Audit and Assurance

This report discusses the changes brought about by ASA 701 in the auditing standards and how the same have been implemented in different industries. It focuses on the key audit matters of Australian mining industry and provides recommendations for auditors.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
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AUDIT AND ASSURANCE
Table of Contents
Introduction......................................................................................................................................2
ASA 701: Rationale.........................................................................................................................3
Improvement in the Principle of Going Concern............................................................................4
ASA 701: Discussion.......................................................................................................................5
Key Audit Matters (KAM) of Australian Mining Industry.............................................................6
Amcor Ltd....................................................................................................................................6
BHP Group Limited.....................................................................................................................7
Rio Tinto Limited........................................................................................................................8
Evolution Mining Limited...........................................................................................................9
Conclusion and Recommendations..................................................................................................9
Reference.......................................................................................................................................10

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Introduction
The profession of auditing is an integral process in financial reporting process as they
provide assurance that the financial statement is showing true and fair view regarding the
financial items which are shown in an annual report of the company. The auditors are guided by
auditing standards when the conduct audit of a business for collecting audit evidences and it is on
the basis of such evidences that an opinion is formed regarding the accuracy of the financial
information presented in the annual reports of the business (Lennox, Schmidt & Thompson,
2018). The investors and various users of the financial statements depends on the auditor’s
opinion for taking major decisions. However, over the last few years audit process has suffered
from malpractices and quality issues which has also affected the users of the financial
statements. The malpractices or application of due diligence in an audit process has led to
downfall of corporate houses as well as the auditing firm itself.
The overall quality of audit has declined affecting the users of the financial statements. In
order to restore the quality and integrity of the profession, amendments were made in the
auditing standards of ASA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report (ASA 701). The standard has replaced the key guidelines of ASA 570 Going Concern and
also several other standards (Kachelmeier, Schmidt & Valentine, 2017). The new standard has
been introduced in order to make improvements in the quality of audit and also disclose more
information in the financial statements of the business. This report would be focusing on the
changes which have been brought about by ASA 701 and how the same have been implemented
in different industries (Auasb.gov.au., 2019). The report would be considering a mining industry
and reveal the changes which the auditor made in reporting of items after the amendments were
made (Auasb.gov.au. 2019).

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ASA 701: Rationale
The introduction of ASA 701 has been made due to a variety of reasons and the same has
also been due to corporate failure where the auditing process lacked proper disclosures and
effectiveness. The fall of Lehman Brothers cases can be considered as an instance where the fall
of the businesses giants was also due to failure of auditing process but the same was mainly due
to mismanagement practices and unethical conduct in the operations of the business
(Auasb.gov.au., 2019). The officials of the company were engaged in unethical conduct of
altering the repo rate which resulted in strengthening the balance sheet of the business and
therefore representing an appropriate financial position of the business (Brasel et al., 2016). The
discrepancies which was noticed in the financial statements by the auditor amounted to $ 50
billion. Even after this, the auditor of the business just issued a unqualified report. This ignorance
of the auditor towards unethical conduct of the business resulted in the downfall of the company
on an ultimate basis. The downfall of the company also contributed to the Global Financial crisis
of 2008 which affected several other businesses.
The above analysis of the cases provides an ample reason for introduction of ASA 701 and
implementation of the same. The introduction of ASA 701 provides guidance to the auditor
regarding the disclosures and audit procedure which needs to be applied by the auditor for
ensuring that quality is maintained in the audit process (Gimbar, Hansen & Ozlanski, 2016). It
can even be argued that if ASA 701 was present the case of Lehman brothers might not have
taken place. On other reason for introduction of ASA 701 is to reduce the audit gap. ASA 701
also promotes transparency in reporting for key information in the financial statements of the
business. The new amendment would require the auditor to disclose any item which is subjected
to or might be subjected to risks of material misstatement and appropriately report on the same

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under the head of Key Audit Matter of the business. The new audit standard which was brought
about after the failure of Lehman Brothers made sure that the auditor implied and check the basis
of assumptions made by the management, estimation done by the management and also the
management’s decision.
Improvement in the Principle of Going Concern
The principle of going concern is considered to be a central principle in terms of both
accounting and auditing as the same assumes that the business was carry on its operations for
long period. The case of Lehman brothers shows that the auditor failed to check the going
concern principle which reveals that there was flaws in the auditing planning process of the
auditor. The auditor should have checked the going concern principle as the market was also
suffering from global financial crisis. It was after the fall of Lehman brothers that ASA 701 was
incorporate and the provisions of ASA 570 was incorporated in the same (Christensen et al.,
2016). This also means that the auditor needs to check going concern principle of the business
and ensure that the same are not affected in any manner. The new standard has also been
introduced in order to avoid corporate failures which has taken place several times in the market.
ASA 701: Discussion
The new standard which is introduced in the form of ASA 701, represents commitment of
AUASB for making improvement in the process of estimation which is followed for ensuring
that the financial statements are showing accurate view of the items which are represented in the
financial statements. The new accounting standard was also introduced with a view to effectively
represent the financial information of the business and also effective communicate the same to

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the users of the financial statement of the business. In addition to this, amendment was also
brought about in ASA 570 as the provisions of the same was incorporated in ASA 701 so that the
auditor can check the going concern principle of the business while conducting the audit of the
business. Most of the businesses which are listed in ASX have implemented the provisions of
ASA 701 while there are some which have not adopted the provisions due to an uncertainty
which is presented regarding the disclosures which needs to be incorporated in the annual reports
of the business. Some of the major features which can be identified are listed below in details:
 The main changes which have been brought about in the new standard is regarding the
disclosure which is provided by the auditor relating to the key audit matters of the
business.
 The provisions of ASA 701 also provide clear explanation regarding the simple
accounting process which is followed by businesses (Byrnes et al., 2018). The objective
of using ASA 701 is to communicate the key audit matters
 The basis which is used by the auditor is disclosed in the financial statements of the
business in accordance with the standard introduced.
 The standard provides the criteria which the auditor needs to follow for the purpose of
effectively conduct audit procedure and provide relevant disclosures for the same.
 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 discussion which is conducted in this section would be focused on reporting of KAM
which is followed in mining businesses operating in the country. In order to assess the mining

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businesses operating in the country are listed in ASX list. The discussion regarding the key audit
matters of the business are discussed in the details below:
Amcor Ltd
The auditor of the business has effectively presented the key audit matters of the business
and the significant matters which have been identified are impairment issues relating to
investments, group income tax exposure and risk of indirect tax exposure in Brazil. The auditor
of the business has identified that Amcor has 47.6% in investments in AMVIG Holdings
Limited. As per the annual report, the carrying value of investments which is made by the
business has changed and the same is shown to be greater in terms of Hong Kong value.
Therefore, this represents that there is a case of impairment of the same (Assets.ctfassets.net.,
2019). This is a key audit matter due to the deficit between the investment’s carrying value and
the quoted share price and it also requires significant judgement on the part of the auditor. The
key areas where judgement is required by the auditor is estimating the share price reflects
recoverable amount or not, estimate future cash flow and determination of discount rate and
growth rate which is followed by businesses.
The business is subjected to income tax provisions in Australia and several foreign
jurisdictions is applicable on a business. The tax charges of the group are very complex in nature
and therefore requires proper attention. It is the main reason due to which the same is included in
the key audit matters of the business. The business is also subjected to other taxes which does not
occur in the Australia. The auditor has reported payments related to excise and indirect taxes of
Brazil to be included in the key audit matters of the business (Twycross & Shorten, 2014). The
tax assessments are complex and the business sought the guidance of external counsel in Brazil
and therefore the same is included in the key audit matters of the business.

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BHP Group Limited
As per the annual report of 2018 for the company, the key audit matters which are
reported in the company’s report are related to Onshore US assets, Samarco, taxation, valuation
of asset and closure and rehabilitation provision. The auditor of the business has provided that
there might be some errors in valuing the asset of US offshores and therefore the same should be
considered while assessing the materiality and important disclosures of the items which are
shown in the annual report of the business (Sirois, Bédard & Bera, 2018). Some of the matters
which are presented in the annual report requires due skills and proper judgement which is
considered as the reason due to which such matters are included in the key audit matters of the
business (Bhp.com., 2019). The auditor has applied different test for valuing the offshore assets
of the business along with assessment of the impairment charges on the assets of the business. In
addition to this, the auditor has taken steps to assess the legitimacy of the Samarco case and also
assess the impact of contingent liability on the financial statements. The auditor of the business
has provided appropriate disclosures regarding the key matters which are identified by the
auditor as having potential of misstatements.
Rio Tinto Limited
In the case of Rio Tinto ltd, the auditor of the business would be evaluating the key audit
matters which can be identified in the annual reports and would provide disclosure regarding the
steps which is undertaken by him for carrying out proper audit of the same. The key audit
matters which can be recognized from the auditor’s report 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 considered by the auditor
as estimation of the same is depended on the estimates made by the management of the company

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and therefore there is chance that there might be material misstatement in the annual report of the
business. The step which the auditor takes for checking accuracy is a test for accuracy of the
items along with analysis of cash generating unit, impairment conditions of the business (Chen et
al., 2016). The auditor then recognises provisions to be one of the key audit matters of the
business as the same depends on the estimation of the management. The auditor can undertake
the steps of detailed testing and disclosure analysis for the provisions which is estimated by the
management of the company. Another key audit matter which can be identified is the uncertainty
in measuring the tax position of the company. In such a situation, the auditor of the business
would be assessing the calculations which is made by the management of the company.
Evolution Mining Limited
The auditor of the business has recognized two key audit matters after carrying out the
analysis of the financial statements which are effectively presented and also incorporates key
disclosures which are shown in the annual report. 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
audit matter makes it a necessity for the auditor to check the reasonableness for the judgements
and assumptions identified by the management of the company for ascertaining 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 of the business needs to
assess the ability of the external valuer in effectively identifying appropriate value for the assesr
which are presented in the financial statements 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

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the financial statements of the business. The auditor of the business needs to make appropriate
determination of the amounts which is presented in the financial statements of the business so
that a level of accuracy is maintained by the auditor of the business.
Conclusion and Recommendations
The above discussion effectively shows that there has been improvement in the auditing
standards which is made with a view point for making improvements in the overall quality of
audit which is conducted by the business. The new auditing standard was brought about due to
the failure of Lehman Brothers and also 2008 financial crisis which demanded a better
framework for auditing. The above discussion shows key audit matters of the business needs to
be adhered by the users of the financial statements and has provided for further improvements.
Some of the improvements which needs to be provided by the auditor are:
 The audit program which is formulated by the management of the company needs to
ensure that the key audit matters are considered and appropriate disclosures for the same
is provided in the annual report of the business.
 The auditor needs to check the strengths and weaknesses of the internal control system
for collection of appropriate audit evidences of the business.
 The auditor needs to communicate key audit matters to the related parties effectively.
This must include the significant transactions which can have a material effect on the
financial statements which are prepared by the auditor of the business.

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Reference
Assets.ctfassets.net. (2019). [online] Available at:
https://assets.ctfassets.net/f7tuyt85vtoa/Ry9ogH9cQemqGA800oiGE/cbcc6bef0d76b79b
e2a227dfc13a7e87/Amcor_Annual_Report_2018.PDF [Accessed 23 May 2019].
Auasb.gov.au. 2019. Auditing Standard ASA 570 Going Concern. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 14
May 2019].
Auasb.gov.au. 2019. Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 13
May 2019].
Bhp.com. 2019. Annual Report 2018. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed 14 May 2019].
Brasel, K., Doxey, M. M., Grenier, J. H., & Reffett, A. (2016). Risk disclosure preceding
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Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., &
Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297). Emerald
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Carson, E., Fargher, N. & Zhang, Y. (2016). Trends in auditor reporting in Australia: a synthesis
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Chen, P. F., He, S., Ma, Z., & Stice, D. (2016). The information role of audit opinions in debt
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Evolutionmining.com.au. 2019. 2018 ANNUAL REPORT. [online] Available at:
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May 2019].
Gimbar, C., Hansen, B., & Ozlanski, M. E. (2016). The effects of critical audit matter paragraphs
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Kachelmeier, S. J., Schmidt, J. J., & Valentine, K. (2017). The disclaimer effect of disclosing
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Lennox, C. S., Schmidt, J. J., & Thompson, A. (2018). Is the expanded model of audit reporting
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http://www.riotinto.com/documents/RT_2018_annual_report.pdf [Accessed 14 May
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Sirois, L. P., Bédard, J., & Bera, P. (2018). The informational value of key audit matters in the
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