Identifying Risk of Material Misstatement in BHP's Annual Report

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.