Analysis of Key Audit Matters and Going Concern in Financial Audits

This report delves into the critical aspects of financial auditing, focusing on Key Audit Matters (KAM) and the concept of Going Concern, as defined by auditing standards ASA 701 and ASA 570. It explores the rationale behind ASA 701, developed in response to the global financial crisis and calls for greater transparency in audit reports, specifically referencing the Lehman Brothers scandal as a case study. The report analyzes the application of these standards within the Australian mining industry, examining the audit reports of six major companies: BHP Billiton, Rio Tinto, Boral Limited, Alumina Limited, Bluescope Limited, and Evolution Mining Limited. The analysis covers key audit matters such as asset valuation, dam failures, and taxation policies, illustrating how auditors assess and communicate significant risks and uncertainties to stakeholders. The report aims to provide a comprehensive understanding of how these auditing standards are applied in practice and their impact on financial reporting and decision-making.

Key Audit Matter and Going Concern
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Contents
Introduction................................................................................................................................3
ASA 701- Communication of key audit matters to stakeholders...............................................4
ASA 570 Going Concern...........................................................................................................5
Lehman brothers holding Limited Scandal................................................................................6
Reporting of key audit matters in the mining industry..............................................................7
BHP Billiton...........................................................................................................................7
Rio Tinto Limited...................................................................................................................8
Boral Limited..........................................................................................................................9
Alumina Limited..................................................................................................................10
Bluescope Limited................................................................................................................10
Evolution Mining Limited....................................................................................................11
Conclusion................................................................................................................................13
References................................................................................................................................14
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Introduction
Financial statements are prepared for a specific purpose i.e. representing financial position
and performance of the company through in a summarised form to stakeholders involved in
operations. This type of information helps stakeholders to understand the performance of the
company and make relevant decisions. This type of objective cannot be achieved by financial
statements if the data provided in the financial statement is not accurate and relevant. In this
scenario, the role of the auditor is very important as auditors have special knowledge and
experience in the field of financial accounting that will help them to identify any kind of
material misstatement, errors or omissions in financial statements. Different auditing and
accounting authorities have stated that the quality of audit procedures adopted by large-scale
audit organizations are decreasing over the period of time (Reding et.al, 2013). This can also
be concluded on the basis of different accounting and corporate fraud such as Lehman
brothers holding scandal, Enron scandal, WorldCom scandal, etc. For protecting the interest
of shareholders Australian Auditing Standard board is focused on changing auditing
standards in accordance with the current business environment so that auditors can identify
any kind of material misstatement and communicate them to shareholders. Another
importance of these auditing standards is to make sure that sufficient information is
communicated to shareholders so that the process of decision making can be facilitated. The
main focus of this report would be on auditing standards in relation to going concern concept
and key audit matters communicated to shareholders (Eilifsen et.al, 2013). For the purpose of
practical analysis, key audit matters and going concern concept followed by auditors of six
large scale organizations operating in the Mining industry of Australia will be evaluated.
These organizations are Boral Limited, BHP Billiton, Rio Tinto, Alumina Limited, Bluescope
Limited and Evolution Mining Limited. All of these organizations are operating in the
Australian Mining industry. It is expected that this report will help in gaining theoretical as
well as practical knowledge about ASA 570 and ASA 701.
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ASA 701- Communication of key audit matters to stakeholders
The concept of communicating key audit matters to shareholders was the first introduced by
international accounting standards in the year 2015. The main purpose behind such an
introduction was to communicate the audit procedures used by a business organization to deal
with complex business transactions in the company. In this manner, shareholders will be able
to understand weather order to have taken sufficient measures to evaluate the accuracy and
relevancy of business transactions that can affect their decision-making process or not. In
addition to that, another objective of this standard was to improve the quality of audit
procedures to increase the level of accountability and transparency in the auditing process
(Council, 2013).
This concept was adopted by AUASB and AASB in the year 2016 and every audit
organization conducting an audit for ASX listed company was required to communicate these
matters to shareholders at the end of their audit report. Key audit matters can be defined as
the business transactions of business matters that are Complex and subjective in the judgment
of auditor's skill, knowledge, and experience. These matters will have a significant impact on
the business operations of the company and should be communicated to the shareholders in
the opinion of auditors.
This requirement in the audit of listed companies has increased the level of transparency and
accountability in audit procedures. Before the introduction of this auditing standard, auditors
were not required to provide any kind of additional information in relation to audit
procedures adopted by them for conducting an audit of financial statements. Only
requirement applicable auditors was to provide an audit opinion on whether management has
followed all the regulations and if financial statements are presenting the actual value of
business performance and position (Martin, 2013). With the introduction of ASA 701,
shareholders can understand the efficiency and effectiveness of audit procedures adopted by
auditors in the examination of complex business transactions.
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ASA 570 Going Concern
According to this auditing standard, on auditors are required to make sure that to the
management of the company has followed sufficient steps to make sure that to the concept of
Going Concern is followed while preparation of financial statements. According to the
concept of Going Concern every business, the organization has to evaluate whether there are
any negative factors that can affect the existence of business in the distant future. There are
various factors that can affect the existence of business in future such as any legal case filed
by the client that can affect the operability of the company. Another example of such factor is
compliance of a particular condition on the basis of which certificate of incorporation was
assigned to the organization (Carson, Zhang and Fargher, 2014). If such conditions exist in a
particular accounting period, then management has to prepare financial statements as if the
business organization is expected to go under liquidation in the near future. In such a
scenario, management will not prepare financial statements in the normal course of business.
The primary responsibility of ensuring that the financial statements are prepared in
accordance with the going concern concept lies with the management of the company. Audit
department and accounting department should ensure that the going concern concept is
evaluated at the end of every financial year. Auditor of the company is responsible to identify
whether management has followed requirements of auditing standard and another accounting
concept during the financial year under consideration (Sanderson, 2014). One of such
accounting concept is going concern concept and specific rules and regulations are described
in Australian Auditing Standard 570 issued by AUASB.
Management and auditors of all the three business organizations under evaluation i.e. Rio
Tinto Limited, BHP Billiton and Boral Limited has followed the requirement of ASA 570.
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Lehman brothers holding Limited Scandal
Impact of accounting and corporate scandals on rules and regulations in auditing and
accounting of business organization is very high. Over the period of time, it can be evaluated
that significant changes in accounting and auditing standards have been brought in by
different authorities due to the negative impact of accounting standards on investors. One of
the most important legislators applicable to the business organization was Sarbanes Oxley act
2002. The main objective of this legislature was to develop a Public Company Accounting
Oversight Board to make sure that business practices of accounting and auditing firms were
in the interest of shareholders and other stakeholders (Adu-Gyamfi, 2016). Accounting
scandals in WorldCom and Enron were the primary reason for introducing this legislation.
The bankruptcy of Lehman Brother holding Limited was one of the most significant events
that affected the governance of financial institutions and other business organizations. With
this bankruptcy accounting authorities all across the world realized that quality of audit
procedures used by auditors for identification of fraud, error, and omissions were decreasing
over the period of time. The primary reason behind the introduction of ASA 701 was to
improve transparency and accountability of auditors towards stakeholders.
After analysing the reason behind Lehman Brother holding bankruptcy it was identified that
management of the company was providing home loan on the basis of the value of the home.
In the year 2007, the real estate market of the United States of America collapsed
significantly. At the time of recovery the majority of loan, holders refused to make payments
as they did not have sufficient funds to make interest and principal payments (Staff, 2017).
The only option available to the financial institution was to recover the amount from the sale
of real estate that was kept as security by the company. Value of real estate decreased
significantly due to the US real estate market collapse that resulted in the bankruptcy of the
company.
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Reporting of key audit matters in the mining industry
This section of the report will evaluate the auditing standard of key audit matters from the
perspective of different organizations operating in the Mining industry of Australia. This
report will identify key audit matters disclosed by the auditor of these organizations
separately at the end of the financial year 2018. After analysing these key audit matters
conclusions will be made on the reporting requirements in accordance with ASA 701 and
whether auditors of the company has complied with all the requirements or not (Sirois,
Bédard and Bera, 2018).
BHP Billiton
1. Valuation classification and presentation of onshore US Assets
Management of BHP Billiton has certain mining assets in the territory of the United States of
America. There are specific rules and regulations that are required to be followed by a
business organization that has assets in foreign countries. These Assets and liabilities are as
follows-
Assets held for sale: US$11.9 billion (2017: US$ nil)
Liabilities held for sale: US$1.2 billion (2017: US$ nil)
On the basis of this evaluation, it can be said that these assets are generated by the company
in the year 2018 as they were nil in the year 2017 (Boral Limited, 2018).
Audit procedure- Auditor of the organization has analysed the procedure used by the
organization for initial recognition of these assets. In addition to that auditor has also
examined the rules and regulations that are used by business organization for fair valuation of
these at the end of the accounting period.
2. Samarco Dam Failure
One of the significant event in business operations of BHP Billiton during the year 2018 was
a failure of Samarco dam. In such business transactions, business organizations are required
to analyse the negative financial impact of such business transactions on the overall financial
position of the company (Christensen, Glover and Wolfe, 2014). Management of the
organization has recorded a loss of $0.6 billion dollars in the financial year 2018 (Boral
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Limited, 2018). This is one of the most material events in the year 2018 that is the reason that
it has been included as key audit Matters by auditors.
Auditor of the organization has identified all the policies and procedures that are used by
business organization for identification of losses. Controls over accounting and disclosure are
associated with the dam failure are also analysed by auditors to check accuracy and
relevancy.
3. Taxation policies
This organization has been operating in different parts of the world and in the United States
of America, the total tax applicable to this business organization has reduced from 35 % to
21% in the year 2018 (Boral Limited, 2018). Change in applicable rules and regulations is a
significant impact and it is important to analyse whether management has followed changes
in accordance with applicable legislatures or not. Total tax expenses recognized by the
organization and profit and loss account is $7.0 billion out of which $1.8 billion is payable at
the end of 2018 (Cordoş and Fülöp, 2015).
Auditor of the company has examined whether new taxation policies are effectively followed
by an organization in the calculation of tax or not.
Rio Tinto Limited
1. Impairment of intangible assets
According to applicable accounting standards, all the Assets of the organization should be
recorded at their fair value and not historical value. Management of the organization has
recorded a decline in value of intangible assets and plant, property and equipment during the
financial year 2018. The total value of intangible assets is $1095 million whereas the value of
plant property and Equipment is $56361 as reported in balance sheet ending 2018 (Rio Tinto,
2018).
Auditor of the organization has examined the financial model used for identification of the
fair value of these assets at the end of the financial year. Auditor has also compared the
policies and procedures used for such valuation with market standards for checking accuracy
and relevancy.
2. Provision for closed down, restoration, and environmental applications
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Total provision made by a business organization with respect to closed down restore ration
and environment application is $9975 million at the end of the financial year (Rio Tinto,
2018). This provision requires the business organization to make estimations in relation to the
timing of future cost associated with the restoration of the business organization. Therefore it
can be said that this provision will be based on experience and judgment of management
which is the reason that it has been included in key audit matters (Brasel et.al, 2016).
Auditor of the organization has analysed all the exemptions on the basis of which this
provision has been developed during the financial year 2018. Auditor has also examined the
legal obligation on the business organization for environmental application to examine the
accuracy and relevancy of the provision.
Boral Limited
1. Acquisition of Headwaters Inc.
Business acquisition is always a very important business transaction from the perspective of
internal as well as external stakeholders. This type of a business transaction will definitely
have a significant impact on overall investment of shareholders. There are specific rules and
regulations that are required to be followed by a business organization in case of business
combinations and these rules and regulations can be very complex as compared to normal
business transactions. in addition to that estimating the value of Headwaters Inc. is also an
important calculation that will result in goodwill or capital reserve for the company (Rio
Tinto, 2018). The complexity of these transactions is the reason that it has been included in
key audit matters. Auditor of the organization has examined the basic structure used for
calculation of purchase consideration for acquisition purpose. The auditor has also examined
whether this business transaction is in the best interest of shareholders or not.
2. Valuation of equity accounted for Investments
This transaction can be defined as the valuation of financial assets acquired by the
organization. As it is already discussed that the financial assets are required to be valued at
their fair value at the end of 2018 (Rio Tinto, 2018). According to applicable accounting
standards, it is important to conduct a fair valuation analysis of these assets at the end of
every financial year and record profit or loss in other comprehensive statements. Auditor of
the organization has examined all the rule and regulation followed by the organization for the
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valuation of financial assets. These rules and regulations are compared with normal valuation
practices in the mining industry.
After analysing the disclosures made by auditors in the above three business organizations
with respect to key audit matters, it can be said that all the rules and regulations are in
accordance with ASA 701.
One of the primary environment of this auditing standard is to disclose the key audit matter
along with the reason for inclusion in key audit matters and audit procedures used for
evaluating accuracy (Bédard, Gonthier-Besacier and Schatt, 2014). All of these
representations are properly provided by auditors of the above three organizations at the end
of the audit report.
Alumina Limited
1. Equity accounting for investment in AWAC
Management of Alumina limited has equity investment of 40% in equity share of AWAC i.e.
Alcoa of Australia Limited. Carrying value of this investment at the end of financial year is
$2.1 billion where is profit generated by this organisation is $653.5 million for the same
accounting period (Alumina Limited, 2018). Management of the organisation has used equity
accounting method for calculation of profit generated by this organisation which is in
accordance with Generally Accepted Accounting Principles. There are various rules and
regulations that are required to be followed by this organisation in using equity method which
is the reason that it has been included in key audit matters.
Auditor of the organisation has evaluated all the Australian accounting standards applicable
on this valuation and compare it with the equity accounting schedule prepared by the
management. As AWAC is also operating in United States of America it is important to
evaluate US Generally Accepted Accounting Principles. Management has identified both of
these accounting standards and it is evaluated that there are no violations.
2. Impairment of investment in AWAC
Management has identified all the impairment indicators in accordance with AASB 136 i.e.
impairment of asset. According to their evolution there are no impairment indicators which is
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the reason that no impairment loss is recorded. Auditors have undertaken understanding of
equity indicator analysis methods of the company.
Bluescope Limited
1. Valuation of property plant and equipment
It is important for business organisation to follow accounting principles of impairment of
asset for calculation of carrying value with respect to non-current assets. All the non-current
assets including goodwill, property, plant and equipment are valued at their fair value at the
end of 2018. Management of the organisation has used discounted cash flow model for
estimation of impairment and recoverable value of plant machinery and equipment.
Discounted cash flow method is dependent on the experience in skills of management as it is
a subjective method. Due to its subjective nature it has been included in key audit matters.
Total value of plant equipment and machinery for Australian Steel products cash generating
unit is valued at $216 million (Bluescope Limited, 2018). Auditor as identify the financial
models and basic assumptions such as inflation rate used by business organisation and
discounted cash flow method.
2. Accounting for tax positions
This organisation is operating in Australia as well as United States of America which
increases the risk of wrong calculation of tax. Complexity of taxation policies is the reason
that it has been included in key audit matters. Company has recorded a reduction to tax
expenses for 2018 as $76.3 million (Bluescope Limited, 2018). Auditor has evaluated
different rules and regulations applicable in accordance with the taxation policies of Australia
and United States of America to examine accuracy of tax calculations.
Evolution Mining Limited
1. Valuation of assets held at Mungari and Cowal
Management has mining assets in Mungari and Cowal. Valuation of these properties are
expected to have a significant impact on group’s income tax position. This matter has been
included in key audit matters due to subjective nature and judgment involved in the
assumptions applied with valuations. Company has reclassified plant property and equipment
worth 92.5 million to mind development which resulted in amortization of mine development
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expenses of 2.9 million (Evolution Mining Limited, 2018). Auditor has read the valuation
report issued by external expert hired by the company for valuation purpose.
2. Impairment of asset
According to the principles of AASB 136 current assets are required to be valued at fair value
of assets at the end of financial year. Calculating impairment loss or profit in non-current
assets required estimations and assumptions on part of management that makes this process
subjective in nature. Impairment losses recorded with respect to one of the cash generating
unit of this organisation i.e. Mt Carlton are $148.6 million (Evolution Mining Limited, 2018).
This cash generating unit two of the companies operating in gold mining industry, therefore
auditor has examined the value of gold for evaluating the accuracy of impairment loss.
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Conclusion
On an overall conclusion, it can be said that these auditing standards will help to increase the
level of transparency and accountability in the auditing process. There are various business
transactions that are very complex in nature and based upon various assumptions and
estimations. Accuracy and relevancy of these business transactions are based on the accuracy
of assumptions and estimations taken by management. With the introduction of ASA 701
auditors will be able to communicate the process used by the business organization in
recording such business transactions. After analyzing the key audit matters disclosed by a
business organization in three different organizations operating in the mining industry, it can
be said that auditors are following all the disclosure requirements in relation to ASA 701. In
addition to the disclosure requirements in relation to ASA 570 are also followed with
deficiency by auditors.
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