Identifying Risk of Material Misstatement in BHP's Annual Report

The article discusses the risk of material misstatement in BHP's annual report in 2018 and how it impacts the auditor KPMG in the assessment process of the financial statement. It identifies various events that may lead to material misstatement, such as the Gulf of Mexico financial loss, low-price environment, and Samarco dam failure. The article also explains the stages of audit evidence in the context of BHP and the importance of assessing material risks.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
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1AUDITING THEORY AND PRACTICE
The risk associated with the material misstatement is that the financial statements of the
various business entities have been misstated to a degree that is material. The risk of material
misstatement is evaluated by the potential auditors of the organizations at both assertion level
and at the level financial statement. At the assertion level, the risk of material misstatement can
be further subdivided into two types of risks that includes control risk and inherent risk. The
Inherent risk refers to the exposure to assertion to misstatement because of error or fraud, before
considering controls (Chen, Chung, Peters & Wynn, 2016). On the other hand, the control risk
deals with the risk of misstatement that cannot be detected or protected by the internal controls of
the reporting organization. In the same context, the financial statement level is related as a whole
with the financial statements. This risk takes place when there is a probability of fraud. In case
the risk of material misstatement is high, the detection risk level of is low and vice versa.
The chosen company of BHP that was known as BHP Billiton refers to the trading entity
of BHP Billiton Limited and BHP Billiton plc, which was an Australian multinational mining,
metals and petroleum dual-listed public company headquartered that has its headquarters in
Melbourne, Victoria, Australia. The company was established in the year 1885 in the mining
town of Broken Hill located in the New South Wales. In the year 2017, the company of BHP
ranked as the largest mining company in the world on the basis of market capitalization. On the
other hand BHP is the third-largest company by revenue, which tripled between the year that
ranged from 2004 and 2012. From the annual report of the company which is to be analyzed, that
contains financial statements for the future, that statements regarding trends in commodity prices
and currency exchange rates (Contessotto & Moroney, 2014). In addition to that the
commodities demand, production forecasts, plans, objectives and strategies of management are
also present in the report. The following discussion deals with the identification of the various

2AUDITING THEORY AND PRACTICE
risk material misstatement present in the annual report of the company of BHP in the recent year
of 2018. The main objective is to highlight the various events taken place in the organization that
would impact the auditor KPMG in the assessment process of the financial statement.
It is one of the crucial step by the auditor is to assess the risk of material misstatement` In
the present case the auditor of BHP is KPMG. The constituents of the audit risk is control risk,
which is the risk that a misstatement can occur in the financial statement that cannot be
prevented, or corrected or detected, on a timely basis by the BHP’s internal control
(Bhattacharjee, Maletta, & Moreno, 2015).
Prior to analyzing the process in which the auditors need to assess the material
misstatement risk it is vital to understand the actual meaning of 'misstatement'. The term
'misstatement' as defined in the ISA 450 is that it considers the difference between the amount,
presentation, classification, or disclosure of the reported item of financial statement and the
amount, presentation, classification, or disclosure that is needed for the item to be according to
the financial reporting framework that is applicable (El-Said, 2017). The misstatements may take
place due to error or fraud. Simply, a misstatement takes place where there is difference in the
financial data that are reported in the statements, and the difference in the expected and the
reported data in the financial statements in order to find out whether they are fairly shown as a
true and fair view. The misstatements that are occurring can be factual, in the case of a clear
requirement breach of a of the financial reporting standard, or they can be judgmental, that arises
from various inappropriate techniques estimation or the selection of unsuitable policies of
accounting.

3AUDITING THEORY AND PRACTICE
There are certain events that can be identified from the annual report of BHP that may
lead to the material misstatement. The events are the situations that may affect the account
balances of a financial statement of BHP, and the recording of these events must follow the
accounting equation, which specifies that assets must equal liabilities addition with the equity of
the shareholder. The sale of a good reduces the inventory, increases accounts receivable, and
since it impacts the profits, it has an effect on equity of shareholder. Similarly, the expenses of
depreciation lower values of the asset, and because they reduce net income and retained earnings,
they, therefore, reduce shareholder's equity.
From the annual report of 2018, there events that are pointed out are risk events. There
occurred a huge financial loss of Gulf of Mexico and a low-price environment. A further level of
toughness is added since there was no debt insurance in the three-year period and BHP would
still have access to US$6.0 billion of credit with its revolving credit facility. The organization’s
directors were to examine the assortment against scenarios as part of process of corporate
planning of BHP in order to help identify key risks that are taking place in the global natural
resources sector. In the process of assessment of the true and fair of the financial statements it
has been found out that the Directors of the opted for divestment of Onshore US. There has been
various assumptions made by the directors regarding the capital expenditure, production, and
operating expenditure with five-year planning process and the alignment of prices with the
cyclical low-price case used in the control stress case for auditing the balance sheet. Considering
the matters, and current position of the BHP and principal risks, the company directors have
expected that the company of BHP will be able to continue in functions and overcome liabilities
as they lag behind.The impact of the shifts of the sustained price and short-term related to price,
that includes the impact of the same has led to a business failure of the company that might

4AUDITING THEORY AND PRACTICE
feasibly be anticipated to lead to risks of material misstatement. The auditor has the led to a rise
in significant alterations in the corporation in two different periods that is price to the occurrence
of the event and after math the event. The difference between the assertions in the two different
period can help in identify the misstatement in the financial declaration. Another event that took
place was the dam failure of Samarco and subsequent suspension of processing and mining
operations of Samarco that impacted the financial results and will be shown as an exceptional
item for the period ended 30 June 2018. The processing and mining operations remain suspended
resulting the dam failure. The Samarco is at present progressing plans to resume their operations,
however, the significant risks associated with the nature and timing of the resumption of
operations remain, including as a result of significant debt obligations of Samarco. The financial
information relating to Samarco has led to a business failure of the company that might feasibly
be anticipated to lead to risks of material misstatement (Zamboni, & Litschig, 2018). The
auditor has the led to a rise in significant alterations in the corporation in two different periods
that is price to the occurrence of the event and after math the event (Barnier, & Wright, 2017).
The difference between the assertions in the two different period can help in identify the
misstatement in the financial declaration.
The other possible event that can lead to risk of misstatement as per the annual report of
BHP in the year 2018 is event of Profit or loss from equity accounted investments, related
impairments and expenses of US$147 million has decreased by US$125 million from the
financial year of 2017. The reduction or fall in the value is primarily due to a change in estimate
to the Samarco dam failure provision offset by higher sales volumes from Antamina and higher
average realised prices received by equity accounted investments in the financial year 2018. This

5AUDITING THEORY AND PRACTICE
can be a possible risk of misstatement that can be identified during the process of
auditing(Collins, Xie, & Zhu, 2015).
The Audit evidence refers to the set of information for the review of a financial
transactions of the company, practices internal control and other factors necessary for the
financial statements certification by certified public accountant or auditor (Louwers, Ramsay,
Sinason, Strawser & Thibodeau, 2015). The amount and type of auditing evidence considered
varies considerably based on the scope of the audit and the on the type of firm that are being
audited.
The Accounting events refer to those events that can be measured in terms of money. The
various events may be recorded as accounting events if they damage a property of the company
and other assets because the damage can be assigned a monetary value (Ritchie & Marshall,
2015). The management requirements of risk as per the annual report of the company yprovides
a boundary for risk management relating to material health, safety, environmental and
community risks associated with BHP. The auditor of the company conducts internal audits test
to comply with the standards and develop plans of action to address any breaches. The key
findings are reported the management and reports are considered by relevant Board committees
(Knechel, & Salterio, 2016). Auditor of the company should not underestimate the importance of
assessment of the material risks, to ensure that audits are responsive to individual audit clients'
circumstances, and when applied properly should help to reduce audit risk.
In the context of the audit evidence of the BHP the auditors require the audit evidence to
check whether BHP has the accurate information in context of their financial transactions. In
addition to this in the stage of audit engagement acceptance or reappointment, audit evidence

6AUDITING THEORY AND PRACTICE
refers to the information that the auditor takes in hand (Alberti, 2014). This may involve change
in environment of the entity control, nature of the entity business, inherent risks and the
objectives of audit work. There are stages of audit evidence in the context of the chosen
company of BHP there are four stages, this include the audit planning stage, where the audit
evidence is the information that the auditor must consider for the most effective and efficient
audit approach. For example, reliability of internal control procedures, and analytical review
systems. There is the control testing stage, audit evidence is the financial data that the auditor
takes in hand for the mix of audit test of control and audit substantive tests in the company of
BHP. In the substantive testing stage, the audit evidence refers to the t information that the
auditor needs to support the financial statement assertion’s appropriation (Graham, Bedard &
Dutta, 2018). They include the rights, existence, obligations, completeness, valuation,
presentation, disclosure and measurement of a particular transaction or the account balance.
Lastly, there comes the opinion formulation stage, where the audit evident acts as the
information that the auditor considers whether the financial statements as a whole represents
validity, completeness, accuracy and consistency with the understanding of the auditor of BHP.

7AUDITING THEORY AND PRACTICE
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8AUDITING THEORY AND PRACTICE
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