ASA 701: Disclosures and Key Audit Matters in the Mining Industry

This report explores the importance of disclosures and key audit matters in the mining industry, focusing on four major companies. It discusses the impact of ASA 701 on transparency and provides insights into specific audit matters in each company. The report also highlights the significance of proper asset valuation, taxation, and rehabilitation provisions in the mining industry.

AUDITING
ASA 701

ASA 701
Executive Summary
Disclosures have become an important consideration when it comes to the current scenario of
the corporate. It is imperative that the stakeholders should be well aware of the happening
that will help in projecting a sound concept. The introduction of ASA has provided benefit to
the stakeholders as they can easily peer into the key audit matters. To conduct this study,
mining industry is considered and from the industry four potential players are selected for the
report. The report revolves around key audit matter and the manner in which the company has
provided adequate attention to it.
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Contents
Introduction.......................................................................................................................................2
ASA 701 and the case of Lehman Brothers........................................................................................2
Mining industry.................................................................................................................................3
RIO TINTO..........................................................................................................................................3
BHP BILLITON.....................................................................................................................................4
Hawkstone Mining.............................................................................................................................5
METALS BANK Ltd..............................................................................................................................6
Conclusion.........................................................................................................................................7
References.........................................................................................................................................8
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Introduction
A lot of financial discrepancies were observed around the world when the case of Lehman
brothers erupted and showcased various issues. Various organizations were affected by this
crisis and many countries were observing problems arising in their markets. The downfall of
Lehman brothers affected the entire community of auditors and made it suspicious in nature
because of the failure to achieve the management of the duty that was to be fulfilled by them
(Venanci, 2012). It is very important for the auditors to provide a true and fair view of the
financial statements of the organization. If any kind of negligence is observed while
assessment of the data then the financial statements will consist of compromise data because
of which the actual facts of the business will not be revealed (Venanci, 2012). It was
observed that the years 2001 to 2008 were very e astonishingly doing for various enterprises
in terms of generating profit. Organizations tried to earn profits and start investing in the
mortgage market during this period but were not able to fulfill their desires. Proper attention
was not paid because of which the mortgage market was already destroyed and another
mistake of the organization was to offer private financing, real estate, and leverage lending
because of which all of its assets were compromised (Viney, 2010).
ASA 701 and the case of Lehman Brothers
The ASA 701 states many important facts and figures that should be revealed by the
organization in the financial statements. The application of the standard will not only health
Organization to maintain the science city of the balance sheet but would have also improvised
the Goodwill of the organization (Rezaee & Kedia, 2012). The absence of the standard will
not only collapse the organization but also create problems in the communication and
concealment of facts and figures that are being depicted by the firm in the financial
statements that are being provided to the stakeholders and board members. These loopholes
were the major factors affecting the business of Lehman Brothers.
Negligence and absence of facts and issues of concern while drafting the financial statements
were:
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There was a specific period from the year 2001 to 2008 in which the organization tried to
earn huge loads of profit. Big amounts of loans were being taken by the Lehman Brothers in
order to build a stable capital structure and increase the profits. This uneven nature of the
market made it uneasy for the organization to function in the mortgage deals and other fields
of investment (Cappelleto, 2010). The form starts investing in dangerous portfolios in order
to earn more profit because of which negligence of various important factors was observed.
Billions of dollars were borrowed by the organization to invest in the risky deals which
further betrayed the organization (Niemi & Sundgren, 2012). All the cells of the organization
were compromised because it was staking them in order to get private financing, real estate,
and other loans.
Concealment of the misstated leverage ratio
There was a huge difference observed between the values of the leverage ratio in the year
2007 and 2008. This ratio was clearly declining for Lehman brothers because of the loans that
were borrowed by it and were paid after the end of the fiscal quarter which restricted from re-
establishing the securities that were to be shown in the balance sheet. All these payments
were repetitive in nature because of which they decrease the ratio and also the sanctity of the
balance sheet (Roach, 2010). There was a time in the organization when the level of the ratio
decrease enormously and also misstated the figures of other transactions in the financial
statements.
Nondisclosure of non-approval of crusade opinion in the United States
The Organization was required to get a permit of sales for carrying out the transactions but
the US refused them to do the same. So, the company made a deal with the financial
department of the UK to carry out the transactions and trade the securities in the same manner
(Kaplan, 2011).
Hence, ASA 701 came into picture with a view to ensure strong level of transparency
together with a strong emphasis on the key audit matter. The main focus of the standard is to
shed light on the principles of better disclosure and the standard is made mandate after
scandals so that the stakeholder are aware of the happenings in the corporate world (Gay &
Simnet, 2015).
Mining industry
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The industry that is chosen in the report is the mining industry and the annual report of four
major companies are selected for the purpose and studied in the light of ASA 701. The
analysis is based upon the annual report and the year 2018 is selected for the purpose of
matter.
RIO TINTO
Provisions for uncertain tax positions
Rio Tinto operates in various territories and as a result of this, the company faces various
challenges with respect to taxation, laws, and regulations, alteration in policies and so on. The
functioning of the company is impacted due to certain matters such as indirect taxes,
transaction-related tax matters, and transfer pricing. The current and non-current taxes
payable for the company amounted to US$2190 million as on December 31, 2018. The
company has incorporated various provisions so as to deal with the uncertainty pertaining to
the amount of tax payable (Rio Tinto, 2018). These provisions incorporated by the company
are entirely on the basis of management’s best estimate which is closest to the amount of tax
payable. Matters pertaining to the transfer pricing of specific transactions between Rio’s
commercial center in Singapore and Rio’s entities based in Australia are emphasized more so
as to deal with uncertainty with respect to specific tax structures. Rio Tinto also holds regular
discussions on these specific matters with the Australian Taxation Office since a year now.
The company is exposed to uncertain tax positions and therefore, the management of the
same must opt for processes and certain accounting policies so as to deal with the same. The
latest updates on tax assessments were evaluated by certain tax specialists. These tax
specialists also reviewed the progress in the ongoing disputes. In the findings of the tax
specialists, it was stated that the company performed completely in accordance with the
requirements of the local tax authorities. It was also affirmed that the company has given due
respect to all the tax provisions.
Provisions for close-down, restoration, and environmental obligations
As of December 31, 2018, the company has provisions worth US$9975 million with respect
to close-down, restoration, and environmental obligations. The uniqueness, associated
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obligations and the presence of long timescales are the characteristics of these provisions that
must be considered by the management in estimating the quantum and timing of future costs
while calculating these provisions. The management must also identify an appropriate rate to
discount future costs to their NPV so as to calculate these provisions (Rio Tinto, 2018).
The legal obligations were formed pertaining to closure provision so as to conduct a detailed
analysis of the cost estimates presented by the management. For this purpose, the method of
rehabilitation and restoration and associated cost estimate was given due consideration.
BHP BILLITON
Key audit matters that had a greater impact on the audit performed by the auditors are
discussed below-
Asset valuation
The valuation of the assets of an organization is utmost important in order to trace the
presence of key audit matters in the same. Even the company affirmed the presence of
material misstatements in the controls and processes with respect to impairment of its assets.
In order to identify the presence of mishaps in the processes and controls pertaining to
impairment of assets, the company opted for a detailed analysis where the key controls used
in the valuation of the assets were monitored, the commodity prices were also ascertained
that were meant to be forecasted and all other significant aspects where considered that could
have impacted the assets valuation of the same (BHP Billiton, 2018).
Taxation
The company operates on a global platform and therefore, it faces a lot of challenges with
respect to different tax structures. The group is also into cross border sales. The estimation of
the associated provision of tax, expenses and the contingent liabilities of the company was
considered as a serious business by the auditors. The auditors worked with various tax
specialties from the territories in which the entity majorly operated and also employed
procedures like tested key controls. The auditors also made it a point to evaluate that whether
the company has made all the required disclosures in its financials so as to allow the users of
the financial statements to gather an insight of the functioning of the same. The auditors also
made it a point to learn about the consistency pertaining to different tax structures prevailing
in different territories (BHP Billiton, 2018).
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Samarco
The failure of Samarco dam project bought about huge losses for BHP Billiton. It is
important to drill into various factors so as to understand the reason behind such a failure.
The legal obligations of BHP, the legal status of claims, disclosures pertaining to contingent
liabilities, etc are various aspects that must be evaluated so as to justify such an unexpected
failure (BHP Billiton, 2018). This area reflected a generous amount of uncertainty and
therefore, it is one of the key audit matters of the entity. The failure of Samarco dam project
was analyzed by means of adopting a comprehensive policy. The auditors analyzed not only
the presence and rightness of the disclosures made by both BHP and Samarco but also
evaluated the key assumptions made by BHP. The auditors ensured that the level of
disclosures made by the companies was acceptable and up to the mark.
Rehabilitation provisions and closures
The company is engaged in restoration, rehabilitation, and closing of the sites. The financial
well being of the company is prone to a significant impact owing to the high volume of
restoration, rehabilitation and closing of the sites. Therefore, it must be labeled as a key audit
matter for the company as it has the tendency to impact the future cash flows of the same
(BHP Billiton, 2018). The tasks of the employees engaged in mine closures were assessed so
as to evaluate the timing costs and the life of the reserves and mines were ascertained through
specialists. To construe the impacts of restoration, rehabilitation, and closing of the sites, the
time value of money and foreign exchange rates were checked and it was later confirmed that
the rehabilitation provisioning was rightly executed by the company.
Hawkstone Mining
The company is in its initial stage of developing new opportunities in natural resource
exploration. For the purpose of financing its exploration and evaluation activities, the
company highly depends on raising its capital and other debt instruments. The availability of
sufficient cash resources is determined by the directors of the company so as to allow the
same to be able to tackle its debts as and when they accrue (Hawkstone, 2018).
The evaluation of the directors’ assessment was included in the going concern concept with
respect to committed forecast expenditure and cash flow requirements of the company for not
less than 12 months.
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Carrying value of mineral exploration & evaluation expenditure
The company has borne certain expenditures for the Kangwane South Anthracite Project in
South Africa for the purpose of mineral exploration and evaluation. It may happen that at one
point of time the appropriateness of the accounting criteria with respect to capitalization of
mineral exploration and evaluation expenditure is lost and the capitalized cost may also go
beyond the value in use. When the presence of an impairment trigger is confirmed only when
there is a requirement of an impairment review. The audit procedures are determined on the
nature of an industry. The audit procedures for the mining industry includes analyzing the
viability of the project and the presence of any impairment of indicators to such costs
capitalized in the ongoing period and assessing the director’s verdict with respect to
capitalization of mineral exploration and evaluation expenditure and to affirm the presence of
any indicators of impairment to capitalized costs (Hawkstone, 2018).
METALS BANK Ltd
Carrying value of capitalized exploration and evaluation
Carrying value of capitalized exploration and evaluation is a significant asset of the company.
The ability of the company to explore its assets to determine the carrying value of capitalized
exploration and evaluation of assets is considered. If the carrying value of the asset cannot be
recouped via sale or successful development or the mineral reserves and resources are
commercially viable for extraction then the carrying value of capitalized exploration and
evaluation shall get impacted (Metals Bank Ltd, 2018). Therefore, this highlights the
presence of risk with respect to the recovery of the amounts reflected in the financials of the
company.
As of June 30, 2018, the company had capitalized exploration and evaluation expenditure
amounting to $7984603 million (Metals Bank Ltd, 2018).
The audit processes were conducted by means of evaluating the intention of the company so
as to continue exploration and evaluation of its assets in the desired areas and for the same
purpose, the future cash flow forecasts of the same were assessed. The company’s right to
explore in the relevant exploration area that comprised of procuring and evaluating
independent searches of the company’s tenement holdings was also evaluated by the auditors
in their audit function (Metals Bank Ltd, 2018) . The auditors also assessed the ability of the
company to fund its planned future exploration and evaluation activity and also the presence
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of negative indicators were identified by means of evaluating the results of recent exploration
activity in the company’s area of interest
CSR Limited
Asset valuation
The assets of CSR were recorded in the annual report at the price higher than the expectation
and were subjected to a variety of assumptions such as alterations in the inflation, growth,
etc. The auditors presented this a KAM as it involves a higher number of assumptions and
alterations. In tune to this, the auditor even conducted different judgments with another
expert to ensure that the process of evaluation undertaken by the firm can be traced with ease.
further, the auditor even facilitated a mechanism to check rates (CSR Limited, 2018). The
best part of the audit was that the effectiveness of the framework that tests the impairment
was also put to evaluation.
Provision for liability of product
The company traced provision of product liability in the annual report that amounted to
$312.4 million and the same rested upon various judgment and assumptions. Moreover, they
even accounted for the size, as well as complications that were linked to provision and for a
variety of purpose. The decision or the idea of other expert was even noted. The auditor
ensured that the matter was not left in isolation rather inquiries and decision were undertaken
so that all the liabilities were evaluated.
Fortescue Metals Group
Revenue generated from the sale of iron ore
The company presented an amount of $8335 million that was generated from the revenue
and this happened to owe to iron ore sale. This was taken as a key audit matter by the audit
matter because the revenue amount was huge. To ensure that this was taken at the correct
figure, the audit methodology was used where the non-cash adjustments done to the revenue
was evaluated. Further, the sales that were provisional were assessed again along with the
deferred income assessment. Moreover, adjustments were even seen in provisional pricing
and the auditor at the end concluded that the sales were in conformity and correct with the
commodity information.
Carrying amount of exploration and evaluation assets
An amount of $813 million was even identified as an asset and it rests upon various
judgments. The auditor assessed the judgment of the company that was linked to exploration
that was not regarded as an asset for development. Moreover, there were different meetings
and discussions that were held by the auditor together with the management to know the
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scene of the project. After innumerable inquiries, the auditor came to the conclusion that the
asset treatment was correct and consistent (Fortescue group, 2018).
Financing ore carriers
The company entered into a contract with the ore carriers and in tune to this received a sum
of $234 million. Since the involvement of the amount is huge, the auditor vouched that falls
under the KAM. The cost of the transaction was verified by the auditor and the financial
arrangement was completely ascertained.
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Conclusion
The key audit matters hold significance and the same must be given due consideration while
preparing the audit reports of an organization. The methodology used by an entity in the
preparation of its financial statements must also be determined so that the investors can rely
on the information obtained from the financial statements of the company and construct
appropriate decisions. The auditors must without any doubt opt for appropriate auditing
measures in their audit function. The auditors must ensure that the reports made by the
company reflect transparency and depicts the true and fair view of its state of affairs.
Due to the global financial crisis, a new auditing standard named ASA 701 is inculcated. The
new standard is initiated so as to safeguard the interests of the investors with the issuance of
key audit matters in the financial statements of the company. As a result of the
implementation of ASA 701, users of the financial statements are now able to trust the
audited reports of the company and are able to make appropriate investment related decisions.
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References
BHP Billiton. (2018) BHP Billiton 2018 annual report and accounts. Available from:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed 15 May 2019]
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ,
Melbourne
CSR Limited. (2018) CSR Ltd 2018 annual report and accounts. Available from:
https://www.csr.com.au/-/media/corporate/files/annual-reports/2018_annual_report_-
for_31_march-2018.pdf [Accessed 18 May 2019]
Fortescue group. (2018) Fortescue group 2018 annual report and accounts. Available from:
https://www.fmgl.com.au/docs/default-source/annual-reporting-suite/fy18-annual-report.pdf
[Accessed 18 May 2019]
Gay, G & Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Hawkstone. (2018) Hawkstone 2018 annual report and accounts. Available from:
http://www.investi.com.au/api/announcements/hwk/e828bec3-443.pdf [Accessed 15 MAy
2019]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and
practice. The Accounting Review. 86(2), pp. 367–383. Retrieved from
https://doi.org/10.2308/accr.00000031
KMPG. (2010) An overview of Risk and disclosure. Available from 12 September 2017
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/
KPMG-pharmaceuticals-disclosures-summary.pdf
Metal Bank. (2018) Metal Bank 2018 annual report and accounts. Available from:
http://www.metalbank.com.au/reports/ [Accessed 15 MAy 2019]
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Niemi, L. and Sundgren, S. (2012) Are modified audit opinions related to the availability of
credit? Evidence from Finnish SMEs. European Accounting Review. [online]. 21(4), p. 767-
796. Available from: https://doi.org/10.1080/09638180.2012.671465 [Accessed 15 MAy
2019]
Rezaee, Z & Kedia, B. L. (2012) Role of Corporate Governance Participants in Preventing
and Detecting Financial Statement Fraud. Journal of Forensic & Investigative Accounting.
[online]. 4(2), pp. 176-205. Available from: doi: 10.1016/j.sbspro.2014.06.041 [Accessed 9
April 2018]
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
Venanci, D. (2012). Financial Performance Measures and Value Creation. State of art .
New York: Springer.
Viney, C. (2010) McGrath’s Financial Institutions, Instruments and Markets, Sydney
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.
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