Auditing and Assurance Services

This report discusses the rationales behind the introduction of the new auditing standard ASA 701 and the auditors' efficiency in Key Audit Matter (KAM) reporting in the mining companies listed under ASX top 100.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
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Table of Contents
Introduction................................................................................................................................2
ASA 701: Rationales..................................................................................................................2
ASA 701: Explanation...............................................................................................................3
KAMs of the Australian Mining Industry..................................................................................4
BHP Group Limited...............................................................................................................4
Downer Edi Limited...............................................................................................................4
Evolution Mining Limited......................................................................................................5
Newcrest Mining Limited......................................................................................................5
Rio Tinto Limited...................................................................................................................5
Whitehaven coal.....................................................................................................................6
Conclusion and Recommendations............................................................................................6
References..................................................................................................................................8

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Introduction
Audit can be considered as a systematic as well as independent assessment of the
accounting books and information of an organization in order to ascertain that to what extent
the financial statements of that organization express the appropriate view of their financial
Standings and health (William Jr, Glover and Prawitt, 2016). In the recent years, the auditing
profession has to face major criticism for its connection in some of the large corporate
collapses all over the world. As the outcome of these concerns and criticism, the profession
has witnessed the development of some new accounting standards in the forms of ASA 701
Communicating Key Audit Matters in the Independent Auditor’s Report (ASA 701), revision
in some of the existing auditing regulations such as ASA 570 Going Concern and others
(Knechel and Salterio, 2016). This report taken an honest attempt to discuss about the
rationales behind the introduction of the new auditing standard ASA 701 along with
discussing the components this particular auditing standard. This report also taken an attempt
to ascertain the auditors’ efficiency in Key Audit Matter (KAM) reporting in the report of the
auditors in the mining companies listed under ASX top 100.
ASA 701: Rationales
The business failure of Lehman Brothers is considered as a corporate failure where
the failure of the auditors can be seen. In Lehman Brothers, the management of the firm was
involved in mischievous use of Repo instrument to artificially strengthen their balance sheet
for $50 billion (Jones and Presley, 2013). Through the auditors of the firm had the knowledge
about this issue, they did not consider this as a significant audit matter and provided the
company with unqualified audit report. This is considered as the main cause that contributed
towards the failure of the firm and provided the fuel to the 2008 financial crisis (Ball 2016).
These two aspects were the major reasons for the introduction of ASA 701. The
standard of ASA 701 was introduced with the view that it would put the obligation on the
auditors consider crucial audit matters like events and transactions which was lacking in the
business operations of Lehman Brothers. Reduction of the auditing gaps developed from the
collapse of Lehman Brothers was another major aim behind this new standard of auditing
(Tarr and Mack, 2013). It is the requirement of the new auditing standard ASA 701 that
auditors must disclose the audit matters that are of highest risk in the report of the auditors so
that the users of the financial reports can know about them. For the business failure of
Lehman Brothers, the auditors failed in assessing and analysing the accounting judgments,

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estimated and assumption used by its management which was a major audit failure. However,
the new auditing standard was brought into the picture in order to put the obligation on the
auditors to consider the assessment of the management’s judgments, assumptions and
estimates (Cordoş, 2015).
The auditors of Lehman Brothers also failed to analyse capability of the firm to
continue as a going concern which was a major flaw in the audit of the company. It is evident
from the 2008 financial crisis that changes can be occurred in the financial markets in quick
succession which is majorly harmful for the going concern status of the firms (Azadinamin,
2013). Since, it was another crucial reason for the collapse of Lehman Brothers, it was
necessary to address this issue with proper regulatory reforms (Hurley and Hurley, 2013).
This contributed towards the revised ASA 570 Going Concern stand where the need for the
auditors is to gain adequate audit evidence for assessing the presence of material
misstatements in the financial reports due to the improper use of going concern basis of
accounting (auasb.gov.au, 2019). It is noteworthy to tell the fact that the availability of these
new accounting standards would be able to avoid the corporate failure of Lehman Brothers.
ASA 701: Explanation
The introduction of ASA 701 represents the AUASB’s commitment to conformity
with the current improvement in auditor’s reporting’s enhancement by the IAASB. The
central objective behind the introduction of ASA 701 is properly communicate the key audit
matters of the companies through the report of the auditors. It is noteworthy to mention the
fact that there are certain major features of ASA 701 which the auditors are required to
adhere to (auasb.gov.au, 2019). They are show below:
o It mandates effectively and properly communicate the key audit matters in the report
of the auditors for the listed companies;
o The standards of ASA 701 creates the major requirements as well as provided
application and other crucial explanatory materials related to effectively communicate
the key audit matters in the auditor’s report;
o It provides the processes to ascertain key audit matters;
o It arrange for the procedures to the auditors on how to successfully describe the key
audit matters;
o It states that circumstances where the auditors do not need to communicate the
determined key audit matters in the auditor’s report; and

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o It provides the needed procedures for the documentation of key audit matters
(auasb.gov.au, 2019).
KAMs of the Australian Mining Industry
For the analysis of the auditor’s efficiency in the reporting of key audit matters, the
mining industry of Australia is choses from which the ASX top 100 listed mining companies
are taken. The following part shows the detailed discussion on the key audit matters of the
chosen companies.
BHP Group Limited
The key audit matters of this company are valuation, classification and presentation of
Onshore US assets, Samarco, taxation, valuation of asset and closure and rehabilitation
provision. The auditors consider these issues as key audit matters in the presence of
significant judgments, significant size of the claims, presence of the high degree of estimation
uncertainty, reduction in corporate income, the process of the company to assess the
reasonableness of the applied judgments and others. The undertaken audit procedures by the
auditor includes testing of the key control of the valuation of US Onshore assets, checking the
impairment charges, assessment of the presence of legal and constructive obligation related to
Samarco, assessing the completeness assertion related to contingent liabilities, assessing the
adequacy of taxation control environment, evaluation of the forecasted commodity prices and
many others (bhp.com, 2019).
Downer Edi Limited
The auditor has identified three key audit matters; they are revenue recognition and
transitional adjustments regarding AASB 15, goodwill valuation and acquisition of control
entities. In the first key audit matter, the auditors have focused on the areas with large number
as well as type estimation and complex judgments. The adopted audit procedures consist of
the company’s processes related to the accounting of contract revenues, sample testing, use of
data analytics and others. In case of goodwill valuation, the auditors have examined the
assumptions related to the determination of CGU, budgeted future revenue, discount rate and
terminal growth rate. The audit procedures include evaluation of the goodwill impairment
mechanism, impairment determination process, accuracy in forecasting and others. The
auditors have considered the third aspect as the key audit matter due to the aggregate size of
the acquisition, presence of complexity in finalizing the provision and others and the audit
procedures are developed as per these risks (downergroup.com, 2019).

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Evolution Mining Limited
The auditors have considered two aspects as the key audit matters which are the
valuation of assets held at Mungari and Cowal and assessment of the asset’s carrying value.
In the first key audit matter, the auditors have examined the involvement of subjective nature
of judgment and assumptions, relative size of Mine Development and Property, Plant and
Equipment balance in the balance sheet and significant judgment in the assessment of tax
position. The audit procedures include reading the valuation report, assessment of the
competency as well as capabilities of the external valuer and other. In relation to the second
key audit matter, the auditors have measured the applied significant judgments involves in the
determination of the impairment charges related to CGU. The adopted audit procedures
include the assessment of the impairment indicators along with the assessment of the
appropriateness of the impairment assessment and others (evolutionmining.com.au, 2019).
Newcrest Mining Limited
The auditors have identified three key audit matters; they are examination of the
carrying value of non-current assets, taxation and mine rehabilitation provision. The auditors
have examined the significant judgments related to the determination of whether there is an
impairment charges or not, the effects of the operation of the company in multiple tax
jurisdiction in their income and the complexity in the estimation of mine rehabilitation
provision The auditors have evaluated the company’s assessment of the impairment
indicators or impairment reversal; they have assessed the reasonableness of the cash flow
model of the company; they have evaluated the tax provision of the company along with tax
receivable in each jurisdiction; they have also calculated the calculation of the company for
the mine rehabilitation provision at each mine and they have assessed the reasonableness of
the adopted economic assumptions like discount rate, inflation rates and others
(newcrest.com.au, 2019).
Rio Tinto Limited
The auditors have considered three matters as the key audit matters; they are
assessment of impairment indicator, provision for close-down, restoration and environment
obligations and provision for ambiguous tax positions. The auditors have considered the first
key audit matter since the process to determine the existence of impairment or impairment
reversal is judgemental which can result in material misstatement. The adopted audit actions
are testing the correctness of the the process in which the management has identified the
CGU, evaluation of the assessment of the management of impairment indicators and others.

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The second key audit matter is considered by the auditors as the calculation of the provision
needs to approximate the significance as well as timing of the future costs; and the adopted
audit procedures include assessment of the process of the management for reviewing the
closure provision, detailed testing and others. The steps taken for the third key audit matter
are assessment of the procedures of the management to ascertain the uncertainty in tax
positions, checking the mathematical accuracy of tax calculation and others (riotinto.com,
2019).
Whitehaven coal
There are two key audit matters in the company; they are assessment of impairment
for property, plant and equipment and mine rehabilitation and closure provision. The auditors
have focused on the first key audit matter because of the extent of the balance in the balance
sheet related to the total assets along with the involvement of key judgments as well as
assumptions. The undertaken audit procedures include determination of the fact that whether
the impairment indicator assessment is done as per the Australian Accounting Standard,
assessment of the appropriateness of identification of CGUs and others. In case of the second
key audit matter, the auditors have assessed the involvement of significant judgments as well
as assumptions involved in the calculation of the provision. The appropriate audit procedures
include assessment of the processes for recognition, review and approval of rehabilitation
provision and others (whitehavencoal.com.au, 2019).
The above study denotes the efficiency of the auditors of the selected mining
companies in both the determination as well as communication of the key audit matters in
accordance with the standards of ASA 701 (Tarr and Mack, 2013). First, the auditors have
determined the key audit matters through the consideration of the required aspects like
judgments, assumptions and estimates. After that, the auditors have implemented the
appropriate audit procedures which can be applied for the reduction of this risks. This
effective reporting of the key audit matters by these auditors in the audit report provides the
users of the financial statements additional information of the financial events and
transactions that are crucial for their various decision-making process (Tarr and Mack, 2013).
Conclusion and Recommendations
According to the content of the above discussion, the business failure of Lehman
Brothers and the 2008 financial crisis were the major reasons for the introduction of the new
auditing standards. The above discussion demonstrates the undertaken auditor’s high

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competency in reporting the key audit matters. The following discussion shows some
recommendations:
o ASA 701 demands the auditor to take into account the effective reporting of key audit
matters. For the identification of these, it is recommended to incorporate appropriate
audit strategies for smooth audit procedures which are helpful for them in the
identification of significant audit transactions and events that can materially misstate
the company’s accounts.
o Another major recommendation to the auditors is to undertake correct approaches and
procedures to talk about the key audit matters with the relative parties. This must
include the significant transactions and events that can materially misstate the
company’s accounts.
o At the time to audit the financial reports of the companies while complying with the
ASA 701 policies, it is recommended to maintain professionalism as well as ethical
integrity since these aspects are helpful in the identification of the suspicious events
and transactions with significant audit importance.
o It is recommended to the auditors to maintain their professional scepticism while
handling the key audit matters.
o Lastly, one most crucial recommendation to the auditors is that they need to maintain
their compliance with the standards and policies of ASA 701 to determine as well as
identify the key audit matters. It is also helpful in the proper communication of the
key audit matters. The auditors need to follow these recommendations.

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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
.pdf [Accessed 14 May 2019].
Azadinamin, A., 2013. The bankruptcy of Lehman brothers: causes of failure &
recommendations going forward. Swiss Management Center (SMC) University.
Ball, L., 2016. The fed and lehman brothers: Introduction and summary (No. w22410).
National Bureau of Economic Research.
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].
Cordoş, G.S., 2015. Implications of the current exposure draft on audit
reporting. Management Intercultural, (33), pp.61-70.
Downergroup.com. 2019. Annual Report 2018. [online] Available at:
https://www.downergroup.com/Content/cms/media/2018/PDF/AGM/DOW0041_Annual_Re
port_2018_FA.pdf [Accessed 14 May 2019].
Evolutionmining.com.au. 2019. 2018 ANNUAL REPORT. [online] Available at:
https://evolutionmining.com.au/wp-content/uploads/2018/10/1858627.pdf [Accessed 14 May
2019].
Hurley, P. and Hurley, R.E., 2013. Warning Signals of the Impending Lehman Brothers’
Bankruptcy Filing.

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Jones, B. and Presley, T., 2013. Law and accounting: did Lehman Brothers use of repo 105
transactions violate accounting and legal rules?. Journal of Legal, Ethical & Regulatory
Issues, 16(2).
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
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].
Riotinto.com. 2019. 2018 Annual report. [online] Available at:
http://www.riotinto.com/documents/RT_2018_annual_report.pdf [Accessed 14 May 2019].
Tarr, J.A. and Mack, J., 2013. Auditor obligations in an evolving legal
landscape. Accounting, Auditing & Accountability Journal, 26(6), pp.1009-1026.
Whitehavencoal.com.au. 2019. Annual Report 2018. [online] Available at:
http://www.whitehavencoal.com.au/wp-content/uploads/2018/09/WVN_224754_Annual-
Report-2018_LR_FA-3.pdf [Accessed 14 May 2019].
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.