Impact of ASA 701 on Key Audit Matters: Mining Industry Analysis

This report provides an in-depth analysis of ASA 701, focusing on key audit matters within the mining industry. It begins with an executive summary outlining the importance of auditing standards in promoting transparency and informing stakeholders. The report then delves into the standard's usefulness and examines how various mining companies, including Alumina Limited, Evolution Mining, CSR Limited, BHP Billiton, and Fortescue Metals Group, address key audit matters in their financial reporting. The discussion covers the impact of ASA 701 on financial statements, the auditor's role in identifying and reporting crucial issues, and the relationship between key audit matters and the concept of going concern. The report uses case studies of specific mining companies to illustrate how they handle matters like equity accounting, asset valuation, product liability provisions, and taxation. The analysis highlights the significance of these matters and their implications for financial reporting and decision-making, offering valuable insights into the practical application of auditing standards in the mining sector.

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Executive Summary
The Auditing Standards are largely designed to bring about greater transparency in the entire
business environment and make the customers aware about the different decisions which are
largely made by the firm. In line of this, it also needs to be understood that, the key audit matters
which will be discussed in the report with respect to the ASA 701, will seek to bring about an
early warning to the customers in regard to those issues which generally affect the firm in a
negative manner. Hence, the usefulness of the standard will be discussed which will then be
followed by the discussion on the mining industry and the manner in which they form their
report.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Analysis...........................................................................................................................................5
Alumina Limited..........................................................................................................................5
Evolution Mining.........................................................................................................................6
CSR Limited................................................................................................................................7
BHP Billiton................................................................................................................................8
Fortescue Metals Group.............................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
The Key Audit matters can be defined as the crucial matters which are largely identified
by the auditing team and may be crucial to be understood by the management as well. The
auditing team generally tends to arrive at this decision after they have reviewed the current
financials of the firm (Akathaporn, Lankton and Stivason 2018). The ASA 701 standard came
up with various closures on how the business must react on the key auditing matters which are
essentially identified and the manner in which in the latter stage of the business these key
auditing matters can become harmful instances for the firm. A similar case occurred with the
Lehman brothers and in line of this, the report sees to examine the reaction of the different firms
on the new standard and also aims to identify the manner in which a business may report it in the
accounting statement of the firm. The mining industry has been chosen for the purpose of the
analysis.
Discussion
The Australian Accounting and Auditing board continues to come up with the new
standards and related regulations so as to improve the overall accountability of the business. The
new standard ASA 701 has been designed in relation to the key auditing matters which hold
utmost importance in the business and in the future may turn out to become quite relevant in
nature (Arens, Elder and Mark 2012). The different auditors tend to identify the particular issues
after they have taken a thorough analysis of the different financial statements of the business
during the financial year review. The different features of the new standard and its overall impact
of the business may be understood to be as follows:

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 The section on the Key Audit matters of the company can be considered to be extremely
crucial and must always be present in the books of accounting of the firm and should be
part of the independent auditing report of the firm.
 The auditor may be required to considerably undertake the analysis of the entire
statements and identify the decision making to be made in the inclusion of the matters in
the report (Griffiths 2016).
 The key auditors hold the duty to associate the pay and the risk as related to those areas.
It is the judgement of the different key auditors which has crucial role to play (Brasel et
al. 2016).
 If there exist any documentary requirements relating to the Key Audit Matters then it
must be relatively identified by the business.
 The 15th December 2016, was identified as a relevant date which could largely be used by
the firm in order to implement the key auditing matters of the firm (Knechel and Salterio
2016).
 Moreover, the entire process can be believed to bring about greater transparency in the
workplace.
Another concept which can be believed to be closely related to the concept of Key audit
matters is the going concern of the firm. In line of this, it becomes considerably important for the
firm to understand that if it wants to attain success in the long run of the firm then in such a case
it will be essentially required to consider the continuity of the business operations (Sirois, Bédard
and Bera 2018). The ASA 570 was relevantly designed to help the different auditors in
completing their overall business goals as well as responsibilities and to be successfully able to
ensure that the overall auditing is done in the view point of considering the firm as a growing

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concern. This means that, the firm has to be considered as a long term entity and in line of this, it
can be considered to be essentially crucial by the auditor to ensure that they reconsider the risk
associated with this and are also able to come up with solutions which help the firm in
continuing the operations in the long run (Tiron-Tudor, Cordos and Fülöp 2018).
A case similar to this, can be understood to be relating to the downfall of the Lehman
brothers who filed for the case of bankruptcy back in the year 2008 and had approximately $640
billion assets and $618 billion in debts. Moreover, it also needs to be understood that the
bankruptcy faced by the firm came as a huge surprise to the society as a whole as they did not
expect a big firm like that of the Lehman brothers come down in this manner (Vik and Walter
2017). The Lehman brothers begun its operations as a comparatively small firm as present in the
Germany and from that time onwards, the firm was able to successfully extend its business
operations in the long run. In line of this, it is crucial to understand that very often the auditing
team is largely blamed for the overall downfall of the company because they were unable to
identify the shortcomings and could not help them company in understanding those areas where
the company was not being able to perform considerably well.
Analysis
For the purpose of understanding the Key auditing matters and their relevance in the
books of accounts and the annual report of the firm, the mining industry has been chosen which
will assist in the identification of the different firms in the industry and the manner in which they
firms are required to adequately deal with the issue of auditing and analysing the matters related
to it.

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Alumina Limited
The key audit matters as outlined in the annual report of the firm can be understood to be
as follows:
Equity accounting for the investment in AWAC
The key audit matter which was identified by the firm in relation to the firm was the 40%
investment by the firm in AWAC. As the percentage of investment can be considered to be quite
high, it is largely understood that, the matter becomes questionable. To assess the completeness
of the investment and understand the complications. The auditors went under various tests which
helped them to identify the manner in which the operations were carried out
(Aluminalimited.com 2019). Through this, it was identified that the firm had followed all
standards adequately related to the US GAAP and the AAS.
Impairment indicator assessment for investment in AWAC
The Alumina Limited had made an investment of approximately 2.3 billion and hence, as
the amount invested was considerably high, the auditors went under an assessment of the
amounts invested and went to check whether the amount invested was impaired or not.
Moreover, they performed various tests and examinations which helped them to arrive at a price
for the same (Aluminalimited.com 2019). The overall value of the group was understood and the
auditors also went under a test which helped them to identify the overall market value and to also
identify the internal and external sources through which the value could be successfully
impaired. The case came out to be relatively clear.
Evolution Mining
Accounting for Ernest Henry Mine

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The accounting for the Ernest Henry mine is always taken as a key auditing matter
because, the acquisition which had been undertaken had a great financial value and in line of this
it can be considered to be rightful for the auditors to take into consideration this case and also
undertake the accounting treatment for the same (Evolutionmining.com.au 2019). Various key
assessments and documentation procedures were focused on in order to gain an understanding of
the case. Through the significant disclosures made, the judgements could be applied adequately
for the firm and this helped to ensure that the commodities were dealt with in the right manner.
The firm also analysed the revenue recognition policy which was made use by the different
auditors so as to assess the different terms relating to the transaction.
Recognition of deferred tax assets
The recognition of the deferred tax assets was taken to be as a key auditing matter
because the amount came up to approximately $58 million and this was recognized by the
auditors as a deferred tax asset case (Evolutionmining.com.au 2019). The auditing company
assessed the overall operations of the firm by assessing the reasonability of the taxable income
and valuating the overall balances of the deferred tax with others.
CSR Limited
Product Liability Provision
The auditing committee previously had recognised a product liability provision which
approximated to around $312 million and hence, they are respect to various judgements
(Csr.com.au 2019). Moreover, it also needs to be understood that due to the complexity as well
as the size of the provision, the issue was greatly audited by the firm to ensure that the business

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is performing in the right manner and that, the overall competence of the external experts could
be undertaken. The auditors also engaged in the overall revision of the assessments and engaged
in various enquires which helped to break down the different liabilities and engage in the
thorough assessment of the same.
Asset valuation
The asset valuation is often considered to be an effective part of the key audit matters and
is largely adopted by the organization as it assists in finding the overall impact of the application
of different assumptions like the growth rates, inflation and the forecast changes. The auditing
team undertook this matter as a serious one because it dealt with the cash flow of such related
assets. In addition to this, the value specialists also carried out the different procedures to
evaluate the process along with the management of the firm and helped to understand the
impairment of the firm`s assets (Csr.com.au 2019). The rates were carried out effectively on a
sample basis and hence, the impairment testing models were put to use by the firm. Hence, the
firm made an analysis of all the key matters as involved in the field of assets to keep a check on
the overall performance of the organization.
BHP Billiton
The following key audit matters were rightfully identified in the case of the BHP Billiton:
Asset valuation
When he overall valuation of the assets was considered, it was found that the firm was
suffering some material weakness in relation to this. The different assets formed approximately
72% of the assets of the entire group. In addition to this, it is required to be understood that,
various tests were conducted by the different key auditors which helped to test the overall

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success of the asset and related impairment (Bhp.com 2019). The commodity process of the firm
was analysed and forecasted so as to ensure that they understood the matter and exalt the overall
competency of the experts. It was realised that various other factors also have an impact on the
valuation of the assets and hence, were discussed accordingly.
Taxation
The taxation forms another crucial aspect of the firm and as the company operates in
different countries, it is important to consider that they are faced by considerably different tax
structures. The company engages in operations related to different borders of the firm and it is
for this reason that the auditors are required to be cautious in the provision of taxes and related
liabilities as paid by the firm. The procedures as undertaken by the firm include procedures like
the assessment and review of the different tax specialists and also understood and assisted the
consistency of the operations. Moreover, the closure and other related disclosures provided to the
investors was also largely determined.
Samarco
The organization had reported facing considerable losses due to the overall failure of the
dam project which they were working on. Hence, this brings about various audit considerations
to determine the overall legal status of the claims made and obligations which are required to be
met by the company including the contingent liability disclosures as present.
As there existed a considerable degree of the uncertainty which is present in the given
scenario and hence, the issue was taken up as a key audit matter. The policy which has to be
followed the firm to determine will be based on the key assumptions which have to be
undertaken by the organization. They were also required to provide a sense of disclosures and

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hence, when identified and analysed, it was largely understood that these were taken to be
acceptable.
Rehabilitation provisions and closures
As the operations of the firm comprises of getting involved in the restoring and
rehabilitation of the different locations as well as the sites and the frequency of such operations
can be understood to be relatively high, it is important to consider that the issue can be stated to
be a key audit matter whereby the operations tend to have an overall impact on the firm and that
it has a strong impact on the cash flows of the operations. To come up with a solution for this,
the firm will be required to gain an understanding of the mines and reserves and with respect to
this, the analysis was undertaken. In order to come up with a solution for the same, the time
value of money with the overall timing costs and related aspects were considered. The aspect
related to the foreign exchange rate was also taken into consideration and the provisions as
provided for them were considered to be acceptable.
Fortescue Metals Group
Revenue from iron ore sales
The Group had engaged in the sales of approximately $8335 million from the sale of the
iron ore and in line of this, it can be rightfully understood that it was chosen as a key audit
matter. The auditing approach which was chosen by the firm could be understood to be to focus
on the non-cash adjustments which had been accommodated as revenue of the firm. The auditors
premeasured the provisional sales to see to it that the deferred income had been accrued to the
particular group (Fmgl.com 2019). In line of this, it also has to be understood that the auditors
also engage in the price adjustment aspect and in relation of this, they were able to find it in

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consistency with the data on commodity. Various affirmations from the customers was also
obtained.
Financing of ore carriers
The Group had got into a special contract to get into an arrangement related to the
financial aspect of the firm. In this arrangement, it is required to be understood that the Group
will be required to receive funding and in line of this, it also involves a large amount of money
(Fmgl.com 2019). This is the reason, the matter has been taken up as a key audit matter. In order
to resolve the issue, the auditors checked the related transaction cost of the firm and inspected
the financial arrangements which were made between the different organizations.
Carrying value of the evaluation and exploration assets
The Fortescue Metals Group also recognised an asset with an approximate value of $813
million back in 2017 and hence, in line of this, they were able to engage in considerable
judgement by the different people as present. The auditing group also engage in various meetings
with the different group management and got into a dealing with the different specialists which
helped them to recognise whether the balance sheet was prepared in the right manner or not.
Additionally, the IBJV sites were visited to find the current status of the project.
Conclusion
Therefore, from the report it was rightfully understood that the Auditing standard of the
701 seeks to bring considerable clarity in the firm. It deals with the Key auditing matters as
involved in a firm and seeks to help the customers to figure out the clarity of the different
operations as involved in the firm. The report highlighted the different features of the standards