Auditing & Assurance for BHP Billiton

This report focuses on the auditing and assurance of BHP Billiton, a giant in the mining sector. It covers key audit matters, audit independence, non-audit services, auditor remuneration, and material subsequent events.

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Auditing & Assurance

BHP Billiton
Executive Summary
The function and function of auditor is vital in the process of business because it is
linked to the ethical movement of the company and the reports need to be verified by
the auditors. In this report, BHP Billiton listed on the ASX and a giant in the mining
sector is selected. The report commences with an introduction followed by key audit
matters, audit independence and other topics relevant to audit.
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Contents
Introduction................................................................................................................................................3
Compliance with the independent needs...................................................................................................3
Non-audit services.....................................................................................................................................3
Auditor remuneration.................................................................................................................................4
Nature of the non audit services................................................................................................................4
Compliance with the independent requirements........................................................................................4
Key audit matters.......................................................................................................................................5
The difference in management’s responsibilities from that of the auditors..............................................6
Material subsequent events........................................................................................................................7
The effectiveness of the auditor’s material information............................................................................8
Whether material information is under-reported or missing.....................................................................9
Conclusion...............................................................................................................................................10
References................................................................................................................................................11
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BHP Billiton
Introduction
The role of auditors assumes a place of special importance because it is in direct link
with the ethics and functioning of the company. The corporate governance of the
company relies on the function of the auditor. Moreover, the auditor report lays a
strong foundation when it comes to the concept of a stakeholder. In this report,
Wesfarmers Limited is selected that is listed on the ASX and in the light of this
company; the role of the auditor is studied in an elaborate manner. The report initiates
with the introduction followed by the auditor’s independence, key audit matters, and
the audit committee (BHP Billiton, 2017). Further, the adequate discussion is spread
on audit opinion and various other matters pertaining to material events
Compliance with the independent needs
The honesty and the hardworking of the company is highlighted by the by the audit
report and the functioning of the auditing body. It is seen that BHP has put up a good
and fair show with reference to the auditing assignments related to the company. All
this has been made possible with the help of systematic audit planning and balanced
networking. Also, the company has been seen to act in accordance with the Audit
standard and the Corporation regulation 2001 which has been beneficial to the
company. Audit control, remuneration, auditing facts is some of the important
highlighted points that will appear in the report along with the auditing techniques of
the company and the acts and the execution of the plans by the main governing bodies
(Geoffrey et. al, 2016).
Non-audit services
Even though the external auditor has facilitated in the provision of a few non-audit
services, yet the independence and objectivity of the company’s external auditor are
protected by limitations on the offering of such services. For instance, various kinds
of non-audit services can be taken by the external auditor only with the RAC
approval. In contrast to this, there may be services that may not be accounted for at
all. This includes services wherein the external auditor may indulge in affairs that
would be handled by the management (BHP Billiton, 2017). In addition, the auditor
can also operate in the advocacy role for the company. Nevertheless, the RAC has
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implemented a special policy in the name of the provision of other services and audit.
This policy covers the pre-approval processes and policies of the RAC to maintain the
external auditors’ independence.
Auditor remuneration
Auditor fees 2017 2016
% %
Audit and review of
financial reports
Audit of annual report 3381 3.126 21308.38 19.73236
Subsidiaries audit 7.04 7.715
44.36882 48.69966
Services of Assurance 3.597 3.493 22.66969 22.04898
other services 1,849 1.508 11653.12 9.519
Total 15.867 15.842
Corporate finance services 0.042 0.276 6.656101 25.29789
others 0.589 0.815 93.3439 74.70211
Total 0.631 1.091
TOTAL 16498 16.933
Nature of the non audit services
No non-audit services were done by the auditor those were excluded by the policy on
provision of audit and other services by the external auditor
Key audit matters
These matters are primarily signified as those matters wherein professional judgment
is necessary and that forms part of the most important audit process in the company’s
financials. This also includes the most crucial evaluated risks associated with material
misstatements that have been recognized by the company’s auditors and that can have
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the biggest impact on the overall audit process (Hoffelder, 2012). The company’s key
audit matters have remained unchanged from the year 2016 and the same has been
disclosed in the year 2017 financial report. The following matters have been
addressed by the auditors in relation to BHP Billiton and the audit opinion is clearly
based upon the same.
The prime area of judgment is associated to the company’s evaluation of future flows
of cash for every CGU (cash-generating unit) that is utilized to analyze the PPE’s
recoverable value together with the recoverable value of intangibles in the financial
statements of the company. Further, this also comprises of recoverable value of the
investments in the company’s subsidiaries. Moreover, the future flows of cash in
relation to forward-looking estimates are inherently problematic to ascertain with
accuracy (BHP Billiton, 2017). Besides, there is also a judgment level implemented in
the ascertainment of order key inputs. The next key audit matter in relation to BHP
Billiton is the valuation of assets. In this matter, the company has selected the same
because of the size of balances that is around seventy-two percent of the total assets of
the company, and the judgment level implemented by them in the assessment of the
reasonableness of inputs utilized in evaluating the company’s analysis of the
recoverable value of the assets (KMPG, 2010). Nevertheless, the company also has
affairs in various countries that are within its taxation regime. Therefore, the nature of
the company’s activities drives various taxation duties including royalties, corporation
tax, production-based taxes, taxes associated with employment, etc. Further, the
cross-border attribute of the company’s sales of the commodity also plays a key role
in creating issues related to international transfer pricing. Nevertheless, the tax has
been regarded as a key audit matter because of the implementation of taxation rules to
the company’s activities that is complicated, specialized, and necessitates judgment to
be exercised by itself in association to the evaluation of its estimation of tax funds,
related provisions, and contingent liabilities. In relation to closure and rehabilitation,
the same is governed by an admixture of statutory requirements and company’s
policies (BHP Billiton, 2017). Further, potential estimates over the life of reserves and
mine are made by the company in ascertaining its rehabilitation provision whose
computation requires judgment owing to the complications in forecasting the time and
quantum of future expenses and thereafter, ascertaining an effective rate to discount
such expenses back to their present value. Besides, the majority of the company’s
assets are long-life in nature that enhances the anticipation of uncertainties related to
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the future flows of cash (Livne, 2015). In addition, the reason behind the selection of
same as a key matter was because of potential size associated to the financial position
of the company and judgment level applied in assessing the estimates of time and
quantum of future expenses and evaluating the rate to discount the expenses back to
present value.
The difference in management’s responsibilities from that of the auditors
To see that the financial report is updated and is positive in nature is that the main
priority task of the accounting and the management body but the auditors thinking and
opinion is of very significant importance. It is the major and upheld task of the auditor
to see that the company’s financial condition has been transparent in nature and all the
statements presented previously are true to the records and to the public (Matthew,
2015). When the accounting and the management body is concerned, it is their
priority to see that all the policies and the portfolios adopted by the company are
beneficial to the same and all the outcomes are satisfying that will ultimately help the
auditors to do their jobs without any hindrance and also to maintain the transparent
nature. All this is seen to affect the final financial report in a very positive manner. All
the records that are about to get disclosed in the financial reports must be true in
nature (BHP Billiton, 2017). It must be noted that the transactions and the related
assets along with the liabilities are all under the supervision and the control f the
management department. Also, the knowledge that an auditor holds is confined to the
one that the company shows up in the starting and the one gained during the process
of audit in the company. The maintenance of transparency of the records showed to
the auditor and the statistics shown in the financial report is the responsibility of the
management of the company (Gay & Simnet, 2015). It is the choice of the auditor if
he wants to take suggestions about the statistics and the structure of the financial
report and also have the choice to release and plan the financial report part by part as
per the availability of records from the side of the management (Roach, 2010). The
presentation of the financial report of a company can be said to be a true blend of the
records presented by the company along with the thinking and opinion of the
respected auditor. In the case of the auditors of BHP, it was seen that the auditors did
not take part in the structure making of the financial report or the establishing of
records for the audit and were only concerned with the detection of the material
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misstatements which were either caused by frauds or carelessness followed by the
company management (Pilbeam, 2009). This can give a very fair and clear idea about
the kind of work that both the management body and the auditing body do and the
marked difference between the working principle and priorities of both the bodies
working for the same company (Cappelleto, 2010).
Material subsequent events
In relation to BHP Billiton, there were some material subsequent events that incurred
after the date of reporting. The reason why subsequent events are referred to as the
material can be attributed to the fact that the same can have an influence on the
company’s performance if they had been reported earlier (BHP Billiton, 2017). BHP
announced an investment scheme of US$2.5 billion for development of its Spence
Growth Option. This included construction of a copper concentrator that can diversify
mine life of the same by fifty years. The company also approved a multi-currency
repurchase plan of bond with an international aggregate capitalization of $US 2.5
billion. Later, the company announced that they have enhanced the value of such
international aggregate cap up to US$2.9 billion (BHP Billiton, 2017). Furthermore,
another material subsequent event was that the company together with the
management and directors ascertained that its onshore US assets were non-core and
options to quit these assets were being effectively pursued. This material subsequent
event was a part of a continuing review of the company’s portfolio. Nevertheless, the
execution of such options on the part of the company could take slight time and as of
now, the company had also proved itself incapable of estimating the financial
influence of any future transaction (Wood, 2011).
Since these events incurred after the reporting date, they failed to possess any impact
on the company’s performance and financial statements as a whole. Based on the
effectiveness and importance of these events, it can be noted that if these events had
incurred prior to the reporting date, the financial data and overall organizational
performance of the company would have been completely different (Roach, 2010).
However, the effect of these events can be noted in the upcoming reporting period
wherein the performance and financials will be surely affected.
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The effectiveness of the auditor’s material information
After the presentation of the financial report by the auditors of the BHP who said to
have prepared it with honesty and as per the Corporation Acts of 2001, it didn’t feel
like the same and there were some loopholes and lacking in positiveness and
transparency was seen which have not been present if the above lines spoken by the
auditors were true enough. The reason behind the above loopholes can be the fact that
the auditors only paid attention only to some of the major key points of the rules and
explained these actions perfectly an in detail while neglecting the others without any
reason. It was also seen that the points that were selected to be depicted and explained
in the financial report were chosen without any base and they utterly failed to give the
bases for which they have or had selected only those particular points (Wood, 2011).
But it must also be seen that among such major mistakes, they did one thing perfectly
and that was the explanation of the process that was taken into action for the adoption
of those particular rules which displayed a positive side of the auditing body as well.
It must always be kept in mind that when investments are made in a company then
they are from the core parties and also from the one who is looking for surplus profits
and in such a case all the records about the assets liabilities and transactions of the
company must be fir and clear in nature and also perfect explanations should also be
saved for them for future references (BHP Billiton, 2017). But as per the financial
report which was presented by the auditor this was the major key point that was seen
to be out of the consideration books and was not included in the report which causes
the hindrance for the investors to make the exact decisions. The carelessness of the
auditors about the fact that not to consider the key points is clear but they have
provided additional and extra footnotes and highlighted the working of the same in
their financial reports. It is thus advised that the financial reports and the records
presented by the auditors of the company can often be misleading and the investors
who have been seeking profits only are to invest in the company with utter care an
only after making perfect and brave decisions (Baldwin, 2010).
Whether material information is under-reported or missing
It can be seen from the annual report of the company that when it comes to financial
statements, there has been provision of details regarding the notes to financial
statements but the company has offered proper footnotes to such information in the
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previous segments but it has not disclosed the same in the financial statements where
it was necessary to be disclosed. Footnotes can assist users in referring and enhanced
decision-making but the absence of such information can make them confused and
deteriorate their effectiveness in making proper decisions. Furthermore, the
accompanying notes to the financial statements of the group have not been properly
reported because the information provided can create complications for users in
decision-making. Besides, the statement of income reported by the company is
reported in a manner that can easily arise doubts in the minds of users. The reason
behind this can be attributed to the fact that there are two income statements disclosed
by the company (Baldwin, 2010). One is the statement of income for the year 2017
and the other is a statement of comprehensive income for the year 2017. In relation to
this, such additional details must form part of another segment and not in the financial
statements because these details cannot assist in the assessment of a company’s
performance. Furthermore, even though these details were necessary to be disclosed
in the financial statement, yet there are no footnotes that can allow users in taking a
valid decision.
Therefore, if the company has not disclosed proper footnotes in the earlier segments
and instead, have reported them in the financial statements, it would have been more
beneficial to the users in their decision-making process (Baldwin, 2010). Overall,
other material information is prevalent in the report that is a positive indicator.
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Conclusion
The audit control mechanisms of BHP Billiton are in proper place because the
auditors have identified all key audit matters that can assist in mitigating the risks of
material misstatements. Furthermore, the directors have ensured compliance with
statutory regulations like Corporations Act that sheds light on the fact that all the rules
have been properly followed. Besides, BHP has also disclosed material duties of their
auditors in addition to their provision of non-audit services that is a positive indicator
of risk assessment strategies on its part. Overall, the audit report and director’s report
have been projected effectively by BHP through the fulfillment of necessary reporting
guidelines.
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References
Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.
BHP Billiton. (2017). BHP 2017 Annual report and accounts.
https://www.bhp.com/media-and-insights/reports-and-presentations [Accessed 9
September 2018]
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia.
AFAANZ, Melbourne
Gay, G & Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants
for In-House and Outsourced Internal Audit Positions: Views from External Auditors.
Accounting Horizons. [online] 30(1), pp. 143-156. Available from
https://doi.org/10.2308/acch-51309 [Accessed 9 September 2018]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
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
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online].
Available from: http://www.financepractitioner.com/auditing-best-practice/threats-to-
auditor-independence-and-possible-remedies?full
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 9 September 2018]
Pilbeam, K. (2009) Finance and Financial Markets. Palgrave Macmillan
Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.
Wood, D A. (2011) The Effect of Using the Internal Audit Function as a Management
Training Ground on the External Auditor's Reliance Decision. The Accounting
Review. [online] 86(6), 2131-2154. DOI: https://doi.org/10.2308/accr-10136
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