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Key Audit Matters in Independent Auditor’s Report

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Added on  2023/03/20

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This report discusses the importance of key audit matters in the independent auditor’s report and their role in enhancing transparency and quality of audit information. It focuses on the new auditing standard ASA 701 and its compliance in the mining industry, using examples from BHP Billiton and CSR Limited. The report also provides recommendations for auditors and concludes with the significance of communicating key audit matters.

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Key audit matters in independent auditor’s report

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Running Head: Report
Contents
Introduction.................................................................................................................................................2
About ASA 701...........................................................................................................................................2
Mining Industry...........................................................................................................................................5
Key audit matters for BHP Billiton.........................................................................................................5
Key audit matters for CSR Limited.........................................................................................................7
Analysis of new standards: ASA 701..........................................................................................................8
Recommendations.....................................................................................................................................10
Conclusion.................................................................................................................................................10
References.................................................................................................................................................12
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Running Head: Report
Introduction
This report is based on the critical analysis and evaluation key audit matters in the auditor’s
matter. This research will highlight the new auditing standard ASA701 and its compliance in the
context of the mining industry. The mining industry has been selected for this research and many
industries such as BHP Billiton, CSR limited and Alumina limited is taken as examples in ASX
100 listed companies. The main purpose of this research is to evaluate the efficiency of the
auditing reports and key audit matters in the independent auditor’s report (Commonwealth of
Australia, 2017).
About ASA 701
The development and implementation of the auditing standard ASA-701 came into existence
after the economic slowdown in the year 2008 and collapse of Lehman Brothers. According to
this new standard, it is mandatory for all the independent auditors of organization to talk about
the effective matters of concern to improve the quality of the audit information and enhancing
the transparency while preparing the financial statements and conducting the audit. Lehman
Brotherswere established in the year 1850 and it was a global financial service company.
Lehman brothers faced the largest bankruptcy in the history of the country because of the
economic slowdown and prices in the year 2007 and the company collapsed which results in the
unqualified audit. Young and Ernst were the independent auditors of Lehman and it is analyzed
that they were aware of the Repo policies and transactions but they did not communicate about
these transactions and the ongoing relations of the company with Hudson Castle because it helps
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in displaying these transactions as the sales of the company (E&Y, 2018). This raised the
questions for the organization in relation to the responsibility of the auditors in the
communication of the material facts. It is very essential for the preparation of material
misstatement and error free financial statement of the organization.
The collapse of Lehman Brothers and its bankruptcy situation give rise for the adoption of the
latest auditing standards ASA-701 which focuses on communication about the key matters of
auditing. This latest rule of auditing is the substitution of ASA 570 according to which,
information regarding any material uncertainty needs to be included in the reports for the going
concern basis of the organization. The auditors are assigned various jobs and tasks that result in
improving the overall efficiency of the organization. According to the Australian accounting
standards board committee (AUASB), the key audit matters are those areas that require attention
of the auditors as per their personal judgment and analysis and of great significance in the
financial reporting. The key audit matters are selected from the governance framework managed
by the organization. The adoption of the new standard is useful as it assists the organizations and
its important members of the top management to focus more on key matters and discussion of
those matters among the organizational member to maintain the consistency of the annual reports
(KPMG team, 2019).
The ASA 701 Standard of accounting states the commitment of the company and it shows the
recent developments and changes made by the IAASB (International auditing and assurance
standards board) in relation to the auditing reports. The standard ASA 701 involves the following
features:
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Mandatory for the key audit matter communication in the auditor's reports of the listed
and registered business entities.
Enables the independent auditors of various organizations to make decisions with regard
to auditing matters
Determines risks that need instant consideration of the auditors and communicates those
matters with the organizational management committees to take the corrective actions.
Auditors need to consider the risk areas and assess them as they can be important for the
overall growth of the organization.
Defines the methods that auditors need to adopted describe and communicate the
significant auditing matters
Analysis of the circumstances where the matter for auditing is not stated in the financial
reports of the business organizations
Provide full information regarding the documentation of the auditing procedures (KPMG,
2018).
The implementation of the latest ASA-701 standard is applicable to those organizations that
prepared the annual reports after the date of 15thDecember 2016. The aim of introducing this new
standard in financial reporting is to increase the public confidence regarding the effective
auditing procedures and financial statements. This new standard is very significant for the
investors as well because it provides better transparency about the auditor’s responsibilities and
insights into the essential auditing matters and actions taken by the supervisors or auditors
towards these matters. However, this will help the investors to take better decisions with regard
to the investment in the company. Therefore, the main purpose of introducing this new standard
is to present accurate information to the people with better disclosures so that the investors or
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other stakeholders can make a decision more efficiently and effectively. Another purpose behind
this new standard is that the organizations can check its compliance with standards set by IASB
(Kuan, 2018).
Mining Industry
The mining industry has been selected for this research and many industries such as BHP
Billiton, CSR limited and Alumina limited is taken as examples in ASX 100 listed companies.
The financial reports of the companies for the year of 2017 would be analyzed to understand and
evaluate the ways of the company to analyze and communicate about the auditing matters. The
annual reports for the year of 2017 have been selected. There are 26 publicly listed metals and
mining companies in the ASX 200 alone in Australia. The mining industries in Australia
constitute over 18% of the overall ASX200 index and every organization is involved into the
preparation of the financial reporting by following the Australian accounting standards and also
identifies the key audit matters for managing the risks in the mining industries.
Key audit matters for BHP Billiton
BHP Billiton is the second largest mining company after the Commonwealth Bank of Australia
on the basis of the market capitalization. The reports of the BHP Billiton Company also stated
some key audit matters which has a great influence on function of the auditing.
Valuation of assets
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According to the financial reports for the year 2017, it was analyzed at the auditors of a company
valued the assets because this constitutes to about 72% of the assets of the group. The annual
reports of the company reported that there are some of the materials weaknesses have been found
regarding controls and processes that engaged in the impairment of the assets. This material
weakness affects the valuation of the Assets. It is observed that the auditors of the company
followed a detailed process according to which the valuation of assets and its controls are
tested, the prices of commodity are evaluated and other factors also considered that may affect
the asset valuation in organization.
Taxation
Talking about the other key audit matter analysed by the auditors is the taxation. As we all know
that company is operating in many big countries because of which reason company have the
different structures for taxation. BHP Billiton Company is engaged in cross border selling of the
products because of globalization and business growth. Therefore, the auditor's needs to be very
careful while estimating the tax provisions, contingent liabilities and expenses. The auditors of
the company used many procedures such as testing of controls and also take assistance of
different tax specialists of the countries where the organization already set up its operations. The
auditors of the company also analyzed the consistency among different countries.
Samarco
From the financial reporting of BHP BillitonCompany, the auditor's has reported the company
losses because of the dam project failure. There are many accounting judgements has been made
that includes the determination of the legal status of a claim, disclosure of liabilities and legal
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obligation of the company. It is Observed that a high degree of uncertainty has been existing
which becomes the most significant part of the key audit matter. The auditors have identified
and assess the assumptions made by the company during the project of Marco. The auditors
analyzed that there is a needfor the proper level of disclosures and the provisions for better
transparency.
Provisions for Rehabilitation and closures of sites
The organization was engaged in the closure of the sites and rehabilitation provisions. The
reason behind the closure of the sites was that the cost of this transaction is high affecting the
overall financial results of the company so there is a need to review the future cash flow of the
company. The foreign exchange rates and the time value of money are also checked by the
auditors after the acceptance of the provisions for the rehabilitation and closure(mackenzie,
2017).
Key audit matters for CSR Limited
CSR is the major Australian Mining company that involves the production of building
production having a 25% share in the Tomago aluminum smelter. Some of the key audit matters
that analyzed from the financial reporting of CSR Limited are mentioned below:
Provisions for product liability
From the annual reports of CSR limited, the product liability amounting of $312.4 million has
beend recognized and it is subjected to many judgments. Auditors of the company have
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considered this as a matter of concern for the organization because of the size and complexity of
the assumptions used in determining this provision.
Asset valuation
The consolidated statement of the organization as on 31st March 2017 includes goodwill,
intangible assets and plants and equipments amounting $97.1 million, $46.7 million and $848.6
million respectively which is made up of cash generating units. It is observed that the
organization has recorded and valued these assets at high prices on the basis of assumptions of
inflation, forecast changes and growth rates. The auditors looked at this as an important matter
in auditing because of the involvement of the various judgments in the future cash flows of cash
generating units(Sutcliffe, 2017).
Analysis of new standards: ASA 701
As from above, it is analyzed that the mining companies like BHP Limited and CSR Limited
also presented required auditing matters which needs should be communicated and disclosed for
thebetter working of the auditing activities. According to the latest ASA-701 standard, it is
required by all the independent auditors of the organization to carry out the audit in compliance
with the Corporation Act 2001 and carefully assess all the important information with regard to
the financial statements for the company. The new standard highlights the responsibility of
independent auditors in the organization and how it is significant to share and covey the relevant
information regarding the auditing matters when presenting the report of independent auditors.
The latest ASA-701 Standard mainly focus on all the details that have been an independent
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auditor and it present the guidelines for the auditing matters communication with the investors
and other stakeholders of the company (Segal, 2017).
After conducting the analysis of the annual reports of mining BHPBilliton and CSR limited, it is
observed that there is a need to adopt this new standard because the communication about
auditing matters is essential as these matters affect the overall performance of organization. The
key audit matters of mining company stated that financial reporting includes some material of
uncertainty and a lot of judgments which has a great impact on the organizations.
Therefore it is observed that new standard ASA 701 and its adoption by the organization will
help in enhancing the organizational communication structures and also improve the
transparency of organizational auditing procedures.
From the analysis of the annual reports of mining companies, it is observed that the latest
standards of auditing are more focused towards the protection of investor’s interests because it
helps in creating awareness about the important matters of auditing reports. As per the new ASA
701 standards, the responsibilities of the independent auditors have been increased, so the
auditors will be able to provide the better version of the financial reports to all those individuals
that show interest in the organizational reports. In the reports of BHP Billiton and CSR Limited,
all the matters of concern are presented under heading of auditor’s independent report and clearly
discussed the area of concern and reason behind this audit matter. This will help the independent
auditors to communicate about the complexities and future cash flows for those people who want
to invest in the company (Bullock, 2017).
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Recommendations
It is suggested that all the auditors should include the relevant information regarding the key
audit matters and ensure that whether the organizational reports are in compliance with the
auditing standard ASA-701. It is very essential that auditors should understand their
responsibilities and effectively communicate about the key audit matters for the quality of the
audit process and bring about the transparency in the auditing procedures. It is recommended
that auditor should separately describe the key audit matters and present of clean and clear
information regarding the audit matters with governance. By doing this, the confidence of the
public can be increased by making them believe that auditors do not hide any significant
information and reports prepared by them are more transparent. Therefore, it is mandatory for all
the independent auditors of organization to speak about the effective matters to improve the
quality of audit information and enhancing the transparency while preparing the financial
statements and conducting the audit (IFAC, 2017).
Conclusion
It is very essential for the organizations to prepare material misstatement and error free
statements. The collapse of Lehman Brothers and its bankruptcy situation give rise for the
adoption of the latest auditing standards ASA-701 which focuses on communication about the
key matters of auditing. This latest rule of auditing is the substitution of ASA 570 according to
which, information regarding any material uncertainty needs to be included in the reports for the
going concern basis of the organization. The auditors are assigned various jobs and tasks that
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result in improving the overall efficiency of the organization. After conducting the analysis of
the annual reports of mining BHPBilliton and CSR limited, it is observed that there is a need to
adopt this new standard because the communication about auditing matters is essential as these
matters affect the overall performance of organization. The key audit matters of mining
company stated that financial reporting includes some material of uncertainty and a lot of
judgments which has a great impact on the organizations. Therefore, it is observed that new
standard ASA 701 and its adoption by the organization will help in enhancing the organizational
communication structures and also improve the transparency of organizational auditing
procedures.
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Running Head: Report
References
Bullock, L. (2017) Auditors reminded on crucial 2017 changes.
Commonwealth of Australia (2017) ASA 701 - Communicating Key Audit Matters in the
Independent Auditor’s Report - December 2015 (Cth).
E&Y (2018) Experience with Key Audit Matters, pp. 1-11
IFAC (2017) Communicating key audit matters in the independent auditor’s report, pp. 1-15
KPMG Team. (2019) Voices on Reporting - Special session: Key Audit Matters and new
standard on leases - Impact on technology sector.
KPMG (2018) New auditor’s report requirement - Communication of key audit matters, pp. 1-4
Kuan, D. (2018) Key audit matters:unlocking the secrets of the audit, pp. 1-24
Mackenzie, A. (2017) BHP Annual report 2017, pp. 20-85
Segal, M. (2017) ISA 701: Key Audit Matters - An exploration of the rationale and possible
unintended consequences in a South African.
Sutcliffe, J. (2017) CSR Limited Annual Report 2017, pp. 1-92
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