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HA3032 Auditing

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HA3032 Auditing

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Course Code: HA3032
University: Holmes Institute is not sponsored or endorsed by this college or university

Country: Australia


(i) Do your own research and critically discuss whether the financial accounting and reporting should be regulated or manager should be allowed to disclose financial accounting information voluntarily.   
(ii) Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB?  
Select 4 public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name.
In this section, go to your firms’ annual reports and save to your computer your firms’ latest annual reports consecutively for last four years. Do not use your firms’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firms’ financial statements carefully and include information from these footnotes in your answer.  
You need to do the following tasks:  
(iii) From your firms’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past four years articulating the reasons for the change.  
(iv) Provide a comparative analysis of the debt and equity position of the four firms that you have selected.


The report covers various dimensions of the corporate and financial accounting. Therefore the four sections of this report are dedicated to regulations, standard settings as well as equity analysis. In the first section, the report discusses if the financial accounting requires regulatory control or management is adequate to deal with it. The second section deals with the accounting standard where the IFRS and IASB are major topics. In the third section, the report identifies four ASX listed companies and provides a discussion on the equity management. Finally, the comparative analysis in the fourth section discusses the debt and equity conditions of the four companies.
i) Corporate Regulation:
The financial accounting is defined as a process where the major aims are information identification, information measurement, and information communication. The term information means the specific accounting information which helps the financial judgment and decisions. As a part of the bookkeeping process in financial accounting, the information identification is done while the same information is extracted from the multi-entry bookkeeping system for measurement and decisions. The final communicated or presented information covers profit/loss and comprehensive income analysis (Henderson et al, 2015). So, the financial accounting is focused in the areas like recorded transactions or accounting controls (bank reconciliation, suspense accounts), financial performance in terms of profit or loss statement as well as financial statement preparation. Again, the business environment deals with different types of organizations (sole trader, partnerships, joint ventures, unlimited company etc). That means the accounting regulation is required in terms of public interests (accuracy and transparency of information) as well as for the health of the company. Moreover, the accounting regulations can control the issues during the financial crisis as it asks for the mandatory disclosure of the important information. In the case of the public security market, the contracts and impartial courts are not sufficient where the non-governmental parties and their voluntary arrangements can increase market complexities. Again, if there are no unresolved market failure issue then the accounting regulations seem “not required” as the management can control the information. However, there are always the risks of self-interested agents inside and outside the business environment where the primary concerns are individual wealth and power. If the financial accounting and reporting are under the control of management only then these self-interested individuals will use the control as a scope to increase power. But the regulatory control introduces complex and detail steps to deal with accounting information so for exclusive and firm-specific benefits the regulatory framework is required. Moreover, the management decisions and quality can fluctuate according to the business types so the market-wide effects need a standard regulatory framework. During the financial crisis, the market needs fair value accounting in terms of pricing patterns and cyclical financial pressure (Schaltegger and Burritt, 2017). So, to address the issues like discretion, bank transparency, cross-country loan variation, market discipline as well as international assets the management seems inadequate. In terms of interstate lines, the regulatory framework can deal with all the dimensions of trade securities while establishing the public sector standard. In this context, the US-based SEC and SOX act 2002 seem significant. Again, the company type must be a factor for the content of the financial statement. As an example, the UK uses company law to describe the size of the company where major criteria are a financial position statement, turnover rate and a number of employees. Moreover, the large private companies and public companies have different contents in the financial statement (Huber, 2015). So, the reporting should be regulated considering the complex dimensions of the financial environment.
ii) Accounting Standard Setting:
According to the diagram, it is clear that AASB follows the guidelines of IFRS in terms of governance, transparency, accountability, and other operations. The Australian framework has started the process since the year 2005 using a strategic direction. That means the IASB and IFRIC work programs are also used by the AASB. In this context, it is significant that the degree of AASB involvement varies both substantively and non-substantively in different issues. Apart from some technical issues according to the ASIC act the AASB framework follows IFRS settings especially in deregulation agenda, treasury relations, and other operational issues. In case of deregulation, the red tape and compliance cost reduction are major points where RDR and section neutrality are based on IFRS settings (Macve, 2015). Again, the corporate regulatory policy confirms accurate and timely information service to treasury minister while for transparency the annual reports reflect IFRS international standards and IASB contemporaneous domestic strategy. Apart from this, the major operational issues are dealt with PS and PGPA acts which are influenced by the IASB framework.
IASB compulsory conditions:
The IFRS is considered as the set of international accounting standards to cover a particular type of transactions and the accounting events in the financial statements. Moreover, the set of standards is issued by the IASB (International accounting standard board) to determine a specific way of accounting reports. The key goal of IFRS is to remove the complexities of an international accounting environment with a common financial language. Therefore, the business and accounts are more transparent in different countries and accounting environment for these set of standards. Today, the major countries who have adopted the IFRS setting include India, Japan, Malaysia, Russia, Canada etc. However, the IASB establishing continent of USA is a little different in this context. Although many Asian and South American countries, as well as EU, have adopted the IFRS but the USA cannot switch from SEC to IFRS (Carson et al, 2017). In terms of legal complexity and financial education issues, the complete switch is not possible. However, USA allows the IFRS information as a supplement for the SEC based financial fillings. Similarly, the other IASB member countries allow the IFRS standard setting as a supplement of existing financial structure to reduce the accounting policy issues Moreover, the IASB member countries have the general idea about the IASB environment so the global adoption of IFRS or using the same as the support is helpful for alternative comparison costs as well as free flow of information.
iii) Equity analysis:
The report selects the big four banks (largest public sector companies) of Australia who are listed in the ASX and belongs to the financial industry. According to the financial statement, the items of equity (common stock, preferred stock, capital surplus, retained earnings, treasury stocks etc) are covered with detail discussion on them. The discussion is given below:
According to the 2017 balanced sheet, the contribute equity varies from 30,000-34,5000 million dollars while the reserves are in the range of 190-629 million dollars in the past four years. Again, the retained profit varies from the 15,000- 16500 million dollars which determines that the comparative information somehow reflect the changes in interest accrual rates. The total equity considering the parent entity interest is varying between 48,000-51000 million dollars while the non-controlling interest in controlled entities varies from 11-23 million dollars. The equity changes statement ensures that treasury share adjustment in terms of insurance is fixed while the equity-based compensation and distribution policies have flexible pattern (Bryce et al, 2015). So, the accounting policy determines that the debt instruments are majorly dependent on the amortized cost while investment in equity instrument is not held for trading and the same has no contingent consideration issues too. Moreover, the credit impairment covers a three-tier credit loss model in terms of amortized costs.
According to the balance sheet, the asset and liabilities are little flat for the consecutive four years and the shareholder equity covers three major points and they are share capital, ordinary share capital and other equity instruments. The reserves and retained profits are other important instruments covering the attributable equity holders and non-controlling interests. The ordinary share capital varies from 33,000-35,000 million dollars while the reserves vary between 2500-3100 dollars. Again, the retained profits move between 20,000-25,000 million dollars by introducing the total shareholders’ equity to 58,000-63,000 million. In terms of equity changes the redemption, share-based payments, reinvestment plans, dividend policy are important and the accounting policy confirms revenue profits capital reserves, asset revaluation, and cash flow hedge reserves as the key equity instruments.
The remuneration report and balance sheet both provide the equity information. The types of equity include deferred share, ordinary share, performance rights as well as the capital notes. Moreover, the balanced sheet states that the shareholder equity in case of an ordinary share varies between 28,000-29,000 million while reserves are highly variable (from 37-1078 million). The retained earnings move from 27,000-29,000 million dollars. The shared capital and attributable reserves change consistently. The major equity instruments are treasury share adjustments as well as share acquisitions schemes and the life insurance funds. Moreover, the reinvestment plan according to accounting policy is covered by the initial investment date rate. The AASB instruments are followed properly in terms of insurance, leases and other operating incomes.
Considering the five year summary of the financial giant the total shareholder equity and non-controlling interest varies between 41,000-61,000 million dollars. In this context, the ordinary share increases consistently from 174 million to the 188 million dollars. However, the share is fixed for the last two years (2016, 2017) while the share price fluctuates 34-40 million inconsistently in terms of high, low and close types. Moreover, the capital adequacy is based on the total equity to total asset percentage as well as the total equity to average asset percentage. The ratios vary from 6.4-7.9% in the five consecutive years. The ordinary share capital varies between 33,000-34,000 million dollars while the treasury and RSP shares vary between 360-490 million dollars. Again, the retained profits vary between 15,000-26,000 million which is inconsistent in the five year time period. In the case of accounting policies, the AAS and corporation act 2001 is important.
 iv) Comparative analysis:
After comparing the annual reports of the four financial institutions it seems that Westpac has the best representation covering all the accounting principles. In this context, it is significant that all the banks use the same basis of accounting principles where the banking act 1959, corporation act 20001 and the AASB framework are important. Moreover, the WBS annual report discusses the historical cost conventions, comparative revisions, and policy changes terms in detail. In the case of  ANZ, the AASB based lease and contracts cover both life insurance and lease issues significantly. That means the operating income is covered by the financial instruments like exchange rate differences, fair value movements, cash flow, and investment hedges as well as repayment model (Beatty and Liao, 2014). The bonus option and reinvestment plan cover the ordinary shares while the trading securities cover the government, corporate securities as well as the equity and overall trading securities. The CBA accounting policies are IFRS framework based which has a high influence on the AASB framework, therefore, the bank use derivative instruments for fair value measurement. In this context, it is significant that the foreign operations cover the expense translation, currency reserves as well as sales investments. Therefore, the derivative instruments include fair value, cash flow, net investment hedges while the other embedded derivatives are AFS, loans, bills and other receivables. For NAB the equity and debt instruments are properly highlighted in the annual report and the debt instruments cover contractual cash flows, financial asset sales while equity instruments are fair value items like trading items, contractual interest terms etc. Again, the ECL issues are covered by the debt instrument loan contracts as well as financial guarantees which means the present asset value and credit-impaired reports are important. Considering the debt and equity positions NAB, CBA and Westpac are in good position but the ANZ has some issues with the 2017 BIS industry sales.
The report confirms that finance and accounting need a standard regulatory framework to deal with the industrial and other cross-functional issues. Therefore, the four annual reports of the financial industry support the requirements of the accounting policies and frameworks to deal with transparency and fair measurement issues.
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.
Bryce, M., Ali, M.J. and Mather, P.R., 2015. Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-Basin Finance Journal, 35, pp.163-181.
Carson, E., Fargher, N. and Zhang, Y., 2017. Explaining auditors’ propensity to issue going?concern opinions in Australia after the global financial crisis. Accounting & Finance.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts, and practice. Routledge.

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