Key Audit Matters in the Mining Industry

This paper discusses the key audit matters in the mining industry and their impact on financial statements. It explores the auditing standard ASA 701 and its significance in enhancing transparency. The annual reports of mining companies are analyzed to understand how they consider key audit matters in their audit reports. The paper focuses on the mining companies listed on the ASX and examines their key audit matters related to revenue, financing, asset valuation, taxation, and rehabilitation provisions.

AUDITING & ASSURANCE

KAM
Executive Summary
The paper aims at shedding light on the research and evaluation of the relevant issues that
concerns the demise of the Lehman Brothers. The paper will focus on the key audit matters
that are needed to be disclosed by the new standards ASA 701 that is communication of the
Key Audit Matter in the Independent Report. The new standards came after the huge issues of
the GFC. Typically, the downfall was mainly caused due to the collapse of the Lehman
Brothers that had a reputation. The research is dedicated towards the downfall of Lehman
Brothers followed by the key audit matters that is required to be implemented. The
importance of KAM and ASA 701 is studied in an exhaustive manner. Further the new
auditing standard is studied by selecting five mining companies that is listed on the ASX.
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Contents
Introduction...........................................................................................................................................3
Interconnection between ASA 701 and the audit report.......................................................................4
Mining Industry.....................................................................................................................................5
 Alumina Limited.............................................................................................................................6
 CSR Limited....................................................................................................................................7
 BHP Billiton Limited.......................................................................................................................8
 Evolution Mining............................................................................................................................9
Conclusion...........................................................................................................................................11
References...........................................................................................................................................12
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Introduction
The effectiveness of ASA 701 can be highlighted from the fact that key audit matters can
now be properly evaluated and considered. This primarily relies on the fact that auditors must
be unbiased in nature while framing their judgment. The reason behind this is because audit
reports are accounted for by many parties to make decisions thereafter. The collapse of
Lehman brother is a strong reflection where the auditor failed to ensure effectiveness and the
collapse is a glaring example of accounting scandal (Sharp, 2010). Hence, if there are issues
in the report, the decision-making ability of parties can be affected negatively. It is also
noticeable that the company has paved a path for enhanced disclosure measures of its vital
information so that stakeholders are benefitted at large (Harris, 2013). Nevertheless,
disclosures are crucial in the current scenario because users can gain an opportunity to make
proper investment decisions, thereby facilitating enhanced transparency measures on the part
of the company (Jones & Presley, 2013).
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Interconnection between ASA 701 and the audit report
In order to calculate the actual audit matter, the introduction of ASA 701 was being
undertaken. However, it is crucial for the auditors to make way for enhanced communication
measures so that the report is not biased in nature. Additionally, it is important for the
management to ensure that the disclosures made in the report can assist users in decision-
making when the actual position of the company is being portrayed to them. Therefore, it is
made clearer that the introduction of ASA 701 can restrict the concealment of crucial facts
and matters (AUASB, 2018).
Further, owing to the auditing procedures, there must be a disclosure of matters that must be
communicated by the auditors in their report. These matters are also called as ‘key audit
matters’ that must be primarily evaluated by the auditors to determine the issues that may be
significant in the concealment of material facts, or may be exposed of uncertainties. Hence,
disclosure of such facts must be surely made by the auditors in their reports. However, any
significant statements provided to the auditors prior to the completion of the audit procedure
must also form part of the report to enhance its usefulness (AUASB, 2018). Nonetheless, if
material facts are concealed by any member of the company and the auditor fails to disclose
the same intentionally or unintentionally, the entire audit process will be biased in nature and
the overall performance of the company can be affected.
The auditing standard ASA 701 is very important in reflecting an auditors’ roles and
responsibilities when in, comes to audit processes (AUASB, 2018). Additionally, it is also
vital in laying down the consequences of an auditor’s negligence in undertaking audit
processes. Further, such standard is also helpful in offering relevant information related to the
preparation of financial statements of a going-concern company (Dolezalek, 2012).
Nonetheless, when financial statements of an organization are prepared by accounting for this
standard, all the assets and liabilities are measured in an effective way so that the
organization attains the ability to realize all these in its normal functioning.
• The key audit matters are made compulsory in the auditors’ reports especially of the listed
companies.
• Auditors are granted the opportunity to decide what must form part of the key audit matter
and what must be excluded from the same (Blay, Geiger & North, 2011).
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• Different ways are ascertained to ensure matters that are of material importance to the
auditors and those that are of lesser importance are not given due consideration. Thereafter,
the auditors must also account for the risks that necessitate further evaluation measures.
Additionally, all the auditors’ judgments that comprise of impacts of material events, relevant
issues, and management judgments are also required to be inculcated in the auditors’ report.
• Thereafter, it is explained how the auditor must take steps to define such Key Audit
Matters.
In the annual reports of companies, the auditing standard ASA 701 would be considered so
that the same could come in their financial reports for the tenure after December 15, 2016.
Moreover, this report aims to focus on such a standard that has been introduced in order to
enhance the public confidence and trust upon the company and its financial statements.
Further, this can also enable in enhancing the audit processes on a whole. This is being
undertaken so that the investors are offered proper transparency in relation to the roles and
responsibilities of auditors (Dandapani, Lawrence & Patterson, 2017). Additionally, it is
being done to offer them a better view of the key audit matters that have been accounted for
by the auditors during their process. The primary reason behind all this scenario is to offer
people with additional disclosure measures so that they can draw better decisions out of the
same (Carcello, 2012). Nevertheless, the reason behind the introduction of such new auditing
standard can be attributed to the fact that International Auditing Standards (ISA) can be
aligned with such standard. In other words, ISA 701 can be aligned with the introduction of
ASA 701, thereby serving a better purpose in comparison to what it was earlier.
Mining Industry
In order to understand the efficiency and description of such a standard, the mining industry
has been taken into account. For such purpose, the annual reports of few companies have
been analyzed in order to ascertain how they have considered key audit matters in their audit
reports. Moreover, all these evaluations have been conducted after taking into consideration
the annual reports of companies for the year 2017.
Fortescue Metals Group
a. Revenue attained from iron ore sale
The company had depicted revenue of $8335 million in its annual report that was attained
from the sale of iron ore (Fortescue group, 2018). The auditors considered this as a key audit
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matter because the amount of revenue was huge in nature. For such purpose, they utilized an
audit methodology wherein non-cash adjustments made to the revenue was prioritized and
examined. In addition, the provisional sales of the company were also measured again
together with the assessment of deferred income. Besides, few adjustments of provisional
pricing were also assessed by the auditors and at the end, they concluded with the judgment
that the same was consistent with the present commodity information. They also obtained
customers’ confirmation regarding all the prepayments of the company.
b. Financing ore carriers
The company had obtained finances associated with its ore carriers and it had entered into a
contract for such purpose. Based on the contract, it received a finance amount of $234 million
and because the amount involved is a huge one, the auditors accounted for the same as a key
audit matter in their report (Fortescue group, 2018). According to the auditors, they had
verified the cost of the transaction and had examined the financial arrangement that was
entered by the company.
c. Carrying amount of exploration and evaluation assets
The company also identified an asset amounting to $813 million and that was dependent upon
several judgments. The auditors examined the company’s judgment associated with IBJV
(exploration and evaluation asset) that had not been regarded as a development asset. Further,
various discussions and meetings were held by the auditors with the management regarding
the matter and they also visited various sites of IBJV to ascertain the present scenario of such
project (Fortescue group, 2018). However, after so many inquiries, the auditors concluded
that the treatment of such assets undertaken by the company was consistent.
 Alumina Limited
After examining the annual report of Alumina Limited, the key audit matters considered by
the company are as follows:
a. Assessment of impairment indicator for investment in AWAC
It can be seen from the annual report that the company has made an investment of $2.3 billion
and the auditors have verified the amount and thereafter, concluded that the same can be
impairment. For such purpose, they also undertook many procedures by presuming the long
tenure price of alumina. Additionally, the auditors of the company also facilitated a
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comparison of the overall organization’s value with that of the market so that any external or
internal sources could be examined and thereafter, impaired values could be identified
(Alumina Limited, 2018). However, they failed to find any impairment evidence from the
company’s investment affairs.
b. Equity accounting for AWAC investment
In the annual report of the company, the auditors have stated the method followed by them in
order to determine the company’s investment of forty percent in AWAC. Further, they
verified the accuracy and effectiveness of the US GAAP principle adhered to by the
company. Thereafter, the auditors had facilitated a comparative analysis to identify the
differences prevailing between the AAS and US GAAP. At last, they regarded this as a Key
Audit Matter in their audit report based on the fact that the amount of investment was
immense in nature and the problems associated with the transformation of figures based on
US GAAP (Alumina Limited, 2018).
 CSR Limited
a. Asset valuation
CSR Ltd recorded its assets in the annual report at a price greater than what was expected and
that was subject to various assumptions like changes in rates of growth, inflation, etc. The
auditors considered this as a key audit matter in their report because of the prevalence of a
huge number of assumptions and judgments (CSR Ltd, 2018). For such purpose, the auditors
also conducted various discussions with other experts so that the procedure of examining the
asset impairment and valuation undertaken by the management can be scrutinized. Besides,
the auditors also facilitated a way to check some of the rates on a sample basis. Furthermore,
they also analyzed the effectiveness of the testing framework of impairment that has been
utilized by the company.
b. Provision for liability of product
The company had identified a provision of product liability in its annual report amounting to
$312.4 million for the year and the same was dependent upon various judgments. Further,
they also accounted for the size and complications associated with the provision and for such
purpose, the viewpoint of other experts was also taken into consideration (CSR Ltd, 2018).
Nevertheless, various inquiries and discussions were made regarding the matter and every
single component of liabilities was analyzed.
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 BHP Billiton Limited
The auditors of the company have recognized some key audit matters in the annual report
based on the ideology that these can have a massive impact on the financials.
a. Valuation of assets
The company had undertaken the valuation of its assets and approximately 72% of the asset
were considered. However, the company itself had reflected that there were few material
inefficiencies prevailing in the control measures associated with assets impairment. As a
result, the concentration of threadworms was enhanced on the valuation process. Nonetheless,
the auditors completed this entire procedure by going through a detailed mechanism wherein
they examined the key controls involved in the asset valuation (BHP Billiton, 2018).
Thereafter, the auditors facilitated a path to assess the prices of goods that can be anticipated.
In addition, they also distinguished the competency and objectivity of other professionals so
that the factors that played a key role in the company’s assets valuation can be duly
accounted for.
b. Taxation
Taxation is another important matter portrayed as key audit matter in the annual report of
BHP Billiton Ltd. The reason behind this can be attributed to the fact that the company
operates in several countries having distinct tax systems. Thereafter, the company is also
involved in international transactions that make it feasible for the auditors to be cautious so
that the anticipation of the provisions of segments like contingent liabilities, expenses, and
tax are not hampered. In relation to this, the auditors of the company utilized measures like
examination of key controls and coordinating with other tax specialists of other countries
wherein BHP functioned. In addition to this, the auditors also investigated the effectiveness
prevailing amongst these countries and evaluated whether proper disclosure strategies have
been adopted for the interests of stakeholders.
c. Rehabilitation provisions and other closures
BHP Billiton is engaged in the activities of closing, restoration, and rehabilitation of sites.
The auditors have regarded this as a key audit matter in their report due to the fact that the
volume of this transaction was extreme in nature and therefore, it pursued the capability to
influence the financial outcomes of the company (BHP Billiton, 2018). Therefore, the
auditors took steps to coordinate with various experts regarding the matter so that the life of
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mines and reserves could be effectively determined. In addition, they also evaluated the
timing expenses of such mine closures for better results. However, after verifying the foreign
exchange rates and other aspects, the auditors concluded that the provision of rehabilitation
was tenable.
d. SAMARCO
Owing to the failure of dam projects of the company, it had to report major losses for the
year. As a result, various accounting judgments of the company had to be re-evaluated that
also comprised of ascertainment of the legal scenario of claims, disclosure of contingent
liabilities, company’s legal roles and obligations, etc. Based on the auditors’ claims, there
was a huge level of uncertainties associated with the case and this is the major reason behind
the incorporation of the same as a key audit matter in the report. For such purpose, the
auditors performed a comprehensive measure to examine all the aspects associated with the
case of Samarco (BHP Billiton, 2018). Besides, they also evaluated the assumptions made by
BHP, examined the appropriateness of disclosure strategies, etc to conclude the fact that the
provision for same was acceptable in nature.
 Evolution Mining
a. Identification of deferred tax assets
The company had identified its deferred tax assets in the annual report and the same reported
at $57.74 million (Evolution mining, 2018). However, it had considered Australian
Accounting Standards for recognizing the same and therefore, the auditors had to verify the
appropriateness of the same. Thus, they took steps to evaluate the company’s ability by
taking steps like a re-evaluation of the number of deferred tax assets, analyzing the
correctness of the company’s taxable amount, etc.
b. Impairment reversal of non-current assets of Mt Carlton
The company had depicted major losses way back in the year 2003 and such losses were
associated with impairment. The figures of losses reported at $148.6 million related to Mt
Carlton’ assets. However, the company has now planned to reverse the same in the current
tenure (Evolution mining, 2018). The auditors of the company considered this as a key audit
matter in their report because the same can affect the financial outcomes in a negative way,
thereby misguiding the stakeholders on a whole. Thereafter, the auditors arrived at the
conclusion that they must not examine the impairment through the usage of several processes
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at a time wherein market information was evaluated, rate of gold was compared, and other
steps as well.
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Conclusion
With the introduction of new auditing standard ASA 701, the effectiveness of auditing
processes has been altogether improved, thereby serving as a boon for all the stakeholders
who rely upon audit reports for decision-making. This report discusses the reason behind the
evolvement of such standard in the modern scenario and how it can play a key role in
protecting the interests of all stakeholders. Nevertheless, with the help of this standard, the
roles and obligations of an auditor have also been altogether enhanced for the general good.
However, this can not only result in proper confidence and trust of people in the quality of
audit but also allow them to make better decisions. In addition, better communication and
transparency by the company can also maximize its goodwill and image in the entire
industry.
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References
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Independent Auditor’s Report. Available from: www.auasb.gov.au [Accessed 18 May 2019]
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https://www.bhp.com/investor-centre/annual-report-2018 [Accessed 18 May 2019]
Blay, A. D., Geiger, M. A. & North, D. S. (2011) The Auditor's Going-Concern Opinion as a
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Carcello, J. (2012). What do investors want from the standard audit report? CPA Journal 82
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[Accessed 18 May 2019]
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Harris, R. (2013) Warning Signs Prior to the Financial Crisis of 2008: A Comparative
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