the audit working papers to this effect. The exhibit presented by the joint auditors with their oral submission does not state that representations were obtained from the Bank's internal legal department in 1985.
Based on the evidence examined by the Investigation, and for the reasons set out above, I have formed the opinion that:
(a) it was inappropriate for the joint auditors to accept non-disclosure of contingent liabilities in the 1985 accounts; and
(b) the procedures performed by the joint auditors to ascertain the quantum of contingent liabilities relating to banking activities and arising from litigation and other sources were inadequate.
However, I have no reason to believe this failure to perform appropriate and adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.5.3 CONCLUDING PROCEDURES
47.5.3.1 Preamble
Chapter 46 - "The External Audit of the State Bank: Background Information" sets out background information on appropriate audit procedures in this area.
47.5.3.2 Matters Noted - Settlement of Audit Issues
There is no evidence in the audit working papers that the following important matter was brought to the attention of Mr T J Whimpress and Mr B H Edwards, the persons responsible for signing the auditors' report on the 1985 accounts of the Bank and hence there is no evidence of how they decided to deal with the fact that The Adelaide Steamship Company was in breach of loan covenants when loan funds were granted to it and was still in breach at 31 December 1984. This matter was noted in the auditors workpapers for the half year ended 31 December 1984.()
In their submission on this matter() the joint auditors did not comment directly on the criticism raised, but it can be inferred from their submission that the matter was not brought to the partners' attention because the Bank was already aware of the breach. I do not regard that as being sufficient reason for not alerting the partners to this matter involving a very large Bank exposure. I am not satisfied it was brought to their attention.
There is no evidence in the audit working papers of how and with whom the following matters, of which Mr Whimpress and Mr Edwards were aware (as evidenced by their personal review of relevant audit working papers or letters they had written to the Bank), were considered, and hence the reasons for the joint auditors accepting the Bank's treatment in its 1985 accounts and/or accounting records.
(a) The failure of the Bank to disclose undrawn commitments, guarantees, etc. totalling $720.5M for the Bank and $725.0M for the group in the 1985 accounts.
In their submission() the joint auditors claim that the partners "were obviously aware of this matter". Although they were doubtlessly aware of it at the time of issuing their management letter, which was dated 17 December 1985, there is no evidence that they had knowledge of it at the time of the audit. If they had been aware of the matter at that time then in my opinion some action should have been taken as regards to appropriate disclosure in the Bank's accounts.
(b) The Provision for Self Insurance of $4.6M in relation to which the joint auditors did not obtain sufficient appropriate audit evidence.
In their submission() the joint auditors state that the partners were well acquainted with this matter, but the references they supplied to demonstrate this in my opinion failed to do so.
In respect of these matters the joint auditors should have considered whether:
(a) they incorporated the matter in their report to management or the Board of Directors;
(b) they insisted that the directors of the Bank correct the matter prior to their signing the auditors' report on the 1985 accounts; and/or
(c) they issued a qualified audit report on the 1985 accounts.
Based on the evidence examined by the Investigation, and for the reasons set out above, I am not satisfied that all significant issues were brought to the attention of the joint auditors by their staff, and that they dealt adequately with issues that were brought to their attention, however, I have no reason to believe any such failure to perform appropriate and adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.5.3.3 Matters Noted - Subsequent Events Review
There is no evidence in the audit working papers that the joint auditors performed a review of events occurring subsequent to balance date and up to the date of signing their report on the Bank's accounts for the year ended 30 June 1985, on 22 August 1985, with the exception of reviewing minutes of Board meetings up to 25 July 1985.()
In their submission() the joint auditors claim that the review of subsequent events was an ongoing matter, and a record was only made when a matter arose which required consideration. However, I believe the procedure of reviewing subsequent events to be sufficiently important for the enquiries made to be documented as part of the audit evidence.
Based on the evidence examined by the Investigation, and for the reasons set out above, I am not satisfied that the audit procedures adopted with respect to the review of events subsequent to balance date were appropriate and adequate, however, I have no reason to believe any such failure to perform adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.5.3.4 Matters Noted - Management Representation Letter
There is no evidence in the audit working papers that the joint auditors obtained written or oral representations from management on matters which were material to the accounts. Examples of the types of information for which it could be reasonably expected that the joint auditors should have sought written representations from management include confirmation that:
(a) The accounts include all material contingent liabilities, including those arising from litigation.
(b) The levels of provisions for doubtful debts are adequate to meet likely losses.
(c) The valuations of assets included in the Bank and Group accounts are in terms of the stated accounting policies.
(d) All minutes of Directors' meetings have been made available to the joint auditors.
(e) There were no plans or intentions that could affect the carrying values of assets in the accounts.
(f) All related party relationships and transactions had been properly considered and presented in the accounts.
In their submission() the joint auditors state that, although their internal audit guides support the obtaining of written management representations, this is not a mandatory requirement and that the requirements of their internal audit guides were met by the review of Board papers in conjunction with the final Bank accounts.
In my view, the review of Board papers is an inadequate substitute for written representations from management and/or the Board addressed to the joint auditors. There is no assurance that the Board papers cover all matters of concern to the joint auditors. They are prepared for a different purpose and addressed to persons whose existing knowledge of matters may be quite different from that of the joint auditors.
Based on the evidence examined by the Investigation, and for the reasons set out above, I have formed the opinion that the audit procedures with regard to obtaining management representations on significant matters were inappropriate and inadequate, however, I have no reason to believe this failure to perform appropriate and adequate audit procedures resulted in a material mis-statement in the Bank's accounts.
47.6 CONCLUSION
In my opinion, the audit opinion expressed by the joint auditors on the accounts for the year ended 30 June 1985 was inappropriate and the carrying out of the audit process leading to that opinion was inadequate, in the following respects:
(a) the joint auditors failed to deal adequately with the significant matters noted in the section on "Concluding Procedures" above;
(b) the joint auditors did not carry out appropriate and adequate audit procedures to gain reasonable assurance that certain amounts shown as assets and liabilities as noted in the section on "Execution" above were not materially mis-stated;
(c) the Provision for Self Insurance of $4.6M was materially mis-stated;
(d) the joint auditors wrongly accepted management treating the balance of the "Equalisation of Interest - Housing Advances Reserve", of $30.6M, as forming part of the Bank's capital and reserves; and
(e) the joint auditors accepted non-disclosure of contingent liabilities of up to $720.0M for the Bank and $725.0M for the Bank Group.
By reason of the foregoing, the joint auditors' opinion that the accounts and group accounts for the year ended 30 June 1985 complied with Section 269 of the Companies Code, Australian Accounting Standards and Applicable Approved Accounting Standards, and gave a true and fair view, was inappropriate, in that there was not a proper basis for that opinion.
In my opinion, for the following reasons, the accounts failed to give a true and fair view, by virtue of items (c) and (d). First, item (c) was, in my opinion, material in relation to the reported profit of the Bank for the year of $28.1M before tax. Second, item (d) was, in my opinion, material by its nature, and in relation to the Bank's reported capital and reserves of $355.0M.