Key Audit Matters in Mining: An Analysis Based on ASA 701

This report provides an in-depth analysis of the application of ASA 701, focusing on key audit matters (KAMs) within the Australian mining industry. It begins by discussing the rationale behind ASA 701, highlighting the Lehman Brothers case as a catalyst for change in auditing standards. The report th...Read More

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student:
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Author’s Note

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Table of Contents
Introduction................................................................................................................................2
Rationale of ASA 701................................................................................................................2
Principle of Going Concern.......................................................................................................3
Explanations of ASA 701...........................................................................................................3
KAMs of the Australian Mining Industry..................................................................................3
Downer Edi Limited...................................................................................................................4
Newcrest Mining Limited..........................................................................................................4
BHP Group Limited...................................................................................................................4
Evolution Mining Limited..........................................................................................................5
Rio Tinto Limited.......................................................................................................................5
Conclusion and Recommendations............................................................................................5
Reference....................................................................................................................................7

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Introduction
The process of auditing is undertaken by professionals for the purpose of analysing
and investigating the books of accounts so that the financial situation of the business is clear.
Auditing as a technique considers all the records which a business maintains and ascertains if
the same are fairly and accurately represented considering conceptual framework of
reporting. It is to be noted that the process of auditing is dynamic in nature and can make
certain degree of adjustments in order to meet the external environment requirements. One of
the developments which have taken place in the field of auditing is the implementation of
new standard of auditing which is ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. This standard was introduced to fill the gaps and also as a
replacement for of ASA 570 Going Concern. The assessment would be showing how the new
auditing standard can be applied for better presentation of the audit report which is
formulated by the auditor (William Jr, Glover and Prawitt 2016). The new standard requires
businesses to report on key audit matters which are difficult to verify and the same needs to
be shown in the financial report formulated by a business.
The assessment considers the mining industry for analysis and would be showing
discussion of reporting framework which is applied by some of the companies which are
classified under the mining industry. The discussion would be showing analysis of corporate
failures of Lehman Brother which was one of the main reasons for the introduction of ASA
701. Further analysis would be conducted with respect of principle of going concern and why
the same is important to be disclosed in the financial statements of a business.
Rationale of ASA 701
The case of Lehman Brothers is one of the reasons due to which changes was made in
the auditing framework which is followed by a business. The auditor for the company at that
time was not able to detect any malicious activities and this affected the financial
effectiveness of the disclosures which were provided by the annual report of a company. The
business effectively used the repo rate of the business for falsely strengthening the financial
position of the business which was shown to be $ 50 billion. The auditor of the company
provided the company with an unqualified report even though the auditor had detected the
activity. This can be regarded as a fault on the part of the auditor and thereby the same
impacted the position of the business in the market and thereby also impacted the brand
image of the entity. The company later faced its downfall and one of the reasons for the
downfall of the company was the financial crisis of 2008.
The introduction of ASA 701 meant changes in the overall framework of auditing as
the standard put forward certain restrictions on the auditor which needed to be followed in
certain situations and the auditor could not ignore reporting process for the business. One
other reason which can be identified for the changes which was made in the auditing
framework was the downfall of Lehman brothers. The auditing standard effectively aimed to
reduce the audit gap which existed in the case of Lehman brothers. The new standard
required the auditor to report every significant matter which is affecting or which might have
an impact on the operations and revenue generation activities of the business. The case of
Lehman brother shows effectively how the entities’ auditor failed to measure the risks which
is associated with the business and the fault of the management can also be identified which
was basically ineffective reporting of financial transactions (Xu et al. 2013). The scam
resulted in loss of reputation of the business and also affected the revenue generation process
of the entity. The newly introduced standard which was introduced aimed to avoid such an

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issue and therefore provided obligations on the auditors for effectively conducting the audit
process and also recognising key matters which can have an impact on the revenue. The
auditor also needs to identify all the items which can impact the daily operations of a
business. In addition to this, an obligation was placed on the auditor that would require the
auditor to make a list of all contingencies, treatments, assumptions which is related to the
reporting process of a business.
Principle of Going Concern
The guidelines which is stated in ASA 570 appropriately requires the auditor of a
business to analyse financial statements so that the auditor can ascertain if any misstatement
in the annual reports directly or indirectly impacts the going concern principle for a business.
In the circumstances the principle of going concern is impacted in any manner than the same
needs to be reported in the annual statements under key audit matters for the business.
During the financial crisis era of 2008, various companies which are involved in
operations faced significant losses which threatened the financial position of the business and
also the going concern principle. The going concern principle for a business was impacted in
the case of Lehman brothers who were not identified by the auditors and the auditor still
passed an unqualified report to support the financial situation of the business. Amendments
were also made to the existing going concern principle so that necessary amendments were
made to the financial statements and the auditor also needed to ensure that proper indicators
are present which would help in determination of going concern principle for a business.
Even the newly introduced ASA 701 allows the auditor to concentrate on going concern
principle as well while forming an opinion on the financial statements of any business. The
new standard would ensure that scandals such as Lehman brothers do not take place in future.
Explanations of ASA 701
The introduction of ASA 701 was mainly due to the commitment of AUASB for the
purpose of improving the quality of audit reports which are formulated by an entity. The
formulated standard was also introduced for the purpose of reporting of key audit matters
which can have an impact on the financial reports which is presented by a business. Some
regulations which were introduced as guidance for ASA 701 are effectively presented below:
 The key audit matters or activities which can have an impact on the reporting process
are shown in the auditor’s report of a business.
 The standard provides restriction on the auditor for applying due skills and care while
formulating key audit matters for a business and effectively bridging the gap in the
audit report formulated.
 Identification of crucial matters which are not presently impacting the reporting
process but have the potential to impact the revenue generation activities are also
presented.
 The standard provides assistance regarding what can be presented in the key audit
matters and how the same can be presented with appropriate data.
KAMs of the Australian Mining Industry
In order to conduct an analysis of the effectiveness of the auditor in terms of
recording of key audit matters of material industry, some of the companies which are listed
and classified under the mining industry have been selected so that appropriate analysis can

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be done (Zakari 2013). The application of the new standard and the disclosures which are
provided in support for the same is shown below:
Downer Edi Limited
The audit report for the entity shows that the auditor has followed the provisions of
ASA 701 and thereby covered certain key audit matters for the company which are mainly
related to revenue recognition and valuation process which is applied for ascertaining the
value of goodwill. The auditor plainly points out certain key estimates and judgements which
are of complex nature and thereby the same are included in KAM for the business. Some of
the techniques which are adopted by the auditor for the purpose of assessing involve sample
testing, application of data analytics techniques and adherence to relevant accounting
standards (Downergroup.com. 2020). The key audit matter for a business reveals that
valuation of goodwill is a matter of concern for which the auditor of the company considers
discount rate and the terminal growth rate along with estimated CGU for the item. In addition
to this, emphasis is also provided on impairment charges and amortization which might be
involved. The auditor also takes steps for the purpose of ensuring that the risks which are
associated with the business are properly managed.
Newcrest Mining Limited
The company is also involved in mining activities and the management of the
business has appropriately reported regarding the key audit matters which are associated with
the company. The two major KAM which has been identified by the auditor involves
estimation of non-current asset’s carrying value and the provisions which is made by the
business for mine rehabilitation. One other area which falls under the purview of Key audit
matters is the accounting process which is applied by the business for charging taxes. The
auditor conducts investigation on impairment charges, tax provisions and the impact the same
has on the financial position of the business (Newcrest.com.au. 2020). The auditor also finds
significant level of complexity in accounting for provisions which is maintained for mines.
The assumptions and estimations which are considered are not clear which impact the
reporting process for the business. The auditor has conducted detailed analysis of every
records for ensuring that the information which is acquired is accurate in nature. Further
assumptions relating to inflation rates, economic factors are also assessed by the auditor. The
auditor has presented the same in the financial reports under the section of key audit matters
for the year.
BHP Group Limited
The business of BHP Billiton ltd is recognised as one of the larger businesses
operating in the Australian Mining Industry and the annual reports of the company shows that
the auditor has adhere to the provisions of ASA 701 for the purpose of reporting key audit
matters. Some important key audit matters involves valuation, allocation and demonstration
of Onshore US assets, Samarco, taxation, estimation of mining provisions which is for
rehabilitation. Some of the issues which have been difficult for the auditor to measure is the
claims and assumptions which exists in valuation practices of the business (Bhp.com. 2020).
The auditor has taken steps for ascertaining the significance of the matters by applying test of
controls, checking impairment charges and assessing the adequacy of taxation practices in
terms of reporting for the business. One of the contingent liabilities for the business is related
to the court filed suit for damages in case of Samarco. Therefore, it can be said that the senior

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auditor has appropriately presented information of key matters in the auditor’s reports and
thereby fulfilled his obligations.
Evolution Mining Limited
The key audits matters are appropriately covered in the financial reports are important
and are considered to be important considering the provisions which is stated in ASA 701.
The key audit matters which are included in the auditor’s report involves assets valuation
case held in Mungari and Cowal and computation of carrying value of assets of the business.
The assets are represented in the balance sheet of the company and therefore the same have
the potential of impacting the financial position of the business in an adverse manner. The
business also has reserves kept aside for the purpose of developing mine development
projects which is also a complex matter to account (Evolutionmining.com.au. 2020). The
auditor would be applying the procedure of reviewing the valuation report and also taking
advices from external advisors. One other aspect which are covered in the key audit matters
for the business involves assessment of impairment indicators which are useful in
determination of values which are portrayed in the financial reports of a business. Therefore,
it can be said that the auditor has taken initiatives to comply with the provisions which are
clearly stated in ASA 701.
Rio Tinto Limited
Rio Tinto is considered to be one of the biggest companies which is currently
operating in the Australian Mining industry. The information related to KAM which are
incorporated by the auditor in the report include charges for impariments, provision for close
down, restoration and different environmental provisions which is created by the business for
effective reports. These items are highly complex in nature and the auditor has applied
various tests to the same so that appropriateness can be ascertained regarding the reporting
process of the business. The management of the company has applied judgements and
estimations in some of the key areas which need to be measured by the auditor. One of the
audit matters relates to judgements which are considered by the auditor for the purpose of
impairments and therefore the auditor has applied authentication tests for ascertaining CGU
and other impairment indicators (Riotinto.com. 2020). The notes to account section show that
the auditor of a business has applied detailed auditing practices for ascertaining the nature of
treatments and disclosures which are shown in the annual reports of the business. Another
key audit matter is the uncertainty which exists in determination of tax position of a business
and also the steps which the business has considered for computation of the tax amount
presented in the annual reports.
The nature of the analysis which is conducted for different companies shows that the
auditors are adhering to the new standard and following all its requirements. The auditors of
different companies have appropriately analysed different assumptions and on the basis of the
same highlighted the key audit matters for the entities. The auditor of business has
appropriately applied all tests and made significant efforts for finding the key audit matters
for a business and also ensured that the business has provided detailed disclosures for all the
complex treatments of the business.
Conclusion and Recommendations
The above analysis effectively shows the importance of ASA 701 in terms of auditing
and maintaining efficiency in the reporting framework of a business. The analysis above

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discussed cases of failure of Lehman brothers which was the immediate reason for
introduction of the new standard. As per the new standard, key audit matters needed to be
highlighted and reported separately for the purpose of ease of the investors in making
decisions regarding investment in a business. The recommendations which can be suggested
to the auditors for better adherence to ASA 701 are listed below in details:
 The auditor of a business needs to identify key audit matters for which proper auditing
steps needs to be identified and applied by the auditor of a business.
 The auditor needs to look for disclosures and if there is a requirement than the past
annual reports for the company can also be referred for ascertaining the reporting
process and different disclosures presented in the past.
 The auditor needs to exercise professional scepticism in case of every step and ensure
that the business has followed all regulations of reporting.

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Reference
Bhp.com. 2020. Annual Report 2019. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2019/
bhpannualreport2019.pdf [Accessed 22 January 2020].
Downergroup.com. 2020. Annual Report 2019. [online] Available at:
https://www.downergroup.com/Content/cms/media/2018/PDF/AGM/DOW0041_Annual_Re
port_2019_FA.pdf [Accessed 22 January 2020].
Evolutionmining.com.au. 2020. 2019 ANNUAL REPORT. [online] Available at:
https://evolutionmining.com.au/wp-content/uploads/2018/10/1858627.pdf [Accessed 22
January 2020].
Newcrest.com.au. 2020. 2019 ANNUAL REPORT. [online] Available at:
https://www.newcrest.com.au/media/annual_reports/Newcrest_Annual_Report_2019_1.pdf
[Accessed 22 January 2020].
Riotinto.com. 2020. 2018 Annual report. [online] Available at:
http://www.riotinto.com/documents/RT_2018_annual_report.pdf [Accessed 14 May 2019].
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
Xu, Y., Carson, E., Fargher, N. and Jiang, L., 2013. Responses by Australian auditors to the
global financial crisis. Accounting & Finance, 53(1), pp.301-338.
Zakari, M., 2013. Accounting and Auditing in Developing Countries-Arab Countries. Journal
of Economics and Political Sciences, Tripoli University, 16(10), pp.1-27.