Auditing and Assurance

The report analyzes the main rationales for the introduction of new accounting standard for both the auditors and the users while referring the collapse of Lehman Brothers. It also evaluates and analyzes the key audit matters of six Australian mining companies under the ASX top 100.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The findings of the report states that the main objective behind the introduction of the new
auditing standard is to address the loopholes that were mainly responsible for the collapse of
Lehman Brothers. It also shows that the auditors are needed to discuss about the going
concern risk of the companies. The findings of the report also shows that the reporting of key
audit matters in the Australian mining industry has provided the users with the additional
information on the reported key audit matters.

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Table of Contents
Introduction................................................................................................................................3
New Accounting Standard ASA 701.........................................................................................3
ASA 701: Rationales..............................................................................................................3
ASA 701: Explanation...........................................................................................................4
Key Audit Matters of the Australian Mining Industry...............................................................4
Conclusion and Recommendation..............................................................................................6
References..................................................................................................................................8

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Introduction
Auditing is the profession where the auditors are responsible for the official
inspection of the accounts of the firms in order to make sure that they are free from material
misstatements and they have been prepared as well as presented in the most true and fair
manner (William Jr, Glover and Prawitt, 2016). Auditors are responsible for providing the
correct audit opinion on the financial performance as well as financial standings of the
clients. The introduction of some new accounting standards can be seen in the recent years
where due to the involvement of the auditors in some of the greatest corporate scandals and
collapses such as the corporate collapses of Lehman Brothers. The new auditing standard has
been introduced in order to make the investors and other users of the auditor’s report able in
knowing the crucial accounting issues within the organizations in better manner. In addition,
this new accounting standards also considers the assessment of the going concern
assumptions of the companies for ensuring the long-existence of the business operations of
the companies. This report intends to analyze the main rationales for the introduction of new
accounting standard for both the auditors and the users while referring the collapse of
Lehman Brothers. This report also intends to evaluate and analyze the key audit matters of six
Australian mining companies under the ASX top 100.
New Accounting Standard ASA 701
ASA 701: Rationales
The new auditing standard ASA “701 communicating Key Audit Matters in the
Independent Auditor’s Report” was introduced in the wake of the 2008 financial crisis along
with the collapse of Lehman Brothers. The audit profession was majorly criticized after the
collapse the famous Lehman Brothers. The senior management of Lehman Brothers used the
repurchase agreement transactions as sales with the aim to boost their financial position
through manipulating the company’s balance sheet. The whole process was an illegal
accenting procedure. Lehman Brothers’ audit partners knew the occurrence of this suspicious
accounting transaction of repurchase agreement transactions, but they did not consider this as
a significant matter for the audit and thus, issued unqualified audit opinion to the company.
The company collapsed even in the presence of clean audit opinion (Wiggins, Bennett and
Metrick, 2014).
This incident largely contributed towards the introduction of ASA 701, the new
auditing standard. Accounting to the viewpoint of this accounting standard, the auditors
would be largely required to take into account matters such as accounting transactions or
events which could have major impact on the audit procedures. It implies that this new
auditing standard was introduced with the aim to reduce the auditing gap which was
witnessed in the case of Lehman Brothers. According to the new auditing standard related to
key audit matters, it has become the utmost responsibility of the auditors to determine as well
as disclose the matters that are of major risk of material misstatements and the effective
commutation of these matters would make the users able in gaining more information on
these matters (Carson, Fargher and Zhang, 2016). This new auditing standard also puts the
obligation on the auditors to make the assessment of the used accounting judgments,
assumptions and estimations by the managements for the preparation of financial statements.
The presence of ASA 701 at the time of Lehman Brothers would make the auditors to
consider the issue of repurchase agreement transactions as a crucial matter with significant
risk and would make the auditors to communicate the same through the auditor’s report.
Thus, it would be possible to save Lehman Brothers from the collapse in case ASA 701 was
available that time (auasb.gov.au, 2019).

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Another crucial aspect is that the auditors of Lehman Brothers did not consider the
assessment of the going concern status of the company in order to make sure that the
company would be able to continue the business operation for unforeseeable period. Going
concern assessment is needed to determine the financial stability of the firms as well as
detaining the fact that whether the company has any intention to abort its business operation
in future (Feldmann and Read, 2013). According to the requirement of ASA 570, Section 6,
adequate and appropriate audit evidence needs to be gathered by the auditors to assess the
appropriateness of the going concern basis of accounting of the companies. These steps are
majorly essential for the auditors in the assessment of the firm’s ability to continue its
operation in unforeseeable time. Every auditor is needed to undertake this assessment of
going concern (auasb.gov.au, 2019).
ASA 701: Explanation
ASA 701 is considered as a very essential document for the auditors because it helps
the auditors in assessing and dealing with the key audit matters through proper accounting
standards. ASA 701 requires the auditors to identify the key audit matters in the financial
statements of the companies so that they can be considered for the audit procedures. It needs
to be mentioned that there are three major requirements of ASA 701 that the auditors are
needed to comply with (auasb.gov.au, 2019). They are as follows:
1. It is required for the auditors to effectively determine the key audit matters by taking
into consideration the relevant aspects of the financial statements. In this process, the
areas of the financial statements with highest audit risks need to be assessed by the
auditors in order to ascertain that whether they can lead to material misstatement or
not (auasb.gov.au, 2019).
2. After the successful determination of the key audit matters, the auditors must ensure
the proper communication of these key audit matters through the auditor’s report. In
this process, it needs to be mentioned that the key audit matters are needed to be
communicated with the users of the auditor’s report and the employees within the
organizations who are responsible for effective governance.
3. Lastly, it is needed for the auditors to ensure proper documentation of the key audit
matters in the correct places (auasb.gov.au, 2019).
ASA 701 provides the auditors with all the needed regulations and rules for the
successful application of this standard.
Key Audit Matters of the Australian Mining Industry
The Mining Industry in Australia is considered as one of the major industries who is
responsible for large contribution towards the economic development of the country. In the
year 2018, the Australian mining industry has generated revenue worth $248 billion which
accounted for 72 percent of the goods export in Australia (minerals.org.au, 2019). The main
companies in this industry under ASX top 100 are Rio Tinto Limited, Newcrest Mining, BHP
Billiton, Downer Edi Limited, Evolution Mining and Whiteahaven Coal. The following
discussion sheds light on the fact that whether the key audit matters have achieved their
purpose in this industry along with the efficiency of the auditors in determining these key
audit matters.
Rio Tinto Limited – The reported key audit matters of this company are provision for close-
down, uncertain tax related provision, impairment indicator assessment and obligation for
environment and restoration. It needs to be mentioned that these are considered as key audit
matters by the auditors because of the use of complex judgments, estimated and assumptions
in the areas like determination of indicator for impairment, identification of cash generating

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units, calculation of provision, management’s assessment related to the provision of closure
and others. These are presented in the section of key audit matters along with the undertaken
audit procedures to deal with these key audit matters (riotinto.com, 2019).
Newcrest Mining – The key audit matters in this firm are non-current asset’s carrying value
assessment, provision for mine rehabilitation and taxation. The auditors have considered
these matter as the key audit matters after the assessment of the used accounting estimates,
judgments and assumptions in some of the crucial areas such as the assessment of the
impairment indicators of the non-current assets, taxation effects of the company’s operation
in different taxation jurisdictions, complex nature of estimation for the assessment of
provision and others. Some of the audit procedures for these key audit matters examination of
impairment assessment process, assessment of cash flow model, examination of the mine
rehabilitation process calculation and others (newcrest.com.au, 2019).
BHP Billiton – The identified key audit matters of this company are offshore assets
classification and procedures, taxation, asset valuation and closure and provision for
rehabilitation. Some of the main reasons for considering these aspects as key audit matters
are the use of complex nature of judgments, claim’s significant sizes, the use of high level of
estimation, decrease in the income of the company, applied procedures for the reasonableness
assessment of provision and others. These key audit matters are expressed in descriptive
manner in the appropriate section of the auditor’s report. Some of the key audit procedures
are test of control and others (bhp.com, 2019).
Downer Edi Limited – The identified key audit matters of this company are recognition of
revenue along with the adjustments regarding transition to AASB 15, control entities
acquisition and valuation of goodwill. The main reason behind considering these aspects as
the key audit matters is the presence of significant accounting assumptions, estimates and
judgments in some of the crucial areas like the determination of cash generating units for
goodwill, terminal growth rate, discount rate and others. These aspects are communicated in
well manner in the appropriate section of the auditor’s report of the company
(downergroup.com, 2019).
Evolution Mining – There are two key audit matters in this company and they are asset
valuation held at Cowal and Mungari and carrying value assessment of the assets. The major
reason for the consideration of these key audit matters by the auditors is the use of judgments,
assumptions and estimates which are subjective in nature in the areas of asset valuation,
impairment indication and the determination of the cash generating units. The auditors have
disclosed these issues in the key audit matter section along with the undertaken audit
procedures such as examination of the competency of the external valuer, examination of the
impairment assessment’s correctness and others (evolutionmining.com.au, 2019).
Whitehaven Coal – The presence of two key audit matters can be seen in this company
which are provision for mine rehabilitation as well as closure and impairment related to
property, plant and equipment. The main reason for the auditors to consider these matters as
the key audit matters is the application of complex nature of judgements, assumptions as well
as estimation in the areas like assessment of impairment indicator in line with the correct
accounting standards, determination of cash generating units, assessment of impairment and
others. The auditors have provided full justification as well as disclosure of these key audit
matters in the appropriate section of the auditor’s report (whitehavencoal.com.au, 2019).
The above discussion includes the description of the crucial aspects of the key audit
matters of the Australian main mining company. In this context, it is required to be
mentioned that key audit matters bring the crucial accounting issues, transactions and events

6AUDITING AND ASSURANCE
to the notice which can lead to the material misstatements in the company’s financial reports.
According to the 2018 Annual Reports of the above discussed mining companies, all the key
audit matters have been provided in the appropriate section of the auditor’s report that is the
“Key Audit Matters” section. While assessing the efficiency of the auditors in the reporting
of key audit matters, it can be seen from the above discussion that all the key audit matters
have been mentioned by their key account names along with the specification of the note
number in the financial statements (Beattie, Fearnley and Hines, 2013). For example, it can
be seen from the 2018 Annual Report of Rio Tinto that the company has disclosed the note
numbers with each of the key audit matter. Investors and other users become able in
understanding these key audit matters in better manner in the presence of these notes
(Pearson, 2014).
According to the new auditing standards ASA 701, the main intention of the key audit
matters is to disclose the required additional information of the significant matters so that
they can understand the level of material misstatements that can be caused by these matters. It
can be seen from the 2018 Annual Reports of these companies along with the above key audit
matters related discussion that proper description of these mattes has been provided on the
identified key audit matters that includes the amount of the accounts, names of the accounts,
used judgments, assumptions and estimates and others. More specifically, it needs to be
mentioned that the auditors have provided the detailed description of the used assumptions,
judgments and estimates in order to ascertain the extent of their complexity, involvement of
subjectivity in them and others (Manoel and Quel, 2017). Thus, it can be seen that the manner
in which the key audit matters are presented truly fulfils the purpose of the key audit matters
since the users can well understand the crucial issues, transactions and events from this
section.
Another major aspects that can be observed from the 2018 annual reports and above
discussion that the reason s for which these aspects are considered as key audit matters are
provided by the auditors which is a key aspect of the communication and reporting of key
audit matters. The auditors have clearly ascertained the reason such as involvement of
subjectivity in the used accounting estimates, nature of complexity in the judgments, lack of
appropriateness in the management’s assessment of impairment indicators, lack of
correctness in the ascertainment of cash generating units and others in the key audit matters
section which is a crucial aspect to inform the users about the key audit matters of the
companies. In addition, the auditors have also provided the information on the undertaken
audit procedures for these identified key audit matters which is a key aspect in the
communication of key audit matters (Ratzinger-Sakel and Theis, 2018).
Conclusion and Recommendation
The above discussion indicates towards the crucial aspect that the collapse of Lehman
Brothers was a major reason for the introduction of the new auditing standards since there
were some major auditing gaps from the end of the auditors. It can be seen from the second
part of the report that the auditors have provided all the required information on the identified
key audit matters of the Australian mining companies. The users can gain additional
information on the key audit matters which includes information on the value of the accounts,
note number of the financial reports, used accounting judgments, assumptions and estimates
and the undertaken audit procedures in response to these key audit matters. Based on the
above discussion, following are some recommendation for the auditors of the above-
discussed companies:

7AUDITING AND ASSURANCE
 In order to satisfy the requirement of ASA 701 regarding the appropriate reporting of
the key audit matters, the auditors of the above companies are recommended to
develop effective audit plan while complying with the standards and policies of ASA
701.
 It is recommended to the auditors of these companies to undertake effective
communication of the identified key audit matters with the readers of the financial
statements in the ‘key audit matter’ section of the auditor’s report.
 It is recommended to the auditors of these companies that they should adhere to the
ethical and professional requirements of the audit profession at the time of
identification of the key audit matters as per ASA 701.
 The auditors of these companies are recommended to ensure complying with all the
standards, rule and regulations of ASA 701 at the time to identify, communicate and
document the key audit matters.

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References
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].
Auasb.gov.au. 2019. Explanatory Statement 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_Explanatory_Statement_2015
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Bhp.com. 2019. Annual Report 2018. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
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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.
Downergroup.com. 2019. Annual Report 2018. [online] Available at:
https://www.downergroup.com/Content/cms/media/2018/PDF/AGM/DOW0041_Annual_Re
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Feldmann, D. and Read, W.J., 2013. Going-concern audit opinions for bankrupt companies–
impact of credit rating. Managerial Auditing Journal, 28(4), pp.345-363.
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Minerals Council of Australia. 2019. Australia’s world-class mining industry sets new
records in 2018. [online] Available at: https://minerals.org.au/news/australia%E2%80%99s-
world-class-mining-industry-sets-new-records-2018 [Accessed 20 May 2019].
Newcrest.com.au. 2019. 2018 ANNUAL REPORT. [online] Available at:
https://www.newcrest.com.au/media/annual_reports/Newcrest_Annual_Report_2018_1.pdf
[Accessed 14 May 2019].
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change and challenge. Journal of Accounting & Organizational Change, 10(1), pp.150-161.
Ratzinger-Sakel, N.V. and Theis, J., 2018. Does considering key audit matters affect auditor
judgment performance?.

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Riotinto.com. 2019. 2018 Annual report. [online] Available at:
http://www.riotinto.com/documents/RT_2018_annual_report.pdf [Accessed 14 May 2019].
Whitehavencoal.com.au. 2019. Annual Report 2018. [online] Available at:
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