Risk Assessment and Audit Planning for Rio Tinto: An Analytical Approach

The assignment content provides an overview of Rio Tinto, a global leader in the mining sector, and its business risks. The company is exposed to various operational, financial, and regulatory compliance risks that impact its reputation, operating license, and performance. To assess these risks, the auditor applies analytical procedures, including ratio analysis, to evaluate the company's profitability, liquidity, and leverage ratios. The results show that Rio Tinto has recovered from previous financial struggles, with improved profitability and a manageable debt-to-equity ratio. However, the high debt-to-equity ratio suggests that the company is highly leveraged and requires further analysis. Based on these findings, it is recommended that NY adopt an analytical test procedure for auditing Rio Tinto's expenses and revenue transactions, as well as conducting ratio analysis to identify potential risks.

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Table of Contents
Introduction................................................................................................................................2
Audit planning............................................................................................................................2
Make the acceptance of the client and carry out the planning for initial audit......................2
Understanding the client’s business process and the industry...............................................3
Assessing the business risk of the client................................................................................4
Performing the preliminary analytical procedure..................................................................4
Recommendation........................................................................................................................6
Conclusion..................................................................................................................................6
Reference....................................................................................................................................7
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Rio – Tinto
Introduction
Rio Tinto is the multinational company from Australia and it is one of the largest
companies in the company dealing in mining and metals products. The company was formed
during the year 1873. They are the leader in producing various products including iron ore,
uranium, metal, coal, diamonds and copper. The main objective of the company is to become
the global leader in mining in association with achieving and maintaining the sector
leadership that will include sustainable development, operational excellence, innovation and
exploration. The working approach of the company is to be effective with regard to all the
operations and activities. All the employees and staffs of the company are well aware
regarding the mission of the company and perform their activities accordingly. This generate
the consistent policies and principles for the entire group as per the global criteria of the
company with regard to environment, people, society and it further ensure the long run
sustainability of the company (Rio-tinto.com.au, 2016).
Audit planning
The term audit planning is stated as the procedure under which the approaches are
planned to carry on the forecasted outcomes that also states the audit scope within the
company. Based on the nature of business and size of the business the planning of audit and
required time may vary. As the business of Rio Tinto is large enough, it will need more time
plan the audit and implement the strategy (Chou, 2015). The audit planning is generally a
step by step process where the control under audit reviews the financial procedure and the
internal control in association with engagement preparation. Preparing the plan for audit for
Rio Tinto is the most stressful job for the audit firm NY audit firm as the entire audit is
depended upon the audit plan. Various stages under audit planning are as follows –
Make the acceptance of the client and carry out the planning for initial audit
Every client is different. In the same way Rio Tinto’s business procedures and
circumstances are different from others. NY audit firm shall consider the mining industry in
Australia and the client’s integrity (Laitinen & Laitinen, 2015). As the previous year’s audit
was carried out by Price Water House Coopers, the audit firm NY, after taking the permission
from the client, must contact the previous auditor before proceeding with the audit. The
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auditor may, if required, contact other companies that are in dealing with client to get any
information regarding the client. The auditor shall perform the following activities before
planning the audit –
 Identify the reasons of the client for audit
 Establishing a level of understanding with client
 Select the staffs who will be engaged under the audit.
It was found that Rio Tinto required the audit to find out true and fairness approach in
preparing financial statement of the company. Further, the audit is required to be carried out
to establish that the financial reports are prepared in accordance with the conceptual
framework and the requirements of accounting standards. It is also expected that the audited
report will increase the transparency, credibility as well as reduce the risk of investors of the
financial statements (Christensen et al. 2016).
The auditor will conduct a meeting with the management of Rio Tinto regarding the
audit aspects like the areas to be covered under audit, availability of required information and
documentation. During the meeting the auditor will also discuss about the staffs who will be
engaged for the audit.
Understanding the client’s business process and the industry
NY audit firm must have clear idea regarding the mining and metal industry in
Australia and the business process of Rio Tinto. The auditor further shall acquire information
regarding the intangible asset, global operations processing system of the information to
deliver the client with best quality services. This approach of the auditor requires knowledge
regarding the following dimensions –
 Business process and operations
 Internal and external environment
 Strategies and objectives
 Governance and management
 Performance and measurements (Pike et al., 2016).
It is found that Australia has wide supply for minerals that are extracted, processed
and sold by mining division (Li et al,2016). The mining industry of Australia is price
sensitive and is export oriented. The performance of Rio Tinto is highly depended on the
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pricing strategies, value of Australian dollar and the trend of supply and demand all over the
world.
Assessing the business risk of the client
The auditor shall apply the strategic systems for getting information for the analysing
the business risk of the client and establishing a basis for assessing the risk associated with
material misstatement. As per the Sarbanes-Oxley Act, the management of the client
company shall certify that –
 They have designed the disclosure procedures and controls for assuring that the major
information regarding the business risk is revealed to them
 The management informed the audit committee and the auditor regarding the
significant deficiencies associated with internal control, if any, inclusive of the
material weaknesses.
As per the recent statement of the chairman of Rio Tinto, Mr. Jan du Plessis regarding
the condition of global business, tremendous uncertainties are exposing the business to the
real risk. Mr. Plessis further stated that the company will continue to reduce the capital
spending and cut-off the costs to face the storm (Costan & Popa 2017). He further stated that
the political environment and global economy started deteriorating since 2015 that led to the
company in a challenging position to run the complex business like Rio Tinto.
Further, the company is exposed to various risks with regard to operational, financial
and regulatory compliance that have an impact on the reputation, operating license and
performance of the company. However, the company tries to reduce the level of risk through
establishing a risk aware culture among the employees and commitment for managing the
risk in effective and proactive manner.
Performing the preliminary analytical procedure
The fourth major step under audit planning is performing the analytical procedures at
preliminary level. Under this step the ratios of the client is calculated and measured with the
industry average as well as with the previous year of the company (Connors et al., 2013). The
ratios considered for are the liquidity ratio, profitability ratio and leverage ratio.
Ratio calculation –
Ratio Formula Result Industry
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average
2016 (US
$m)
2015 (US
$m)
Profitability ratios
Net profit ratio Net profit / sales 19% -2% 20%
Return on equity Net income / shareholder's equity 14% -2% 10%
Liquidity ratio
Current ratio Current assets / current liabilities 1.61 1.52 1
Liquid ratio Liquid assets / Current liabilities 1.29 1.20 1
Leverage ratio
Debt ratio Total liabilities / total assets 0.49 0.52 0.50
Debt to equity ratio Total liabilities / total equity 0.95 1.07 0.5
Evaluation of the financial health
Profitability ratio – it us recognized that the company was not able earn positive return during
the year 2015, However, during 2016 Rio Tinto recovered from that position and was able to
earn a net profit ratio of 19% as compared to the industry average of 20%. The return on
equity of the company was 14% that was more than the industry average of 10%. It indicates
that the company is able to generate sufficient income to their shareholders. However, the
significant changes in the profitability position during 2016 as compared to 2015 must be
enquired and find out.
Liquidity ratio – the current ratio of the company was 1.52 and 1.61 respectively for the year
2015 and 2016 against the industry average of 1. Further, liquid ratio of company was 1.29
and 1.20 respectively for the year 2015 and 2016 against the industry average of 1. It
indicates that the company can pay off their short-term obligation efficiently. However, as the
current ratio of the company is quite high, the auditor must find out that the company may not
use the working capital efficiently.
Leverage ratio - The leverage ratio represents the debt load on the company as compared to
the equity. It reveals the amount of assets owned by the shareholders and how much is owned
by the creditors. It is recognized from the above calculation that the debt ratio of the company
is more or less as per the industry average and does not require extensive analysis by the
auditor (Gurov & Milgunova, 2016). However, the debt to equity ratio of the company is
quite high as compared to the industry average and that indicates that the company is highly
leveraged and the auditor shall look into the fact.
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Recommendation
Looking at the above scenario of Rio Tinto, it is suggested that for the purpose of
auditing, NY shall adopt the analytical test procedure under which the expenses and revenue
related transactions for the current year as well as the previous year shall be analysed.
Further, under the analytical test approach the ratio analysis of the company will be carried
out for the current as well as the previous years.
Conclusion
It is concluded that, the audit planning is essential for carrying out the audit smoothly.
The audit partner from NY audit firm fund that Rio Tinto is the global leader in the mining
sector. However, it is exposed to various risks and the company has some established
strategies to mitigate the risks. Under the audit planning, the auditor will take into
consideration all the aspects like risks, financial performance, and reason behind the audit
and business process of the company for successful audit.
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Reference
Chou, D. C. (2015). Cloud computing risk and audit issues. Computer Standards &
Interfaces, 42, 137-142.
Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), 1648-1684.
Connors, G. J., DiClemente, C. C., Velasquez, M. M., & Donovan, D. M. (2013). Substance
abuse treatment and the stages of change: Selecting and planning interventions.
Guilford Press.
Costan, L., & Popa, S. (2017, May). The Company's Internal Audit Seen as a Piece of a
Complex System. In Control Systems and Computer Science (CSCS), 2017 21st
International Conference on (pp. 371-374). IEEE.
Gurov, V., & Milgunova, I. (2016). Improving of assessment methodology of the audited
organizations performance at the stage of audit planning. Економічний часопис-ХХІ,
(157), 115-118.
Laitinen, E. K., & Laitinen, T. (2015). A probability tree model of audit quality. European
Journal of Operational Research, 243(2), 665-677.
Li, J., Zhang, Y., Shao, S., Zhang, S., & Ma, S. (2016). Application of cleaner production in a
Chinese magnesia refractory material plant. Journal of Cleaner Production, 113,
1015-1023.
Pike, B. J., Chui, L., Martin, K. A., & Olvera, R. M. (2016). External Auditors' Involvement
in the Internal Audit Function's Work Plan and Subsequent Reliance Before and After
a Negative Audit Discovery. Auditing: A Journal of Practice & Theory, 35(4), 159-
173.
Rio-tinto.com.au. (2016). Reports. [online] Available at:
http://www.wesfarmers.com.au/investor-centre/company-performance-news/reports
[Accessed 10 Sept. 2017].
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