Audit and Assurance

This assessment analyzes the importance of key audit matters in the mining sector and their impact on the audit reporting framework. It discusses the introduction of key audit matters after the fall of Lehman Brothers and identifies key audit matters reported by Australian mining companies.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
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Author’s Note

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AUDIT AND ASSURANCE
Executive Summary
The main purpose of the assessment is to analyse the business sector which is associated with
mining operations. The assessment would be recognizing the importance of key audit matters of
the business and how the same can affect the audit reporting framework which is followed by the
business. The key audit matters which have been introduced is mainly due to the fall of the
Lehman Brothers which is also discussed in the report. The report would be identifying
companies engaged in mining businesses and analyse the key audit matters which are reported by
such companies in the annual report of the business.

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Table of Contents
Introduction......................................................................................................................................3
ASA 701: Rationales.......................................................................................................................3
Improvement in the Principle of Going Concern............................................................................5
ASA 701: Explanation.....................................................................................................................5
Key Audit Matters (KAM) of Australian Mining Industry.............................................................6
BHP Group Limited.....................................................................................................................7
Rio Tinto Limited........................................................................................................................7
Newcrest Mining Limited............................................................................................................8
Evolution Mining Limited...........................................................................................................9
Whitehaven coal..........................................................................................................................9
Downer Edi Ltd.........................................................................................................................10
Conclusion and Recommendations................................................................................................11
Reference.......................................................................................................................................12

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Introduction
Auditing is a simple process of confirming the authentication of the books of accounts
which is prepared by the accounting department of any organization. It is said that the place
where the work of the accountant ends from there the work of auditor starts as to determine the
true nature of the accounts and analyzing the future of the company. For the period of last few
years the audit and auditor became the part of much malpractice and hence the practice came
under the purview of criticism. Due to the inappropriate practice done by the auditor against the
standard of audit many big corporate companies have met their demise (Ghafran and O'Sullivan
2013). This also puts a great impact on the market and hence a market has collapsed in the whole
world. The new standards have been introduced against the malpractice of the auditor in the form
of ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report (ASA 701).
This standard has replaced the existing guidelines of ASA 570 Going Concern and other
standards which is mentioned in terms of rules and regulation for the auditor to save from audit
(Auasb.gov.au. 2019). This report mainly discusses about the auditing standard of ASA 701 and
other auditing standard which will affect the accounts of the company and as a whole affect the
whole market (Auasb.gov.au. 2019). This report also discusses the efficiency created in Key
Audit Matter (KAM) in the report of the auditor which can be find in the annual report of the
mining company who are associated with the Australian Stock Exchange (ASX).
ASA 701: Rationales
The business of Lehman Brothers has seen demise due to the market reasons among
which auditor’s failure is one of the vital reasons. The management of the company has also one
of the reasons for the downfall of the company as the management involves in the malicious acts.

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As the management of the company has been accused for tempering the repo rate and hence the
company’s balance sheet gain a considerable amount of strength. The management of the
company was involved which amounted to $50 billion. The auditor of the company holds full
knowledge about the malicious acts of the management of the company and yet the auditor has
released unqualified report in favor of the company. The fraudulency made by the management
of the company and auditor’s ignorance of such malicious acts lead to the downfall of Lehman
Brothers and also one of the main reasons for the financial crisis which occurred in 2008.
After analysing the facts mentioned above and the other two vital reasons ASA 701 has
been introduced as the auditing standard in the system. The rules and regulation of mentioned in
ASA 701 are strictly made keeping in mind that the auditor need to conduct their auditing with
full authentication irrespective of time and place (Auasb.gov.au. 2019). It can be easily taken for
granted that due to the absence of ASA 701 the case of Lehman Brothers happened. The main
reason for the introduction of ASA 701 is to decrease the audit gap (Weirich and Reinstein
2014). The auditor needs to mention about the practice or misstatement which the auditor thinks
to be highest form of risks as per ASA 701. This will help the auditor to analyse the financial
statement of the company with full might and try to find out any kind of misstatement (Lennox,
Schmidt and Thompson 2018). As in the case of Lehman Brothers, the auditor of the company
had omitted the possibility of misstatement in their financial statement and hence failed to
measure the risk associated with the company. This lead to the demise of Lehman Brothers and
also brings the audit and whole audit profession under the eyes of criticism. The new audit
standard which was introduced after the case of Lehman Brothers make sure that the auditor
should imply and check the information regarding assumptions made by the management,
estimation done by the management and also the management’s decision.

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Improvement in the Principle of Going Concern
The case of Lehman brother shows that the principle of going concern was violated
which the auditor did not notice while conducting the audit for the business. This can be
considered as one of the major flaws in the audit program which was followed by the auditor of
the business (Bédard, Gonthier-Besacier and Schatt 2014). Thee auditor of the business did not
consider the impact of the crisis of 2008 which had affected severely many firms and as a result
the principle of going concern of a business was affected. The business of Lehman brothers was
also affected in such a scenario. After the fall of Lehman brothers, regulations needed to be
amended regarding the audit process which is to be followed by the business. ASA 570 also was
amended so that a guide can be created for the auditor to follow in case there are signs that the
going concern principle of the business was affected (George-Silviu and Melinda-Timea 2015).
The provision which is stated under ASA 570 held the auditor responsible for identifying
significant items which may be material for the business and can be misstated (Christensen,
Glover and Wolfe 2014). The new auditing standards which are introduced and also the
accounting provisions which is important from the point of view of business in order to ensure
that such an instance of corporate failure does not takes place in the market.
ASA 701: Explanation
The new provisions which are included in ASA 701 represents the commitment of
AUASB for making improvements in the estimation process whether the financial statements are
showing true and fair view of the financial position of the business or not (Carson, Zhang and
Fargher 2014). The main reason due to which board of AUASB wanted to change is to assist the
auditor in identifying the key audit matters of the business and also comment on the same from

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the perspective of audit (Sirois, Bédard and Bera 2018). The amendment was made in ASA 570
so that the auditor can create appropriate communication regarding the key audit matters of the
business. Some of the business has not implemented the ASSA 701 which is mainly due to the
fact that businesses are unsure regarding the disclosures of key audit matters in the financial
reports of the business. Some of the major features which can be identified are listed below in
details:
 The new provisions make it mandatory for disclosing and reporting key audit matters
which are identified by the business.
 The provisions which is stated in ASA 702, makes it clear that crucial explanation and
simple accounting process is to be followed by the business. The objective of using ASA
701 is to communicate the key audit matters to the users of the financial statements.
 The processes which can be used by the auditor for identifying key audit matters are
stated in the standard.
 The standard provides some criteria which the auditor needs to follow for the purpose of
disclosing the key audit matters of the business and necessary steps which can be taken
by the management of the company in this respect (Xu et al. 2013).
 In addition to this, the standard also reveals situation where the auditor does not need to
reveal key audit matters of a business.
Key Audit Matters (KAM) of Australian Mining Industry
The reporting framework which is applied by the auditor for reporting the KAM of
businesses would be effectively analysed in case of mining businesses operating in the country

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and the same are listed in ASX 100 list for mining companies. The discussion regarding the key
audit matters of the business are discussed below in details:
BHP Group Limited
As per the annual report, the key audit matters which are recognized in this company are
related to Onshore US assets, Samarco, taxation, valuation of asset and closure and rehabilitation
provision. The auditor has pointed out that the fault may be in the valuation or presentation of the
financial information relating to the same. The auditor recognises the matters considering the
size and materiality of the items which are presented in the financial reports of the business. In
some instances, the management has applied its judgements for presenting an information which
the auditor has listed as Key audit matter as it is difficult to assess the reasonableness of the
estimate which is considered by the business (Bhp.com. 2019). The steps which are taken by the
auditor as per the annual report of BHP Billiton shows that the auditor would be testing control
of valuation of US Onshore assets, assessing the impairment charges of the business, evaluating
the legal consequence related to the Samarco case, assessing the impact of contingent liability on
the financial statements and several other steps. These steps are taken so that the appropriate
disclosures are provided the key audit matters of the business.
Rio Tinto Limited
In the case of Rio Tinto ltd, the auditor of the business would be assessing the key audit
matters identified and would provided disclosure regarding the steps which he will take for
carrying out proper audit of the same. The key audit matters which have been identified by the
auditor are impairment indicator evaluation, provision for close-down, restoration and
environment obligations and provision for ambiguous tax positions (Riotinto.com. 2019). The
consideration of impairment is taken by the auditor as the same is depended on the management

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estimates and therefore there is a high chance that the same can be misstated. The step which is
taken by the auditor in such a case is conducting a test for accuracy of the estimate along with
analysis of CGU, impairment conditions would be considered by the auditor of the business. The
auditor then recognises provisions as the second audit matter which would be undertaken by the
auditor as the same also depends on the judgement of the management and also on the timing of
the future costs which is considered in this case. The auditor can undertake the steps of detailed
testing and disclosure analysis for the provisions which is shown by the auditor (Gimbar, Hansen
and Ozlanski 2016). The third key audit matter which can be identified is the uncertainty in
assessing the tax position of the business and in this case the auditor would check the
mathematical accuracy of tax calculation and other aspects would also be assessed by the
auditor.
Newcrest Mining Limited
As per the annual report of the business, the key audit matters are effectively disclosed by
the auditor of the company and the key audit matters which have been identified by the auditor
are inspection of the carrying value of non-current assets, taxation and mine rehabilitation
provision. The auditor recognises that the management of the company has taken estimation in
considering the impairment charges of the business and also identifies that there lie complexities
in measuring the mine rehabilitation provision (Newcrest.com.au. 2019). This is the reason that
the auditor has included the same in the key audit matter’s list. As per the annual report, the
auditor of the business has undertaken necessary steps for checking the appropriateness of the
impairment charges and also have checked the judgements which is taken by the management in
this respect (Azim 2013). The auditor has assessed the cash flow reasonableness and also the
business model which is followed by the company. The auditor of the business has reasonably

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conducted audit procedures for assessing the provisions of mine rehabilitation for each mine
which is possessed by the company. The auditor also considers the assumptions which are taken
by the management of the company which are discount rate, inflation rates and others
(newcrest.com.au, 2019).
Evolution Mining Limited
In this company, the auditor of the business has identified tow key audit matters which
are effectively presented in the financial statement of the company. The key audit matters which
are identified are valuation of assets held at Mungari and Cowal and assessment of the asset’s
carrying value. The first key audit matter required the auditor to check the reasonableness for the
judgements and assumptions which are considered by the management for measuring the Mine
Development and Property, Plant and Equipment balances which are depicted in the financial
statements of the company (Evolutionmining.com.au. 2019). The auditor in such a case has
assessed the competency of the external valuer who has valued the assets of the business and also
checked whether the same are accurately represented in the books of account of the business
(Carson, Fargher and Zhang 2016). In case of the second key audit matter which is identified by
the business, measures have been taken by the auditor for determination of the impairment
charges related to CGU. The auditor has checked the audit indicators along with assessment of
appropriateness of the same in the financial statements of the business (Ege 2014).
Whitehaven coal
The auditing process for Whitehaven coal ltd has revealed that there are two significant
audit matters which are shown in the financial statements of the business. The key audit matters
are assessment of impairment for property, plant and equipment and mine rehabilitation and
closure provision (Whitehavencoal.com.au. 2019). The firs key audit matter is important as the

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same is shown to be material because of the significance of the account balances and also the key
judgements and assumptions which are applied by the management of the company for assessing
the financial conditions of the business. The main audit procedure which is applied by the auditor
is assessing the impairment indicator as per Accounting Standard, assessment of the
appropriateness of identification of CGUs and others. In case of provision which is the second
key audit matter for the business, the assumption and appropriateness of the judgements would
be considered for recognition of the values which is shown in the financial statements of the
business.
The above discussion regarding the key audit matters which is followed by most of the
business effectively shows the matters which are discussed in the financial reports and how the
management of company and also the users consider such information for taking major decision
regarding the business. The auditor also applies key audit process for ascertaining the relevance
of the key audit matters to a business and what are the steps which the auditor can take for
conducting audit on the same.
Downer Edi Ltd
The key audit matters which is shown to be reported in the financial statement of the
business includes Recognition of revenue and transitional adjustments, valuation of goodwill and
acquisition of controlled entities. Significant amount of revenue is generated by the business
from rendering of services and construction contracts. The contracts which has a long period
since completion uses stage of competition method for ascertaining the revenue of the business
for the current period. Therefore, it can be said that there lies significant level of judgements and
estimations which is the main reason that the auditor has included the estimate in key audit
matters of the business (Downergroup.com. 2019). The second key audit matter which is

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identified is the valuation of goodwill. The estimation of goodwill requires judgement for the
auditor on various aspects such as CGU associated with the asset, cash revenue expected from
the use of the asset, discounting rate and growth rate. This is included in key audit matters of the
business as the same requires significant judgements on the part of the auditor.
The business acquired new controlling interest entities during the period for which
valuation of different assets and liabilities acquired is a complex process and therefore the same
are included in the key audit matters of the business.
Conclusion and Recommendations
The above discussion shows that improvement in auditing standards were brought about
in auditing standard after the collapse of Lehman Brothers and also 2008 financial crisis. The
above discussion also shows analysis of some key audit matters which have been reported by
mining businesses operating in Australia. Some recommendation which can be provided for
further improvement are:
 The auditor needs to formulate an appropriate audit program which considers key audit
matters so that significant audit transaction can be recorded and appropriate disclosure
can be provided related to the same.
 The auditor of the business must also check the internal control system of the business
and always look for corroborative audit evidences in the business.
 The auditor needs to communicate key audit matters to the related parties effectively.
This must include the significant transactions and events that can lead to the material
misstatements in the financial statements.

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Reference
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2019].
Auasb.gov.au. 2019. Auditing Standard ASA 701 Communicating Key Audit Matters in the
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https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 13 May
2019].
Azim, M.I., 2013. Independent Auditors Report: Australian Trends From 1996 to 2010. Journal
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Bédard, J., Gonthier-Besacier, N. and Schatt, A., 2014, January. Costs and benefits of reporting
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Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis
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Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter paragraphs
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[Accessed 14 May 2019].
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