2019 Auditing & ASSURANCE ASA 701 Executive Summary

AUDITING & ASSURANCE
2019

ASA 701
Executive Summary
With the due passage of time, the listed companies are undergoing immense change and the
expectation of the investors is increasing on a constant note. One of the major initiatives
taken by the regulators is to introduce the new accounting standard ASA 701 that is
disclosing the key matters of auditing contained in the annual report. The report provides an
in-depth analysis on the element on this standard. To conduct this report, the annual report of
mining companies is selected and each of the four company’s annual report is studied and
presented for the purpose of discussion.
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Contents
Introduction...........................................................................................................................................3
Implementation of ASA 701...................................................................................................................4
Mining industry.....................................................................................................................................4
Alumina Limited....................................................................................................................................5
BHP Billiton............................................................................................................................................5
Evolution Mining...................................................................................................................................7
Fortescue Metals Group........................................................................................................................8
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10
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Introduction
The application of ASA 701 was done in order to conduct the audit process easily and
compute the values more efficiently. The application of this standard has not only to help to
improvise the procedure and communication on the part of auditors but also help them to
frame and unbiased financial report. It is important on the part of the managers of the
organization to disclose necessary data in order to provide a proper reflection of the
performance of the organization with the help of the financial statements (Gay & Simnet,
2015). The financial statements can be used by the investors and stakeholders in order to
carry out the process of decision making while making investments.
Hence, it can be clearly stated that hiding information from the public can lead to a violation
of such standard. Hence, in order to conduct an ethical audit process, proper disclosure of all
the matters should make which are free from any kind of fabrication or unethical changes
(Rebel, 2016). The auditors are required to disclose all the material facts and statements
provided to them in the audit report which can be helpful for the ascertainment of the actual
financial performance of the organization (Goergen, 2012). If all the values and figures
presented in the financial statement of the organization are ethical in nature then the
organization will be able to depict a clear performance statement and determine the
organizational goals and strategies according to it.
The ASA 570 is one of the most important auditing standards that helps the auditor to find
the relation between the rules that are to be played by him and the audit of the financial
statement that is to be conducted. Also, the standard helps to assist the organization to
maintain financial accounts on the basis of going concern concept which means that the
organization assumes that it will function for an indefinite period of time. Also, the company
assumes that it will not back off from any of the operations and will work for a long period of
time which will help it to gain the confidence to invest in more assets (Livne, 2015).
Preparation of financial statement based on the standard will also help the organization to
record the assets and liabilities in a manner which will further help to realize then with the
help of normal operation of the business in the future (Suphatsorn & Phapruke, 2011)
• The KAM communication should be mandated in the reports of the listed entities of
auditors.
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ASA 701
• The auditors must be allowed to take decisions regarding the reports that have been
included by various entities for KAM communication.
• The auditor should also determine the key audit matters has to ascertain the points which
are most important for auditing and requires immediate attention. Areas of risk should be
considered for assessment so as to make judgments that can help the auditor to signify
various events, judgments of management and other important matters that are part of the
financial report (Niemi & Sundgren, 2012).
• It also helps the order to determine the way in which we have to describe the statements of
KAM.
• Also, situations will be analyzed where matter related to the organization was stated in the
annual report by other entities (Viney, 2010).
• Various other proof documents that were depicted in the financial statements will be
assessed by the auditor.
Implementation of ASA 701 & Case of Lehman Brothers
The untimely demise of Lehman Brothers shocked the entire nation. The prices of Lehman
Brothers dropped by 73% of its former value while the financial institutions of The United
States dealt with huge losses. The sudden disintegration of Lehman Brothers and the global
financial crisis put a question mark on the role of auditors. Lehman Brothers opted to make
wrong use of Repo 105 transaction in order to portray a positive image of the financial well
being of the same in front of the users of its financial statements. This was entirely done with
the motive to increase its equity share capital. The funds received by the company were
utilized towards the payment of the company’s underlying debt obligations. The balance
sheet of the company was designed in a manner so as to portray a favorable image of the
company which was only possible with the support from the auditors. A new auditing
standard ASA 701 was implemented in this regards. ASA 701 made it compulsory for all the
companies to report its key audit matters and make all significant disclosures in the financials
of the same.
Implementation of ASA 701 should be made in the annual report so as to prepare the
financial statements properly. One of the most important objectives of the report is to
determine the standard in which the financial statements of the organization will be prepared
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and audit process that will be carried out by the auditor. By analyzing and determining these
factors, the investors will be provided with:
• Proper transparency of the financial statement of the organization.
• Insights of the financial statements that have been audited by the officials.
This will not only help the organization to make disclosures on the basis of the decisions that
are being made by them but also will help them to maintain the financial statements of the
organization on the basis of the new standard that will be utilized by them to maintain the
financial accounts of the organization (Parrino, Kidwell & Bates, 2012). Therefore, this is the
main reason to start a new standard in accordance with the international auditing standards.
Mining industry
In order to assess the mining industries, annual reports of some of the companies have been
analyzed in order to find the key audit matters that are to be assessed by the auditor in the
financial statement of the report. The analysis is made on the basis of the annual reports of
the companies for the year ending 2018.
Alumina Limited
The most important periodic metals that have been highlighted in the report are:
Equity accounting for the investment in AWAC
Adapt been specified by auditors in the procedures followed by them that 40% investment
will be made in the company. The appropriateness and completeness of the financial
statements of the organization were done by the auditors in accordance with the principles of
US GAAP. The differences that existed between the AAS and the US GAAP were also
clearly analyzed by the auditors (Alummina Limited, 2018). This was considered as a key
audit matter because the magnitude of the investment made by the company was very high
and low complexity of the tasks that were carried out by them was increased because of the
requirement of conversion of currencies.
Impairment indicator assessment for investment in AWAC
The total amount of investment made by the organization was stated to be 2.3 billion dollars
and hence it was very important for the auditor to check the impairment amount because the
figure was very huge and can further affect the organization for a long term. The auditors also
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analyzed and compared the market value and group value for the internal or external sources
of the organization that was to be impaired. However, no evidence of statements present in
the impairment values was found in the investments made by the organization (Alummina
Limited, 2018).
BHP Billiton
The auditors have stated some of the key audit matters that are believed to be very important
for conducting the business:
Asset valuation
It is very important for the organization to value its assets at proper rates. There were
materials weaknesses present in the financial reports of the organization in relation to the
impairment values of the assets. Therefore this increase the focus of the auditor's on such
valuations (BHP Billiton, 2018). A detailed analysis was being made in order to test the key
controls of the valuation of assets and commodity prices that were being affected because of
the changes made in the standards used by the organization for maintaining financial
statements.
Taxation
Since the company pursues various affairs throughout the world, taxation can be considered
as a significant matter of audit. Further, the company is also actively engaged in cross-border
transactions and thus, the auditors were prudent when it comes to estimation of aspects like
contingent liabilities, costs, and tax. Nevertheless, the auditors utilized procedures like
examined key controls and initiated proper coordination with several tax professionals in
countries wherein the company functions (BHP Billiton, 2018). Additionally, the auditors
also scrutinized the consistencies available betwixt various countries to evaluate whether the
company has made relevant disclosures for the benefit of investors.
Samarco
The dam project of BH Billiton witnessed failure and as a result, it reported major losses for
the year. Further, various actions associated to accounting judgment needs to be monitored
such as legal liabilities, disclosure of contingent liabilities, etc. Nonetheless, there were
extreme uncertainties associated with such scenario and this is the reason why it forms a
crucial part of the company’s audit matter. The auditor followed a comprehensive approach
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ASA 701
towards the project of Samarco and for such purpose, they evaluated the significant
assumptions provided by BHP, checked the accuracy and completeness of both the
companies, etc (BHP Billiton, 2018). After such process, the provisions and disclosures were
approved as acceptable to them.
Rehabilitation closures and provision
The Group is actively engaged in the closure, rehabilitation, and restoration of sites and
owing to the volume of immense transactions, this was anticipated to possess a massive
impact on their outcomes. Hence, the same was also regarded as a key audit matter as the
statement of future cash flows can be affected. The auditors performed with professionals to
determine the life of mines and reserves and evaluated the operations of such professionals
related to the closure of mines, thereby attaining a position to analyze the timing cost.
Further, they also verified the forex rates and the time value of money for monitoring the
influences of the same. Thereafter, the provisioning of rehabilitation was considered as
acceptable.
Evolution Mining
Consideration of Ernest Henry Mine
The auditors assert that the accounting treatment for the acquired interest by the company in
other mines has been duly examined. According to them, such acquisition pursued immense
financial importance upon the company. Besides, the auditors also scrutinized all prime
transaction documents associated with the case. For such purpose, they verified whether
proper disclosure initiatives have been adopted by the company because various judgments
have been made in relation to when revenue could be considered while selling commodities.
Lastly, they also utilized a policy of revenue recognition to evaluate the terms and conditions
of all transaction documents (Evolution mining, 2018).
Recognition of deferred tax assets
The Group has reported deferred tax assets amounting to $57.74 million based on the
requirements of AAS (Australian Accounting Standards). The auditors must verify the same
as recognition of deferred tax assets have been done based on the same. Hence, the auditors
took steps to evaluate the reasonability of the Group’s taxable income, reassessed its balances
of deferred tax assets, etc.
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In the year 2003, the Group had also reported impairment losses amounting to $148.6 million
associated with assets of Mt Carlton. However, it now had reconsidered the decision by
reversing the same. This was regarded as significant by the auditors because it can have a
major impact of the financials of the company.
CSR Limited
Valuation of assets
The company recorded its assets at a higher price that were subject to factors like forecast,
changes in growth rates, inflation, etc. The auditors considered this as an important matter
because immense judgment lie upon such forecasting of cash flows related to the future. For
such purpose, they conducted various processes together with valuation professionals so that
assets impairment could be effectively checked. However, few rates were also verified from
the samples and the auditors examined the effectiveness of impairment testing techniques
utilized by the company (CSR Limited, 2018). Therefore, in this manner, all the aspects were
monitored by the auditors that could affect the company’s overall performance.
Provision of product liability
A provision of product liability was reported by the company at an amount of $312.4 million
that was also subject to various judgments. For such purpose, the auditors supervised the
complications prevalent in the transaction by evaluating the competence and independence of
all external professionals (CSR Limited, 2018). Additionally, they also initiated various
inquiries and segregated all liabilities, thereby ensuring information about every aspect of the
provision.
Fortescue Metals Group
Ore carrier financing
The Group had entered into contracts for the purpose of financing of ore carriers. In relation
to this, it had attained resources of around $234 million. Nonetheless, since such amount is a
huge one, the same could have affected the company in a significant manner (Fortescue
group, 2018). Further, according to the auditors, they have scrutinized the transaction
expenses in an effective way and the financial arrangements entered by the company have
also been examined.
Revenue generated from the sale of iron ore
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ASA 701
The company had depicted a revenue of $8335 million in the year 2017 that had been attained
from the sale of iron ore. This matter has also been identified as a key audit matter because
the amount involved is material and huge in nature. For such purpose, the auditors had
utilized an approach wherein they exerted due to focus upon segments like non-cash
adjustments that have been made to such revenue amount (Fortescue group, 2018). Further,
they also reassessed the provisional sales and deferred income related to the company. In
addition, few adjustments of provisional pricing were also analyzed by them because the
same has been found to be materially significant with the present commodity data. Lastly, in
relation to prepayments, customer confirmations have been verified.
Exploration and evaluation assets’ carrying values
The company had also identified an asset amounting to $813 million in the year 2017 and the
auditors exerted due focus on their judgments especially in the case of IBJV that had been
regarded as an exploration and evaluation asset instead of a development asset (Fortescue
group, 2018). Further, the auditors made way for relevant discussions with the management
of the company to verify whether the assets could be tenured or not. For such purpose, they
also visited several sites associated with IBJV so that the present scenario of the project can
be ascertained. However, the same was found to be effective.
Conclusion
Auditing standards are very crucial in the current scenario considering the number of
transactions present in the environment. This report has played a vital role in shedding light
upon a new standard of auditing namely ASA 701 (Communication of key audit matters).
This standard can be regarded as very beneficial because it helps communication of key audit
matters so that frauds or errors can be mitigated, thereby preventing any financial crisis in the
future. The reasons behind the introduction of this standard have also been discussed through
the report and it makes it clearer that the standard intends to safeguard the interests of all
stakeholders including investors so that they are advocated about the significant audit
matters. Overall, this has enhanced the auditors’ duties and liabilities but the confidence and
trust of people can be ensured when it comes to reliance on audit reports because they can
easily make their decisions accordingly.
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References
Alummina Limited. (2018) Alummina Limited 2018 annual report and accounts. Available
from: https://www.aluminalimited.com/latest-annual-report/ [Accessed 14 May 2019]
BHP Billiton. (2018) BHP Billiton 2018 annual report and accounts. Available from:
https://www.bhp.com/investor-centre/annual-report-2018 [Accessed 14 May 2019]
CSR Limited. (2018) Fortescue group 2018 annual report and accounts. Available from:
https://www.csr.com.au/-/media/corporate/files/annual-reports/2018_annual_report_-
for_31_march-2018.pdf [Accessed 14 May 2019]
Evolution mining. (2018) Evolution mining 2018 annual report and accounts. Available
from: https://evolutionmining.com.au/wp-content/uploads/2018/10/1858627.pdf [Accessed 14
May 2019]
Elder, J. R., Beasley S. M., & Arens A. A. (2010). Auditing and Assurance Services. Person
Education, New Jersey: USA
Fortescue group. (2018) Fortescue group 2018 annual report and accounts. Available from:
https://www.fmgl.com.au/docs/default-source/annual-reporting-suite/fy18-annual-report.pdf
[Accessed 14 May 2019]
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Goergen , M. (2012). International Corporate Governance. Prentice Hall.
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. [online] Available
from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full [Accessed 14 May 2019]
Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), p. 767-
796. Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 14 May
2019]
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
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Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Rebel. (2016) Responsible Business and Profit Maximisation [online]. Available from:
http://www.responsiblebusiness.eu/display/rebwp2/Responsible+Business+and+Profit+Maxi
misation [Accessed 14 May 2019]
Suphatsorn, T., & Phapruke, U. (201 1). Internal audit planning strategy of Thai- firms: an
empirical investigation of antecedents and consequences. International listed. Academy of
Business and Economics, 11 (2). Available from:
https://pcaobus.org/Standards/Auditing/Pages/AS2101.aspx [Accessed 14 May 2019]
Viney, C. (2010) McGrath’s Financial Institutions, Instruments and Markets, Sydney
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