Audit Theory and Practice: Importance of ASA 701 and Analyzing Key Audit Matters in Mining Industry

This report discusses the collapse of Lehman Brothers and the importance of ASA 701. It analyzes key audit matters in the context of mining industry and recommends better transparency in relation to the obligation of the auditors. The report promotes the feasibility of transparency after the collapse of Lehman Brothers.

Audit theory
and practice

Contents
Introduction............................................................................................................................................3
Importance of ASA 701.........................................................................................................................3
Issues of Lehman Brothers....................................................................................................................3
Analyzing and evaluation......................................................................................................................4
Recommendation...................................................................................................................................9
Conclusion...........................................................................................................................................10
References............................................................................................................................................11

Introduction
This report brings out a discussion on accomplishment of key audit matters in regards to new
standard ASA 70. AUASB committee has coined ASA 701, because it is important to consider
the personal monitoring of the financial statements in a particular period. ASA 701 strongly
believes that there should be transparency in the conduction of the company to all the
stakeholders (Cordoş, and Fülöp, 2015). Therefore, this transparency will help the stakeholders
to take investment decisions. Key audit matters are reported under ASA 701by the people who
manage governance of the organization. This report will firstly discuss the collapse of Lehman
Brothers. Then, this report will discuss the significance of key audit matters relevant to mining
sector according to ASA 701 (Christ, Masli, sharp, and Wood, 2015).
Importance of ASA 701
Invention of ASA 701 comes up with the concept of commitment in order to confirm to the
recent improvements and other developments that is related to auditor`s recording that has been
coined by the IAASB (international Auditing and Assurance standards board). This standard
increases confidence that the public has on the financial statements of the organization by using
701 (Christ, Masli, sharp, and Wood, 2015).
Issues of Lehman Brothers
The main cause of the failure of Lehman Brothers is ineffective and weak core and outer audit.
The main aim is to evaluate financial conditions of the audited company. Estimating the financial
result for the audited company can help the stakeholders to ensure that it can undertake

investment decisions (Endaya, and Hanefah, 2016). Lehman`s commitment to the prime an high
rated loans led to feel the customers as they do not derive any value in return after selling the
houses. The market reports have revealed that the shattering of market (global crisis) blurred the
vision of long term projections by considering market uncertainties (Cordoş, and Fülöp, 2015).
Although, the organization has generated 64 percent of the revenues with its majority of
investment in mortgage business. The reports have conveyed that the company could settle its
repo rates, equities and its related fixed income. There was a possibility company would have
settled its repo rates and maintain a positive relation with counterparties. The credibility reported
by the Leman Brothers was quite questionable (Endaya, and Hanefah, 2016). As per the David
who was an American hedging manager and his related audit report reveals that the earning is
not at all credible and the information was not communicated properly. This report will
announced loss when it was issuing the IPO. The financial conditions of the company have
deteriorated and suffered a loss of $208 billion when the second quarter was necessitates the
requirement of liquidation of nearly $6 billion. The company purely lacks customer confidence
and trust (Endaya, and Hanefah, 2016).
Communicating key audit matters through ASA 701 in the independent report of auditors
The main aim of this standard is to increase the confidence on the financial statements of the
organization and in their audit processes (Kachelmeier, Schmidt, and Valentine, 2017).
Analyzing and evaluation

The industry chosen for the analysis is the mining industry. This evaluation will examine key
audit matters in the context of mining industry. Analysis has been done on the basis of annual
reports of the year ending 2018. The companies selected are listed under ASX. The companies
are Alumina limited, BHP Billiton limited, CSR LIMITED, Ernest Henry Mine and
FORTESCUE GROUP (Kachelmeier, Schmidt, and Valentine, 2017).
The auditor has indicated that the company ascertained its 40 percent of the investment of the
organization. Auditors have monitored the appropriateness and assurance that the company has
been complying with the US GAAP (Köhler, Sakel, and Theis, 2016). In respect of equity
evaluation, it is seen that in 2016, the company has identified difference between the ASA 701
and GAAP (generally accepted accounting principles) (Khlif, and Samaha, 2016). The auditors
consider key audit matters as per ASA 701 because the investment amount was so high that
complexity has been involved while conserving amounts while complying with GAAP (Köhler,
Sakel, and Theis, 2016). While considering the impairment in assessing investment in the
company, it is seen that the company has undertaken the investments was nearly $2.3 billion
when the auditors checked the amount that has been invested in this to what extend it could be
impaired for the performance through many processes as it is assumed long term price of the
company. Impairment is calculated as the difference between group`s value and its market value,
which is determined from the internal and external sources by using the values that is to be
impaired. The auditors do not found any such proof while evaluating the impairment account by
the company (Lennox, Schmidt, and Thompson, 2018).
BHP Billiton limited

The auditors ensured to indicate that some of the key audit matters that they trust as the greatest
impact on audit as shown by the auditors (Sirois, Bédard, and Bera, 2018).
The auditors value assets where it was found that it consisted of 72 percent of assets of the
group. The company accepts that it has some type of weaknesses that is related to the process
and its related control included in the impairment of assets. It leads to increase the focus of the
threadworks on asset valuation. To analyze the data, it is seen that auditors undertake detailed
procedure to examine the key controls in the estimation of assets in valuation of assets and its
forecasting regarding the commodity prices to promote the objects and see the competency of
experts (Zain, Zaman, and Mohamed, 2015).
The auditors have confronted that auditors have studied in regards to the accounting standards
and its treatment when other mine acquired the company. The process of acquisition has a great
significance for the company (Gelderen, Hesselink, Westert, Robben ,Boeijen, Zegers, and
Wollersheim, 2017). The auditors have focused on several assessments on the main transactional
document that is needed to be studied. Auditors have focused and checked whether sufficient
revelations were done by organization or not because the enterprise has useful judgments as per
the sales of different commodities would be further measured as revenues. The organization uses
revenue recognition policy on which basis assessment have been undertaken for all the
transactions (Gelderen, Hesselink, Westert, Robben ,Boeijen, Zegers, and Wollersheim, 2017).
Taxation is another point of concern for the auditors as well as the company as it is important to
remain transparent to the governments while showing its profits because after being approved by
the government, shareholders develops a sense of confidence and it is under ASA 701. With each
element of the balance sheet and other financial statements, it is seen that company has
communicated effectively audit key matters and created transparency. Different industry works

with different set of tax structures. This company also engages cross border sales. Auditors have
become conscious in regards to the estimates that are related to tax provisions, contingent
liability and the expenses. Auditors will use a set of key controls as they work with the tax
specialist so that it could manage the operations and sales from different countries (Sirois,
Bédard, and Bera, 2018). Auditors will have to conscious in regards to estimation of the related
provisional taxation, contingent liability and its related expenses. Auditors have processed and
tested various key controls within different countries and monitor whether the group will be able
to disclose significant discourses among the stakeholders so that they could interest investors
(García, Gambetta, Benau, and Pérez, 2019).
The auditors have found that the deferred tax assets of amount $57.74 million and it is
mandatory to identify this amount and whether it comply with the Australian standards.
Auditors will have to take into consideration that whether it recognizes deferred tax assets.
Auditors assess the capability of the company by undertaking some steps and assessing the
reasonability of the revaluation of balances of the deferred tax assets and also the reasonability
of taxable income. They have also assessed the capacity of the group to follow the steps such as
reasonability of taxable income and revaluation of the balances of deferred taxable assets
(Gelderen, Hesselink, Westert, Robben, Boeijen, Zegers, and Wollersheim, 2017).
Recently, in order to fulfill with the ASA 701 and following the key audit matters, it is seen that
BHP Billiton limited has reported huge sum of losses because of collapse of dam idea project.
Many accounting monitoring actions of the organization need to be monitored and further
included in the legal status of the claims and legal aspects of the obligation that are needed as the
contingent liabilities and their disclosures. The auditors have followed an comprehensive policy
that can further check all the things and the extensiveness of the required disclosures as created

by both the companies. For the rehabilitation closures, it is said to involve the restoration by
closing the sites as the flood of transactions is so high that it is expected to consider the main
cash flow of the organization. Auditors have worked to improve the mine closures and its
associated timings (Sirois, Bédard, and Bera, 2018).
CSR limited has undertaken a recognition that considers provision of the product liability to the
estimated amount of nearly $312.4 million with the provision that are subject to judgments.
Auditors have assessed independence and its competent external auditors in this regard. Auditors
often enquiries that further break down liabilities through assurance in terms when each single
item of the provisions. The company has detailed the assets at high price that were further theme
to application of several expectations such as growth rate, estimate changes, and inflation.
Auditors undertook many key audit matters that will pass many judgments as involved in
projecting and estimating the upcoming cash flow of these possessions. The auditor often
undertakes many procedures with its team so that it can engage the management of organization
to look at the impairment of assets and their main assumptions were also checked. Some rates are
scanned on the sample as auditors often assess the appropriateness of impairment evaluation s
used by the companies.
Fortescue group of metals
Auditors used the audit approach of reporting the revenue with the sales of the iron ore where
audit was reevaluated where the key audit matters are significant with the focus of non-cash
adjustment derived as revenue. The auditors evaluated and monitored the provisional sales as
the u income accruing to the whole organization. It is seen that these conditional sales, the
deferred income, and pricing adjustments are found to be comprised with the commodity data

that has been fundamental externally. The customers have already confirmed prepayments,
which are obtained, to the company. Auditors have identified that recently the company have
entered into a well defined contract to get financing arrangements as it is the carrier of the
organization. In this type of arrangements, it is seen that the company received a funds of $234
million as financial monitoring included huge money in such a way that it found to be effective
in the material form. Auditors have said that they have checked the transactional cost and they
have also inspected financial arrangements in between the companies (Vik, and Walte., 2017).
The company has identified the assets and this type of recognition includes a lot of life-
threatening judgment of the corporation where the valuation and exploration of assets that has
not categorized as the developed asset rather than considering the work-in-progress. The
auditors have held discussion while managing the group and when checking it when the group
has the correct set of tenure regarding the assets or not. Auditors have visited several mining
sites so that it can know the status for the project. The auditors found that conduct of
organization with assets that are steady to the status (Quick, and Rasmussen, 2015).
Recommendation
As per the collapse of Lehman brothers, it is firmly recommended that the company should
maintain better transparency in relation to the obligation of the auditors. It is important to
promote deep and clear insight in the important key audit matters and most importantly how
internal auditors deal with those concerned audit areas (Quick, and Rasmussen, 2015). It is
comely the responsibility of the auditors to prioritize the actual condition of the business with the
assistance of financial declarations by considering importance of autonomous auditors report of
the four mining companies. Lehman Brother's downfall suggests the obligation of exacting the

same level of pressure from the standards and compliances. The procedures and ethics stated as
per ASA 701 Work together Key of Audit Matter in Report of self-regulating auditors’ and
‘ASA 570 Going Concern’ shapes the obligation of secure peril controlling practices and tactics
in these mining establishments (Quick, and Rasmussen, 2015).
Conclusion
From the above debate, it can be established that all the four ASX listed mining companies have
been developing a sense of how actually ASA 701 communicating the audit matters will create
transparency. This feasibility of transparency has been promoted after the collapses of the
Lehman brothers. ASA 701 that considers communicating the KAMs so that investors would
develop a sense of transparency among the stakeholders to undertake the investment plan. It is
crucial to impose and set some standards according to the auditing standards. Accountability is to
inform the management and organization regarding the capability of the organization.

References
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