Importance of Key Audit Matters and ASA 701 in the Mining Industry

This report discusses the importance of Key Audit Matters and ASA 701 in the mining industry, with a focus on the case of five major firms. It explores the relevance of key audit matters, the features of ASA 701, and the impact of auditing issues on firms. The report also analyzes the key audit matters in Alumina Limited, BHP Billiton, Evolution Mining, CSR Limited, and Fortescue Metals Group.

Running head: ACCOUNTING AND ASSURANCE
ACCOUNTING AND ASSURANCE
Name of the Student
Name of the University
Author Note

1ACCOUNTING AND ASSURANCE
Executive Summary
The ASA 701 was introduced to bring about greater transparency into the firm and to ensure that
the crucial maters of the firm is outlined to the managers before the downfall. The reason why
the key auditing matters are primarily focused on can be stated to be the ultimate reason that
their occurrence may bring about harmful impacts on the overall operations of the firm and have
a negative impact on the overall consistency of the operations. Hence, the report identifies the
importance of the Key Audit matters, the ASA 701 and also outlines the case of the mining
industry in order to understand the standard in a better manner.

2ACCOUNTING AND ASSURANCE
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Analysis...........................................................................................................................................5
Alumina Limited..........................................................................................................................5
BHP Billiton................................................................................................................................6
Evolution Mining.........................................................................................................................8
CSR Limited................................................................................................................................9
Fortescue Metals Group.............................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

3ACCOUNTING AND ASSURANCE
Introduction
The Key audit matters can be stated to be those matters which can be rightfully defined as
the matters which the auditor deems to be important and believes will take up an important
position in the overall financial statement of the current period of assessment (Arens, Elder and
Mark, 2012). They key audit matters can be stated to be generally elected from the matters which
can be believed to have utmost relevance (Vik and Walter, 2017). The report primarily aims to
outline the overall case of the ASA 701 and define the different audit matters which are generally
chosen by the independent authors in case of a mining industry. The five major firms as involved
in the mining industry have been chosen for the assessment.
Discussion
According to the new standard ASA 701 of the Australian Board, the Key audit matters
can be stated to be those matters which are highly crucial in nature and hold utmost relevance
according to the personal judgement of the audit of the auditing firms reviewing the books of
accounts of the firm during a particular assessment period (Carson, Fargher and Zhang, 2016).
The features of the new standard can be defined as follows:
 It is considerably important to mention the Key audit matters in the books of accounts
which are generally audited by the different auditors (Köhler, Ratzinger-Sakel and Theis,
2016).
 It can also be considered to be very crucial for the auditor under the different entities to
undertake considerable decision making and include the same in the report.
 It is the duty of the different key auditors to consider the different areas associated with
risk and pay considerate attention to those areas (Griffiths, 2016). The judgement of the
auditors can be stated to have a key role to play.

4ACCOUNTING AND ASSURANCE
 Other documentary requirements related to the Key Audit Matters must be identified
relevantly.
 Moreover, the ASA 701 needs to be implemented and mentioned in the annual report of
the firm from the period 15th December 2016 (Knechel and Salterio ,2016).
 The entire procedure is largely believed to increase the transparency as present in the
workplace.
In addition to the key audit matters, the ASA 570 was formed to provide a relevant
guideline to the different auditors as present and to assist them in fulfilling the overall business
responsibilities and to view the organization as a going entity (Cosserat and Rodda, 2004). The
auditing standard mentions that, it can be understood to be the duty of the auditor to reconsider
the risk associated with the different operations of the firm and come up with solutions which
will assist the company in overcoming the same.
An important case of the auditing issue can be understood to be the case of Lehman
brothers who filed the case of bankruptcy in the year 2008 and at this point of time the firm has
approximately $640 billion assets and around $618 billion in debts. The bankruptcy came as a
huge surprise for the globe and was a result of the United States subprime mortgage which
induced various financial crisis present around the globe (Kachelmeier, Schmidt and Valentine,
2017). The Lehman brothers began as a small firm with adequately humble origins and
undertook huge growth in the following years to come. However, the auditors were unable to
engage into the identification of the different issues which lie in the firm and hence, they failed
as a company to guide the brothers and hence, when the cracks in the market were experienced,
the Lehman brothers could not stand the tremors and ultimately succumbed(Sirois, Bédard and
Bera, 2018).

5ACCOUNTING AND ASSURANCE
Analysis
In the given section, the analysis for the mining industry shall be undertaken. In the
particular section, annual reports of some of the companies as present in the mining industry
shall be identified.
Alumina Limited
Some of the crucial key audit matters which have been rightfully mentioned in the report
of the company can be stated to be as follows:
Equity accounting for the investment in AWAC
The auditors have rightfully mentioned the process which they undertake to ascertain the
40% of investment of the company AWAC. The auditors have also undergone the analysis to
assess the completeness as well as the appropriateness of the United States GAAP which has
been largely adopted by the firm (Aluminalimited.com ,2019). The difference in the standards
between the US GAAP and the AAS have been identified adequately. The reason why the given
issues is considered to be a Key Audit Matter is because, the investment made by the firm were
considerably high and the complexity as involved in the conversion resulted in conversion of the
amounts to US GAAP.
Impairment indicator assessment for investment in AWAC
The organisation made an investment of approximately 2.3 billion and hence, with
respect to this, it can be rightfully understood that the auditors assessed the amounts which have
been invested and whether it could be impaired or not. In addition to this, they performed various
procedures as well as processes which assisted them in assuming the long term price for this
(Aluminalimited.com, 2019). The auditors also engaged in comparing the value of the Group

6ACCOUNTING AND ASSURANCE
with the market value and underwent a study about the internal as well as the external sources
using which the values could be easily impaired. However, no such evidence was found in the
impairment of such an investment by the Alumina.
BHP Billiton
With respect to the BHP Billiton, the following issues have been found which were later
considered as the key auditing matters.
Asset valuation
After the valuation of the different assets was conducted, it was found that the different
assets were believed to have approximately 72% of the total assets of the entire group. However,
it was considered that the Group reported some kind of a material weakness in relation to the
different processes as well as controls lied in the field of impairment. Moreover, this lead to an
increased focus on valuation and the audits undertook this by following a detailed procedure
which was then tested against the different key controls as well as the valuation of assets.
Moreover, they also evaluated the commodity process which were later forecasted and exalted
the overall objectivity and competency of the experts (Bhp.com ,2019)Various other factors
which will have an impact on the valuation of the assets of the company were discussed
accordingly.
Taxation
The taxation can be considered to be another key audit matter as the company would be
required to undergo an operations in various parts of the world which have different tax
structures. The company additional engages in the cross border sales and it is for this reason that

7ACCOUNTING AND ASSURANCE
the different auditors are required to be additionally cautious in relation to the provision of taxes
and related contingent liabilities. They also undertake processes like the key controls, working
with tax specialists and other related countries which helped them to study the consistency which
exists in the major operations of the firm. In addition to this, they also engaged in the study of
consistency amongst the operations of the different firms and determined whether the closure has
been made to the investors or not.
Samarco
The BHP Billiton has considerably reporting losses due to the failure from the dam
project which was largely undertaken by the company. In line of this, it can be considered
important for the firm to understand that, this brings about various audit and judgement
procedures which will ensure that the determination of the legal status of the claims, the legal
obligations of the BHP Billiton and the related contingent liability disclosures can be undertaken
considerably (Bhp.com, 2019). There also exists a higher degree of uncertainty as present in the
case and hence, this is the reason why the particular issue has become a key audit matter for the
firm. The auditors followed a comprehensive and effective policy in order to determine what
went considerably wrong in the case study. After their study, they were able to understand that
all the key assumptions were taken by the firm and they had also completed their overall
disclosures on a whole. Therefore, the provisions and the disclosure can be understood to be
acceptable.
Rehabilitation provisions and closures
As the group is considerably involved in the restoring and rehabilitation of closing the
different sites and a considerable portion of such transactions was high, the auditors expected

8ACCOUNTING AND ASSURANCE
this to have a huge impact on the overall operations of the company and it is for this reason, that
this particular key audit matter is considered to be largely serious and affect the cash flows of the
company. They have worked with the different specialists which has then assisted them to gain
an understanding of the reserves and mines. To find a solution they found out the work of the
specialists of the different mine closures and through this, they were successfully able to
understand the overall timing costs. Moreover, the time value of money along with the foreign
exchange rates were also taken into consideration and as a result of this, they found the
provisioning was largely acceptable in nature.
Evolution Mining
Accounting for Ernest Henry Mine
The accounting for the Ernest Henry Mine was taken up as key audit matter because, the
acquisition in this case had significant financial interest and hence, with respect to this, it can be
rightfully understood that the auditors undertook considerable interest in the accounting
treatment for this mine. They focused on the different assessments on key transactional
documents which were required to be studied in this case. They also underwent significant
disclosures which helped them to apply their judgements in the right manner when the sales of
the different commodities were to be considered (Evolutionmining.com.au, 2019). The revenue
recognition policy was used by the different auditors to assess the terms of the transaction.
Recognition of deferred tax asserts
The auditing group has recognised a deferred tax assets amount of approximately $57.74
million and as per the Australian Standards this can be understood to be recognised only to a
certain extent. Hence, in line of this, the auditors will be required to use this in recognition of the
deferred tax assets (Evolutionmining.com.au, 2019). The group assessed the ability of the Group

9ACCOUNTING AND ASSURANCE
by following procedures like assessing the reasonability of the taxable income and revaluated the
balances of the deferred tax and others.
CSR Limited
Product Liability Provision
The audit committee previously recognized a product liability provision approximating to
the amount of $ 312 million and hence, this was made subject to various judgements. The
complexity as well as the size of the provision went under an examination by the auditors. In line
of this, it can be considered very relevant for the business to ensure the independence as well as
the competence of the external experts (Csr.com.au, 2019). The auditor not only went for a
revision of the assessments but also engaged in enquiries, broke down the different liabilities and
additionally went under thorough assessment of components.
Asset valuation
The asset valuation can be largely considered to be an effective move which is generally
adopted by the firm and goes a long way in assisting them to decide the application of various
assumptions like the growth rates, inflation, the forecast changes and many more. The auditing
team of the firm undertook this issue to be a key auditing matter because various judgements
were involved in the forecasting of the future cash flows of such related assets. In addition to the
auditors, the value specialists carried out various procedures in evaluating the overall processes
along with the management of the firm which went a long way in assisting the firm to understand
the impairment aspect of the assets (Csr.com.au, 2019). The rates were checked effectively on a

10ACCOUNTING AND ASSURANCE
sample basis and the impairment testing models were also made use of by the company. In this
manner, the auditor of the firm checked all matters which could have an impact on the overall
performance of the firm.
Fortescue Metals Group
Revenue from iron ore sales
The Group reported a sales of approximately $8335 million from the sale of iron ore and
hence, it can also be largely understood that, this was chosen as a key matter. The auditing
approach was largely chosen by the company which comprised of the focus on the two of the
non-cash adjustment which have been accommodated in the revenue of the firm (Fmgl.com,
2019). The auditors also engaged in premeasuring the provisional sales so as to ensure that they
will be successfully able to analyse the deferred income which wold have accrued to the group.
They also engaged in the relation of the provisional pricing adjustment and as a result found it to
be in consistency with the commodity data prevailing externally. It was also mentioned that even
in case of the prepayments to be made, the confirmations could be obtained from the customers.
Financing of ore carriers
The Fortescue Metals Group has entered into a special contract for getting into a financial
arrangement to be the overall carrier of the organization. In this particular kind of an
arrangement, the Group will be required to receive an adequate funding and hence, as this
involves a large amount of money, the matter is a key audit matter (Fmgl.com, 2019). The
auditors checked the overall transaction costs and also inspected the financial arrangement
between the different companies as present.
Carrying value of the evaluation and exploration assets

11ACCOUNTING AND ASSURANCE
The organization also recognised an asset with the value approximately $813 million in
the year 2017 and through this they were successfully able to involve a considerable judgement
by the different people as present. The auditing group engaged in various meetings with the
group management and got into a checking whether the tenured assets were balanced in the right
manner or not. In addition to this various IBJV sites were also visited to find the current status of
the project.
Conclusion
Hence, the report aimed to highlight and understanding the Auditing standard named
ASA 701 which talks about the Key auditing matters in a firm. The report discussed the different
reasons why the new standard was implemented and in addition to this, aimed to identify the
different key auditing matters as considered by the different firms in the mining industry in
Australia. It provided great importance to the overall role of the auditors which would enhance
public faith in the firm’s financial statements.

12ACCOUNTING AND ASSURANCE
References
Aluminalimited.com 2019. Annual Report. [online]. Available at:
https://www.aluminalimited.com/latest-annual-report/ (Retrieved on: 20 May. 2019).
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Bhp.com 2019. Annual Report. [online]. Available at:
https://www.bhp.com/investor-centre/annual-report-2018 (Retrieved on: 20 May. 2019).
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis
and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Cosserat, G.W. and Rodda, N., 2004. Modern auditing. John Wiley & Sons.
Csr.com.au 2019. Annual Report. [online]. Available at:
https://www.csr.com.au/-/media/corporate/files/annual-reports/2018_annual_report_-
for_31_march-2018.pdf (Retrieved on: 20 May. 2019).
Evolutionmining.com.au 2019. Annual Report. [online]. Available at:
https://evolutionmining.com.au/wp-content/uploads/2018/10/1858627.pdf (Retrieved on: 20
May. 2019).
Fmgl.com 2019. Annual Report. [online]. Available at: https://www.fmgl.com.au/docs/default-
source/annual-reporting-suite/fy18-annual-report.pdf (Retrieved on: 20 May. 2019).
Griffiths, P., 2016. Risk-based auditing. Routledge.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K. ,2017. The disclaimer effect of disclosing
critical audit matters in the auditor’s report. Working paper.

13ACCOUNTING AND ASSURANCE
Knechel, W.R. and Salterio, S.E., ,2016. Auditing: Assurance and risk. Routledge.
Köhler, A., Ratzinger-Sakel, N.V. and Theis, J., 2016. The effects of key audit matters on the
auditor's report's communicative value: Experimental evidence from investment professionals
and non-professional investors. Available at SSRN 2838162
Sirois, L. P., Bédard, J., and Bera, P. ,2018. The informational value of key audit matters in the
auditor's report: Evidence from an eye-tracking study. Accounting Horizons, 32(2), 141-162.
Vik, C. and Walter, M.C., 2017. The reporting practices of key audit matters in the big five audit
firms in Norway (Master's thesis, BI Norwegian Business School).