Audit Reporting and Key Matters

This assignment focuses on auditor reporting standards, particularly International Standards on Auditing (ISA) 701 - Key Audit Matters (KAMs). Students are required to analyze academic articles and annual reports of companies like Alumina Limited, BHP, and Yancoal to understand how KAMs are implemented. The assignment delves into the challenges and benefits of disclosing KAMs, examining their impact on financial reporting transparency and stakeholders' decision-making.

AUDIT AND
ASSURANCE

EXECUTIVE SUMMARY
Audit is an official examination and inspection of the books, accounts, vouchers, documents,
other statutory records by an independent body for determining as to what level the company has
followed the standards of disclosure for presenting a true and fair position of the company. The
person who conducts such inspection is known as auditor. Assurance is an audit service which is
provided by a certifies chartered accountant professional. The present project report is about the
rationale of ASA 701. The new auditors' reports are prepared with the implementation of the
provisions of the ASA 701 which requires auditors to be judgemental in determining the key
audit matters of the business concern that has potential of affecting the independent audit reports.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
What is ASA 701 and why it is rationale?.............................................................................4
Key auditing matters in the mining industry..........................................................................7
RECOMMENDATION and CONCLUSION .................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Audit and assurance is the assessment of records and accounts of a company for finding
out the honesty and fairness of the financial position disclosed by the organisation (Abbott and
et.al., 2016). The report will cover the rationale of the Audit Standard 701 which deals with the
communication of key matters in the independent report in the pursuit of the legal requirements.
Further, it will include an analysis of key matters in the mining industry for determining whether
the implementation of ASA 701 will disclose more information to the users of financial reports.
MAIN BODY
What is ASA 701 and why it is rationale?
Auditing Standard 701 is an Australian auditing standard which tells about the
responsibility of auditors of communicating the key matters in the authentic auditor's report
(Carson, Fargher and Zhang, 2016). The auditor is intended to address both as per its judgement
regarding as to what has to be communicated in the auditor's report and the what will be the form
and content of such communication in the report.
Key audit matters can be described as the such matters which requires the specific
judgement of the auditor. It is considered as of utmost significance in the audit of the financial
records of the company belonging to the current period(Auditor Reporting Standards
Implementation: Key Audit Matters, 2019).
PURPOSE: The main objective of this auditing standard is to communicate and disclose
the key matters for enhancing the transparency of the audit that has been performed on a
company. The communication of such key matters facilitates the intend users of the financial
report, an additional information which helps them in understanding the key aspects of the
business entity along with the significant professional judgement of the auditor (Tepalagul and
Lin, 2015).
Main features of this standard are:
 Communication of key audit matters is mandatory in the auditor's report while
performing audit on the listed companies on ASX.
 Allowing and enabling the auditors of different business concern for deciding whether to
consider key audit matters in their reports or not (Sánchez-Medina, Blázquez-Santana and
Alonso, 2019).

 Ascertaining the means and way, an auditor ascertains the key matters such as identifying
the matters which needs prompt attention of the auditor. After this, an auditor is required
to find out the areas of the risks that high consideration and assessment. Auditor's
judgement involves impact of significant events, judgement and considerations of the
management of an entity and other crucial matters which shall be included in the reports
of the auditors.
 The auditing standard also deals in the matters also how the auditors will ascertain the
way in which such key audit matters will be presented.
 The report shall also include the circumstances and situations in which the issue related to
KAM is not declared in the financial annual report by the corporates.
 The standard also signifies that various other documents shall also be communicated by
the auditor in its report which is related to KAM.
This auditing standard is applicable and is implemented in the annual financial report of the
organisations which would publish their annual report after December 15th 2016 (Christensen and
et.al., 2016).
Rationale: The rationale of this auditing standard can be seen from the case of Lehman
Brothers. It was a global financial services firm based in U.S. The organisation was fourth
largest investment bank in the US and was founded in 1850 in Montgomery. The firm was
engaged private banking, fixed incomes and equity, trading in United States. The organisation
collapsed in the year 2008 when it filed for the bankruptcy (Ernst & Young accused of hiding
Lehman troubles, 2010).
Auditing issue regarding the collapse of firm: It is believed that poor and ineffective
auditing led to the demise of the Lehman Brothers. The auditor of the company who was Ernst
and Young, neglected some key auditing aspects which led to creation audit report which was
not precise and was not made with best professional judgement of the auditors. Some important
points from this case:
 The company acquired some mortgage lenders in the expectation that the prices in the
housing sector would remain stable in a boom state and will not fluctuate in a negative
way in the future. The auditors did not take this opinion as key matter into consideration
was neglected in their auditor's report.

 This led to the preparations of the reports which were not capable of projecting the
market uncertainties and risks with accuracy.
 The auditors' report did not reflect the action of Lehman Brother of excessive borrowing
that increased their leverage ratio which was way higher than the what was required to be
maintained as per the U.S. Regulations. The leverage ratio was 31:1 against the ratio
required by the legislation which was 15:1.
 The auditor's report also did not show and communicated the repurchase agreement
transactions of the Lehman Brother. Repos is agreement to repurchase the securities from
the buyer at a higher rate on the future specified rate.
 The company made huge accounting fraud when it started selling assets (repos 105 &
108) worth 5% and 8 % respectively higher than the funds received. This was referred to
as over – collateralisation of the repos (Fraud Files: Is Ernst & Young to Blame in
Lehman Bros. Fraud, 2010).
 Lehman Brothers deceived its investors by the way of window dressing of its financial
statements as it used Repos for hiding its high and excessive leverage during the period
when auditing was performed by the Ernst & Young. It was stated that balance sheet of
the company because of company's Repos was boosted by around $50 million.
 The audit report of the firm also failed in its work when it could not detect the
correspondence entries of the inflows of repos in the liabilities side of the balance sheet
was not done by Lehman Brothers.
 The routine operations of the company were financed by the repo markets and fixed
income and equities. At here also, Ernst and Young failed to inspect the frequency and
timing of the transactions related to repos.
 In the time of boom, the leverage ratio should be high but in the time of recession, it
should be low. Since, the time of 2008 is marked with global financial crisis, the
company had exceptionally high leverage ratio which the auditor failed to detect and
communicated in their reports, led to a situation where they could anticipate the market
risks and uncertainties.
 This poor auditing called for the reform in the auditing standard for communication of the
key matters in the auditor's report as this authentic report provides significant insights of
the company's records along with the authenticity of the professional judgement of the

auditors. This in a very crucial affects the investment decisions of the investors
(Cameran, Campa and Francis, 2018).
If the auditing standard such as ASA 701 would have been established at that time, the
investors would have gotten an early warning of the fraud of the company. In the annual report,
the auditors did not perform an assessment on the key areas of the business that led the auditing
firm to neglect the important facts of the company regarding deceitful accounting treatment that
firm used for hiding the excessive leverage ratio by the way of treating repos as sales of the
business. This gave wrong picture about the soundness of the company and investors were
severely affected by such ineffective auditing procedure in the year 2008. In fact, the demise of
Lehman Brothers affected the global capital markets significantly (George-Silviu and Melinda-
Timea, 2015).
ASA 570: This auditing standard is concerned with reporting of the financial statements
with an assumption that the entity is going concern concept. There are some financial reporting
regulations that requires companies to perform a specific assessment on the ability of business
entity to continue as a going concern. It states that management needs to consider the accounting
standards made on this regard and also requires entities to give disclosures about its ability to
continue as a going concern . Like the Australian accounting requires compulsorily requires the
business entitles to make clear and concise disclosure of the ability of the entity to continue as a
going concern and everything related to it must be set out in the financial reports of the company
(Bava and Gromis di Trana, 2019).
Such a revision of the ASA 570 was necessary as investors needs early warning regarding
the intentions of the company that whether it is going to be a going concern entity and does the
entity has the ability to continue itself as a going concern in the future. Disclosure of such
information has been made mandatory for protecting the interests of the investors and others who
are affected by the financial reporting of the company.
Key auditing matters in the mining industry
The industry selected is mining in which the annual reports of some companies will be
evaluated for ascertaining and analysing the key audit matters in their reports. Following are the
key audit matters that have been considered as significant aspects which could greatly affect the
audit performed by them. These are:

For example: Equity Accounting for Alumina's investment in Alcoa World Alumina
and Chemicals (AWAC): In the key audit matters section of the auditors' report they have
mentioned the method of accounting for the investment of 40 % in AWAC. The auditor has
considered this as KMA because of the ratio of the investment held by the company in the
AWAC. The auditors also assert that complexity is involved in the changeover of amounts that
has to be accounted as per the AAS from US GAAP. Auditors examines the appropriateness and
completeness of the GAAP provision in the preparation of the financial statement. There are
some differences between the AAS and GAAP and for the conversion of amounts, auditors have
considered it to be a KMA (Alumina limited annual report, 2018).
Impaired indicator assessment: Another KAM is the impaired indicator of Alumina's
investment in equity in AWAC. The investment accounts for $2.1 billion which is a significant
amount in the consolidated financial statements of AWAC. The auditors channelized their efforts
for the assessment for ascertaining whether there was any evidence or indicators that showed
equity investment in AWAC could be impaired as on the date of 31st December 2018. The
auditors assessed the movements in the material assumptions made in the valuation of the equity
investment in AWAC by the management, market capitalisation of the organisation which was
compared against its net assets and valuation done by analysts'.
Similarly, the auditor of the BHP Billiton has also considered impairment indicator as a
key audit matter as the size of the assets of the company for special assessment is required. This
is necessary as impairment in the value of asset could significantly affect the financial position of
the company.
Taxation: Auditors has taken this factor as a key audit matter as the company in
operations in number of different countries which have their taxation system. This was taken as
KAM because there are various taxation obligations applicable on the company, including the
tax reform after the election of Trump. The professional judgement was also necessary for
assessing the estimation of tax by the company, its related provisions and contingent liabilities.
The auditors assessed that whether the company has shown consistency in adhering the tax
regime of different countries and whether it has made sufficient disclosures regarding the
contingent liabilities and other tax related provisions in the best interest of the investors (YAL
Annual Report, 2017).

Valuation of asset: For example, auditors of BHP Billiton took the asset valuation is a
key matter because the size of the balances of the company is 60 % of the BHP Group's total
assets. The auditors were of the view that judgement is required for assessing whether there was
any indicators of reduction in the value of assets or impairment reversal. They made an
assessment on the future cash flow for each and every cash generating unit of the company. This
was done for ascertaining the recoverable worth of the property, equipments, plant & machinery
etc (BHP annual report, 2018).
Closure and rehabilitation provisions: The professional judgement was required as
auditors considered that there is inherent complexity in the forecasting the magnitude and timing
of the future costs and ascertaining a rational discounting factor rate for bring them back at their
present value. Also, the most of the assets of the organisation are long term assets which
increases the uncertainty in forecasting the future cash flows (annual report, 2018).
The new auditing and assurance standard have been supported by many global
accountancy body such as ACCA which believes that new audit reports will provide more
opportunity to the users of such information like investors, suppliers, government, employees,
analysts, regulators and others, to effectively understand the audited financial statements of the
listed companies in Australia. The provisions of the ASA 701 will help in providing extra
information in the sense that auditors are required to communicate key audit matters that needs
the professional judgement and attention of the auditors (Masdor and Shamsuddin, 2018). This
would be helpful to the users of the financial information as they will get to know the more
concise and clear which is embraced truthfulness and integrity picture of financial position of the
listed companies in the country.
RECOMMENDATION and CONCLUSION
For keeping intact, the investors and confidence of the investors, it is necessary that
companies follow the proper ASA and such financial reporting has to audited and assessed by
the auditors in the manner prescribed in such auditing and assurance standards. The new auditors'
reports are prepared with the implementation of the provisions of the ASA 701 which requires
auditors to be judgemental in determining the key audit matters of the business concern that has
potential of affecting the independent audit reports. Such KMA signifies that some aspects of the
business require the special attention of the auditors which has to be communicated in the

financial reporting of the company. This new measure has been taken for protecting the interests
of the investors whose investment decisions relies upon the financial performance of the
company. Thus, auditors assess the completeness and appropriateness of the auditing and
accounting standards have been properly or not met, if not then it is duty of the auditor to
communicate the same to the investors so that investors can get fair and true picture of the
financial position of the business entity.

REFERENCES
Books and Journals
Cameran, M., Campa, D. and Francis, J. R., 2018. Audit effects of accounting firm organization
levels.
Christensen, B. E and et.al., 2016. Understanding audit quality: Insights from audit professionals
and investors. Contemporary Accounting Research. 33(4). pp.1648-1684.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance. 30(1). pp.101-121.
Abbott, L. J and et.al., 2016. Internal audit quality and financial reporting quality: The joint
importance of independence and competence. Journal of Accounting Research. 54(1).
pp.3-40.
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.
Sánchez-Medina, A. J., Blázquez-Santana, F. and Alonso, J. B., 2019. Do Auditors Reflect the
True Image of the Company Contrary to the Clients’ Interests? An Artificial Intelligence
Approach. Journal of Business Ethics. 155(2). pp.529-545.
Bava, F. and Gromis di Trana, M., 2019. ISA 570: Italian Auditors’ and Academics’ Perceptions
of the Going Concern Opinion. Australian Accounting Review. 29(1). pp.112-123.
George-Silviu, C. and Melinda-Timea, F., 2015. New audit reporting challenges: auditing the
going concern basis of accounting. Procedia Economics and Finance. 32. pp.216-224.
Masdor, N. and Shamsuddin, A., 2018. The Implementation of ISA 701-Key Audit Matters: A
Review. Global Business & Management Research, 10.
Online
Alumina limited annual report. 2018. [Online]. Available through:
<https://www.aluminalimited.com/uploads/Alumina-Ltd-Annual-Report-2018_ASX.pdf>
BHP annual report. 2018. [Online]. Available through:
<https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf>
Auditor Reporting Standards Implementation: Key Audit Matters.2019. [Online]. Available
through: <https://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/
auditor-reporting-standards-implementation-key
Fraud Files: Is Ernst & Young to Blame in Lehman Bros. Fraud.2010. [Online]. Available
through <https://www.aol.com/2010/12/23/fraud-files-is-ernst-and-young-to-blame-in-
lehman-bros-fraud/>
Ernst & Young accused of hiding Lehman troubles. 2010. [Online]. Available through
<https://www.reuters.com/article/us-ernstandyoung-lehman-lawsuit/ernst-young-accused-
of-hiding-lehman-troubles-idUSTRE6BJ1FP20101221>

annual report . 2018. [Online]. Available through <file:///home/user/Downloads/Annual-Report-
2018.pdf>
YAL Annual Report.2017. [Online]. Available through
<http://www.yancoal.com.au/content/Document/ASX%202017%20YAL%20Annual
%20Report%20Published%2030%20April%202018.pdf>