An Analysis of ASA 701 and Key Audit Matters in the Mining Industry

This report examines ASA 701 and its impact on financial reporting within the mining industry, focusing on key audit matters (KAM). The introduction highlights the significance of ASA 701 in providing stakeholders with crucial information, drawing parallels to the Lehman Brothers case to emphasize the importance of diligent auditing. The report delves into the importance of KAM, outlining its innovative characteristics and its role in enhancing transparency. The mining industry is then analyzed, with in-depth case studies of BHP Billiton, Rio Tinto, Alumina Limited, and CSR Limited. The report scrutinizes the key audit matters identified by the auditors of these companies, such as taxation, asset valuation, provisions for rehabilitation, environmental aspects and closure. The findings highlight the crucial role of auditors in assessing financial risks, ensuring accurate disclosures, and upholding corporate governance within the mining sector.

AUDIT & ASSURANCE

Executive Summary
In the present world, owing to the presence of innumerable transaction, corporates are bound
to make adequate disclosures to thrive in the market. This is because stakeholders require
appropriate information to make decisions thereafter. Thus, the introduction of ASA 701 has
been a boon to the stakeholders as it assists in offering relevant information about the key
audit matters. With the help of this report, the mining industry has been taken into
consideration and four prime players of such industry have been studied for better
understanding. Overall, this report is primarily based upon the key audit matters that are
analyzed by auditors of the companies during their audit processes.
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Contents
Introduction.......................................................................................................................................3
ASA 701 and the situation of Lehman Brothers.................................................................................3
Importance of KAM...........................................................................................................................4
Mining Industry.................................................................................................................................4
BHP Billiton Ltd..................................................................................................................................5
Rio Tinto Limited................................................................................................................................6
Alumina Limited.................................................................................................................................7
CSR Limited........................................................................................................................................8
Conclusion.......................................................................................................................................10
References.......................................................................................................................................11
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Introduction
In the case of Lehman Brothers, there were numerous financial issues that resulted in its
disintegration. Furthermore, many other corporates also encountered major problems and as a
result, countries on a whole suffered when their markets fell. In addition to this, the overall
community of auditors also witnessed a huge deterioration based on goodwill and reputation
because their functioning in the minds of people was badly affected. In other words, the audit
processes performed by auditors became suspicious in nature in the eyes of people because
the management of Lehman Brothers failed to undertake due care in fulfilling their roles and
responsibilities (Lapsley, 2012). Hence, it is very crucial for the auditors to exercise due care
while auditing the financials of an organization. Moreover, if any negligence is found in their
activities, the financials of such organization will be considered to be biased and hideous of
material information, thereby resulting in the concealment of real facts. In the years 2001-
2008, various organizations were in the stage of earning higher profits because they were
inclined towards investment in the mortgage markets (Teen, 2012). However, all their desires
were failed to be attained because prior attention was failed to be exerted towards the market
that was already hampered. Additionally, Lehman made another blunder by offering real
estate, private financing, and lending of leverages that resulted in the compromise of all its
assets.
ASA 701 and the situation of Lehman Brothers
The introduction of ASA 701 resulted in the emergence of various facts that are bound to be
reflected by a corporate in its financials. Moreover, the implementation of such a standard
can play a key role in improving the financials of the corporate, thereby, in turn, enhancing
its goodwill and image in the eyes of the public (Kruger, 2015). However, if the
implementation of such standard has not been undertaken, the corporate can encounter major
defeat because major facts will not be properly revealed to the stakeholders, thereby resulting
in a lack of proper communication and transparency on its part (Ruhnke & Schmidt, 2014).
Nevertheless, these were the major issues that Lehman Brothers had to encounter and that
resulted in its disintegration (Geoffrey, Joleen, Kelli & David, 2016). While preparing the
financial statements, the major negligence on the part of Lehman was first that it endeavored
to attain the maximum amount of profits during the period 2001-2008. In relation to this, it
borrowed an immense amount of loans so that a stagnant capital structure can be established
and the profits can be increased altogether (Kaplan, 2011).
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Furthermore, this unstable market scenario assisted the company to operate in the mortgage
market and provided it an opportunity to function in other investment segments. Additionally,
the firm also started investing in various scandalous portfolios so that it could maximize its
profits and because of these crucial factors went ignored by it, thereby resulting in major
complications (Moroney & Trotman, 2016). Secondly, the organization was successful in
attaining billions of dollars in the form of loans so that the same could be invested in risky
opportunities that altogether backfired in the upcoming tenure (Manoharan, 2011).
Nevertheless, the organization’s overall systems became compromised in nature since it took
a major risk of borrowing an immense amount of money for unfair profit motives
(Christensen, 2011).
Importance of KAM
As per Lakis & Masiulevicius (2017), ASA 701 has been a boon to the stakeholders of an
organization because it plays a key role in advocating about the commitment to align with the
latest developments and changes associated with reporting of auditors based on IAASB
(International Auditing and Assurance Standards Board). Such standard comprises of
innovative characteristics such as:
1. Allowing the auditors of several organizations to frame their decisions associated with
the fact whether any matter must form part of their report as KAM (AUASB, 2018).
2. Making the communication of key audit matter mandatory in nature especially for listed
organizations.
3. Granting an opportunity to the auditors to define the ways they can explain such KAM’s.
4. Ascertainment of ways an auditor can determine such KAM’s especially the ones that
are more significant in nature. Thereafter, they must also assess the risky areas that
necessitate more examination. Further, auditors’ judgment that comprises of effects of
material situations, management judgments, etc must also be incorporated in the auditors’
reports (AUASB, 2018).
5. Other documentation that must also form part of the auditors’ report in relation to KAM.
Mining Industry
This report intends to analyze the annual reports of some organizations and the area of
operation wherein these organizations operate is the mining sector. Therefore, all the
following evaluations or assessments have been undertaken based on the annual reports of the
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selected organizations. The top 10 organization in the mining industry comprises of BHP
Billiton, Rio Tinto, South32, Newcrest Mining, Fortescue Metal Group, Alumina Ltd, CSR
Ltd, Metals Bank, Hawkstone and Padbury Mining.
However, to attain an exhaustive understanding of the KAM in mining industry we are
dealing with the four major companies
BHP Billiton Ltd
The key audit matters that had a significant impact on the audit process are as follows:
Taxation
BHP Billiton Ltd functions on a wider scale and owing to its affairs in various countries, it
must account for different tax regimes. Therefore, the estimation of the company’s provisions
of contingent liabilities, tax, and other expenses was duly focused upon by the auditors since
they regarded the same as a key audit matter. For such purpose, they made attempts to
interact with tax professionals of different countries wherein BHP transacted with. In addition
to this, the auditors also decided to analyze whether the Group had taken initiatives for
adequate disclosures in their financial statements because if the same had not been present,
the stakeholders would fail to make proper decisions (BHP Billiton, 2018). In relation to tax
regimes, the auditors made attempts to examine and assess the different tax structures of
other countries so that the basis on which BHP had made provisions for its contingent
liabilities, tax, and other expenses could be properly ascertained.
Valuation of assets
Assets valuation is believed to be very significant in the current phase and in relation to BHP
Billiton, it must be noted that the provision for asset valuation made by the company has
assisted in determining the prevalence of key audit matters in its annual report. Nevertheless,
BHP itself had verified that there were material misstatements in its measures in relation to
asset impairment. Therefore, in order to analyze the prevalence of such issues in its control
processes associated with assets impairment, the Group had undertaken an enhanced
procedure wherein all its material controls utilized in the process of assets valuation had been
properly scrutinized (BHP Billiton, 2018). In addition to this, the Group had also ordered
proper analysis of its prices of commodities and other segments wherein it was believed that
the same could influence the valuation of assets on a whole.
Closures and provisions for rehabilitation
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BHP Billiton is primarily engaged in the closure, rehabilitation, and restoration of its sites
and the financial situation of the company has been vulnerable to the massive number of
transactions associated with such segment. Hence, it must be regarded as a key audit matter
in the annual report of the company by the auditors as the same has the potential to influence
the cash flows in the future. Furthermore, the employees’ operations involved in the closure
of mines had also been analyzed so that the timing expenses could be assessed and the life of
mines or reserves were also determined with the help of professionals. Nonetheless, in order
to ascertain the influence of rehabilitation, closure, and restoration of the company’s sites, the
rates of foreign exchanges and the time value of money were also examined by the auditors
(BHP Billiton, 2018). At last, the auditors had verified the fact that the provisions for
rehabilitation, restoration, and closure of sites had been properly executed by BHP Billiton
Ltd.
SAMARCO
BHP Billiton had to face immense losses during the year owing to its dam project of Samarco
that failed. Hence, it is crucial to carry out necessary operations in order to determine the
reason why such project witnessed a major failure. Nonetheless, the legal responsibilities of
the company, disclosures associated with respect to contingent liabilities, and the legal
scenario of its claims are also few segments that must be adequately assessed so that a proper
justification for the project failure can be ascertained. This is the reason why the auditors of
the company considered such segment to be a key audit matter and reflected the same in their
report (BHP Billiton, 2018). Additionally, the failure of the dam project of Samarco was also
assessed by means of implementation of a comprehensive policy. Moreover, the auditors also
assessed the appropriateness and prevalence of the disclosures established by both Samarco
and BHP Billiton. In addition, the prime assumptions that had been framed by the company
were also scrutinized by the auditors. Overall, the auditors made sure that the disclosure
levels made by BHP were appropriate and adequate.
Rio Tinto Limited
Restoration, environmental, and closure provisions
The Group had provisions amounting to US$9975 million for the year 2018 in relation to the
obligations associated with restoration, closure, and environmental aspects. The efficiency of
the obligations and the prevalence of long timescales are few traits of such provisions that are
required to be accounted by the management in anticipating the timing and quantity of future
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expenses during the computation of such provisions (Rio Tinto, 2018). Nonetheless, the
management must also recognize an effective rate in order to discount the future expenses to
their net present values, thereby assisting in the calculation of provisions. Further, the legal
liabilities were established associated with provisions of closure to undertake an enhanced
evaluation of the cost anticipations portrayed by the management. Nevertheless, the method
of restoration and rehabilitation was given enhanced focus and attention by the auditors.
Provisions associated with unspecific tax situations
Rio Tinto functions in several countries and therefore, the organization encounters immense
problems while dealing with regulations, laws, taxation policies, etc. Nevertheless, the
operations of the organization have been influenced owing to specific matters like
transaction-related matters, indirect taxes, and transfer pricing. The non-current and current
assets that are payable for the organization reported at $US2190 million till the year-end
December 2018 (Rio Tinto, 2018). Nevertheless, the organization had inculcated several
provisions in order to deal with all uncertainties associated with the amount of payable tax.
These provisions established by the organization are purely reliant based on the best interests
of the management that is closest to the value of payable tax amount.
Matters related to the transfer pricing of transactions between the commercial center of the
company in Singapore and other entities in Australia have been more emphasized so that
uncertainties can be dealt in a better way in relation to various tax regimes. Further, Rio has
also been holding continuous discussions on these aspects with the Australian Taxation
Office since the past year. Nonetheless, the organization is vulnerable to various unspecific
tax situations and thus, the management must choose such procedures so that the same can be
handled easily. Further, the latest updates on tax evaluations were analyzed by specific tax
professionals. In addition, the tax experts also analyzed the progress associated with the
ongoing complications. Moreover, in the findings of the tax experts, it was concluded that the
organization performed totally in alignment with the necessities of the domestic tax
authorities. It was confirmed at last that the organization had considered all the provisions of
tax.
Alumina Limited
The key audit matters that have been reflected in the annual report of the company are as
follows:
Assessment of impairment indicator for investment in AWAC
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The company’s investment had been reported at $2.3 billion and therefore, the auditors had
verified the total amount that had been invested and that can be impaired. Furthermore, they
also performed many procedures and presumed the long-tenure alumina prices for the same.
They also compared the organization’s value with that of the value of market and investigated
any external or internal sources utilizing the values which could be impaired (Alumina Ltd,
2018). However, the auditors found such evidence in the investment impairment by the
company.
Equity accounting for AWAC investment
The auditors of the company have examined the process they had followed for determining
the investment of forty percent of AWAC investment. Further, the auditors investigated the
accuracies and adequacies of the principle of US GAAP that was initiated by the
organization. Thereafter, they accounted for the differences that prevailed betwixt the
Australian Accounting Standards and US GAAP. Nevertheless, they regarded this as a key
audit matter because the investment magnitude framed by the company was also immense.
Besides, the complications associated with the conversion of values to US GAAP was also
accounted for by the auditors.
CSR Limited
Valuation of assets
CSR Ltd had measured its assets at a very massive price that was subject to the
implementation of various presumptions like growth rates, forecast variations, inflation, and
many more. Further, the company considered this as a KAM in the annual report because
there were significant judgments associated with the same that resulted in the expectation of
future flows of cash of assets. Besides, the auditors also made discussions with various
experts regarding the assessment of the process wherein the assets impairment and their
respective assumptions were also properly evaluated. However, few of the rates were also
verified by the auditors on a sample basis (CSR Ltd, 2018). They also made attempts to
evaluate the accuracies associated with the testing models of impairment that were utilized by
the organization. Therefore, in this way, the auditors of the company made all efforts to
scrutinize the scenarios that could significantly affect the company’s overall performance.
Provision of product liability
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There was a provision of product liability reported by the organization at an amount of
$312.4 million during the year and that was also reliant on significant judgments. The
auditors evaluated the entire situation and the complications associated with such judgments
(CSR Ltd, 2018). They also analyzed the independence of external professionals in this
regard because the same could have materially affected the financials of the company.
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Conclusion
With the help of this report, ASA 701 have been properly discussed in the light of recent
corporate requirements. This standard deals with Key Audit Matters that assist organizations
in enhancing their level of transparency towards the stakeholders. Further, the report also
plays a vital role in discussing the reason behind the implementation of such standard and
how it attempts to safeguard the interests of investors by making them duly aware of the key
audit matters focused upon by the auditors. Nevertheless, in order to satisfy the material
requirements of all stakeholders, adoption of such standard within the auditing framework
will be the need of the hour. However, the responsibilities and roles of an auditor are very
crucial in this regard because they can only instil trust and confidence in the minds of people,
thereby in turning maximizing the company’s goodwill on a whole.
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