Auditing Standards and Key Audit Matters: A Report Analysis

This report provides a comprehensive analysis of audit and assurance services, with a specific focus on the impact of the global financial crisis and the subsequent development of auditing standards. The report examines the rationale behind the introduction of ASA 701, 'Communicating Key Audit Matters,' and its objective to enhance transparency in financial reporting. It also explores the revision of ASA 570 concerning an entity's ability to continue as a going concern. A case study of BHP Billiton Limited is included to evaluate the effectiveness of reporting key audit matters in the independent auditor's report. The report highlights the importance of these standards in improving audit quality and providing stakeholders with more relevant information for decision-making. The analysis covers the identification of key audit matters, their significance, and the procedures used to address them, offering a detailed understanding of how auditors assess and report on critical financial aspects.

Running head: AUDIT AND ASSURANCE SERVICES
Audit and assurance services
Name of the Student
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Author Note

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Executive summary:
The paper is developed to gain an insight into the auditing standards that is developed in the
rouse of global financial crisis. The rationale behind introducing auditing standard 701 is
researched providing an in depth explanation of the standard and its objective. Moreover, the
revision of the standard ASA 570 with respect to the entity capability to continue sustain also
been discussed. In this regard, a listed entity from the mining sector has been selected for
evaluating the efficacy of reporting the key audit matters in the independent report of auditor
or in the financial report. Introduction of the reviewed auditing standard is intended to bring
an perfection in the overall quality of audit and enhancing the transparency.

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Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Evaluating the revision of ASA 570:.........................................................................................3
Explaining the rationale for the new auditing standard ASA 701:............................................5
Evaluating the efficacy of reporting of key audit matters of BHP Billiton Limited:.................6
Conclusion:................................................................................................................................9

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Introduction:
In this study, a critical evaluation of the key audit matters presented in the
independent auditor report of one of the companies from either banking or mining industry
from the ASX (Australian stock exchange) has been elucidated. The auditing standard that is
“ASA ASA701 Communicating Key Audit Matters” has been incorporated to provide the
analysis. In addition to this, the revision of the standard ASA 570 has also been explained by
identifying the potential issues associated with entity’s capability to continue sustain. The
chosen organization for the purpose of analysis is BHP Billiton Limited that has it’s
headquarter in Melbourne, Australia. Financial year 2019 marked the solid performance of
the company that made it confident about the long term outlook. Over the past few years,
organization has generated strong cash flow that is used for delivering strong return to the
shareholders and attract growth projects. Auditing of the financial statements has been
conducted by the auditors in accordance with the requirements of the professional code of
conduct and corporation Act of Australia, 2001 (Carson et al. 2016).
Discussion:
Evaluating the revision of ASA 570:
Auditing and Assurance Standards Board (AASB) issues the the Auditing Standards
according to the rules and regulations of the Australian Securities and Investments
Commission Act 2001, Government of Australia. ASA 570 states the Auditing Standards, its
requirement and implications relating to Going Concern. The revision in the ASA 570 shows
the recent development in the Auditor’s Reporting in accordance with the International
Auditing and Assurance Standards Board. Going Concern is an accounting concept which
means the firm can continue its operations indefinitely as it has resources to maintain its
ongoing operations or is making a good volume of profit to stay afloat and avoid bankruptcy.

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On the other hand, ASA 701 deals with “communicating of Key Audit Matters (KAM) in the
Independent Auditor’s Report.” ASA 701 contains the Matters that is significant to the audit
but has been enacted as per the legal environment and business scenarios prevalent in
Australia (Tiron et al. 2018).
The ASA 570 along with the Corporations Act of 2001 mandates the management to
conduct an assessment of the entity’s capability to sustain and explicitly state the conclusion
in the financial statement along with the formal statement of the solvency of the entity. The
auditor then has to check the disclosures made by the management and express his opinion
through an Audit Report. The primary responsibility of the Auditor concerning the
implementation of the ASA 570 is to find and secure sufficient audit evidence pertaining to
the management’s preparation of financial statements using Going Concern concept of
accounting and then expressing his unbiased opinion on the financial statement pointing out
any material misstatement if any exists through the Auditor’s Report. The main objectives of
the auditor relating to ASA 507 are a collection of a proper and significant amount of audit
evidence, pointing out any material misstatement evident in the financial statement if any and
finally reporting in pursuance of ASA 507. There are numerous requirements for an auditor
to follow while performing the audit under ASA 507; the primary requirement is that while
assessing the financial statements for risks that is prepared by the management in conformity
with the Going Concern concept, the auditor should ensure that all the conditions that may
create a doubt or can affect the financial statement materially relating to the company’s
aptitude to carry on as ever running has been complied with, under the provisions of the ASA
507 (Knechel and Salterio 2016). It also states that, if an assessment of risk has already been
done, then the auditor should discuss with the administration regarding the inherent risk
identified if any, and what are the steps taken to mitigate such risks and in the absence of

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such evaluation, auditor is required to collectively identify the inherent risks if any and
inform the management about the same.
Explaining the rationale for the new auditing standard ASA 701:
ASA 701 was developed to improve the quality of audit by enhancing the
communication of the information between the management and the users of the financial
statements. It is issued in conformity with the international standards prescribed by the
International Audit and Assurance Standards Board and the International Federation of
Accountants. ASA 701 applies to both yearly as well as half-yearly financial statements.
Application of this particular standard is done after or on 15th December, 2016 and for the
audit of the financial report of the entity at the end of financial year. As per ASA 701, the
Independent Auditor is required to critically assess both the matters to be communicated as
well as assess the format of the communication. Key Audit Matters are those matters where
the professional competence and prudence of auditors are most remarkable and noteworthy in
the process of an audit of the financial statement. ASA 701 requires that such matters should
be communicated through the report to maintain transparency about the financial
performance. Disclosure of such additional information helps in enhancing and building
transparency and facilitate understanding of issues and things which are of material
importance according to the professional judgement of the Independent Auditor (William et
al. 2016). The key decisions taken and resolutions passed by the management and their
implications on the firm as a whole regarding the audited information is communicated. The
Key Audit Matters thus forms a crucial part of the decision-making process of the existing
investors and other stakeholders as well as for the potential investors and lenders (Sirois
2018).

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It is required by the auditor under the application of ASA 701 to ascertain key audit
matters after a thorough analysis of the financial information’s and finally making the users
aware of those matters through the Auditor’s Report (Auasb.gov.au 2020). Some of the items
that should be incorporated while informing on the matters of significant importance to audit
are
 The auditor should devote his attention while analysing both the areas involving a
higher proportion of management judgement as well as the estimates of accounts
which has been previously identified as having some material misstatement (Segal
2017).
 Areas of higher potential risk should be focused more, especially relating to material
misstatements and areas of possible window-dressing.
 The impact on the audit procedure should be portrayed by the auditors in the relevant
period relating to the audit of the events significant in the auditor’s judgment (Mock
et al. 2018).
ASA 701 was developed out of a revision on ASA 570. ASA 570 only covered the
Going Concern concept of accounting and its implications whereas ASA 701, which is an
improved revision of ASA 570 contains the matters that are of great significance to the
stakeholders to know and form their individual opinion relating to their involvement with the
firm (Christofferson and Grönberg 2018). So, it can be concluded that ASA 701 is an
upgraded version of ASA 570 but not a replacement of it.
Assessing the efficacy of reporting of key audit matters of BHP Billiton Limited:
In this section, the efficacy of reporting of the significant matters of BHP Billiton
Limited in its independent auditor report has been critically assessed. Such assessment has
been done to evaluate whether the auditors has effectively represented such matters that

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assists people in their process of making financial decision. ASA 701 mandates the
announcement of the identified significant audit matters in the auditor report of the reporting
entity. That is the auditor is responsible to make the communication of such matters and the
judgement made for the assessment. The key audit matters are the most significant matters in
the audit of the financial statements of the entity and any risk of material misstatement
associated with such accounts should be assessed by auditors (Dogan and Arefaine 2017). It
has been found from the financial report o BHP Billiton Limited that the key audit matters are
summarized in details that have formed the basis of their audit opinion. Moreover, disclosure
of such information is done in the decreasing order of significance to the overall audit. In
addition to this, according to the requirement of the EU public interest entities, the key audit
procedures used for addressing the matters has also been outlined. The procedures undertaken
to perform the evaluation of financial statements forms the basis of results along with
addressing the key audit matters (Barac and Williams 2016). No separate opinion on such
matters are made and audit opinion is done based on the overall information.
For each of the accounts that has been identified at the risk of materially misstated are
considered to be the significant matters and such matters are addressed by performing
primary procedures. The sustaining of the organization was not identified as the key audit
matter and the auditor has not reported anything in this regard. Items identified to be
suspected or actually noncompliance that do not have adequate significance in the audit
process is referred to as key audit matters. In context of the auditors presenting the opinion as
a whole, it is important to evaluate the key audit matters and document it in the financial
report of the organization. Therefore, from this discussion, it has been found that the auditors
of BHP Billiton Limited have communicated such matters and have formed an audit opinion
having determined the key audit matters (Bhp.com 2020). That is the auditors have
determined the matters seeking significant attention when performing audit.

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Some of the matters of significant importance to audit as identified by the auditor
includes Samarco dam failure, non-current assets impairment, rehabilitation and closure
provision and taxation. Assessment of materiality relating to failure of Samarco dam is done
by evaluating the accounting treatment and challenging the judgment in assessing the key
assumptions. With regard to non-current assets impairment, the possible indicators of
impairment is assessed and their recoverable amount is evaluated (Iwanowicz and Iwanowicz
2019). Addressing of this item as key audit matter has been done by evaluating the key
inputs, performing sensitivity analysis and testing the internal controls. In addition to this,
rehabilitation and closure provision is assessed for the complexity of the judgment of auditor
and significant provision size. Expenses related to income tax is also considered to be a
significant item in audit and the assessment has been done by evaluating the interpretation of
the tax law of the group and performing the assessment of the provisions. Non-current assets
ascertained for the impairment and has been identified for the assessment of the evaluation of
recoverable amount and indicator of impairment (Bhp.com 2020).
All the key audit matters identified by the auditors are disclosed and they are
addressed using different primary procedures adopted for the different accounts identified. In
addition to this, auditors also adopted some additional procedures for evaluating the accounts.
Taxation risk is another identified key audit matter for which the calculation of uncertain tax
matters of the groups is identified. As a part of the risk evaluation, it has been ascertianed that
there’s a high degree of uncertainty in estimation having wide reasonable outcomes
(Bhp.com 2020). From the overall analysis of the facts presented about the key audit matters,
it is inferred that the company conforms the requirements of ASA 701. As per the
requirement of para A31 to A33, the annual report presents a separate section disclosing the
key audit matter and provides a detailed description of the individual key audit matter in
reference to para A34-A38 of ASA 701 (Mališ and Brozović 2016).

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Auditors have also set materiality that has been determined by setting benchmark and
this has been considered to be the principal considerations in assessing the financial
performance of the entity (George and Melinda 2015). Furthermore, it has been ascertained
from the financial report that the auditor of BHP Billiton do not have anything to report on
the aspect of going concern. Analysis presents the fact that there do not exist any substantial
uncertainties impacting the entity’s capability to sustain. Auditors are entitled to make
reporting on the existence of material uncertainty if any that impacts the going concern ability
of entity by concluding on the appropriateness of the conclusion made by the directors.
Auditors considered some of the factors while evaluating the conclusion made by director.
These included business model of the group, inherent risk and also analysing the impact of
Brexit on the entity’s ability to sustain. All such identified risks have been evaluated for
making conclusion on their significance and requirement of the additional procedures. It has
been concluded in this regard that the entity’s ability to sustain was not identified as a matter
of significant importance to auditing (Fornelli 2016).
Conclusion:
The study elucidates the introduction of ASA 701 emphasizing on the matters
significant to audit and mandates its disclosure in the report of the listed or reporting entity.
In addition to this, the reasons that resulted and caused the board to revise the going concern
standard ASA 570 has also been discussed. ASA 701 intended to improve the quality of audit
and enhance the transparency of the information by communicating. The detailed analysis of
the facts presented in the report of BHP Billiton Limited concerning audit have found that
there is effective disclosure of significant matters in the financial report of the company. The
requirement of this particular standard of providing a detailed disclosure has been fulfilled by

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the auditors. Therefore, the users of the financial report are offered with greater transparency
concerning the facts and facets of the audit that has been performed.

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