Auditing and Assurance in Australia: KPMG Case Study Analysis Report

This report provides a comprehensive analysis of a case involving KPMG, one of the Big Four accounting firms in Australia, and its audit of Discovery Metals. The report begins with an executive summary outlining the key issues, including misleading advice provided by KPMG regarding the share price of Discovery Metals, which led to significant financial losses for shareholders. The introduction sets the stage by highlighting the scrutiny faced by Big Four firms due to issues like conflicts of interest and threats to audit independence. The report then delves into the specifics of the case, detailing KPMG's oversight error in valuing Discovery Metals' assets and the subsequent class action filed by shareholders seeking compensation. The report also examines the level of assurance provided by KPMG and the nature of evidence collected. It further evaluates the remedies sought by regulatory agencies and Discovery Metals' stakeholders, particularly the shareholders. Finally, the report discusses the challenges and opportunities for audit firms in the post-Banking Royal Commission regulatory environment, including increased surveillance by ASIC and the need for greater transparency and independence in providing assurance services. The report concludes by emphasizing the importance of audit quality and the need for regulatory compliance to reduce errors and maintain public trust.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Question 1: Public Perception of the ‘Role of the Auditor’................................................2
Introduction.....................................................................................................................3
Answer to Requirement 1..............................................................................................3
Answer to Requirement 2..............................................................................................4
Answer to Requirement 3..............................................................................................4
Answer to Requirement 4..............................................................................................5
Answer to Requirement 5..............................................................................................6
Conclusion......................................................................................................................6
References.........................................................................................................................8

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Question 1: Public Perception of the ‘Role of the Auditor’
Executive Summary
This report shows that the main reason for KPMG coming under the scrutiny of
regulators is the delivery of misleading advice on the share price of to the shareholders
of Discovery Metals. The auditors of KPMG failed in using the audit insight correct
which contributed to the delivery of misleading advice to the client. Since shareholders
of Discovery Metals are the main affected stakeholders because of this advice, they
filed a case against KPMG by demanding the compensation. This also raises issue on
the conflict of interest and threat to audit independence for the advisory services to
Discovery Metals by KPMG.

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Introduction
The Big Four audit firms in Australia have been under major scrutiny for their
recent activities where they delivered inappropriate audit opinion based on inappropriate
audit findings. Reasons for this include aspects like conflict of interest, threat to audit
independence, involvement in providing non-audit services by these audit firms and
many others. The main aim of this repots is the analysis of an incident or case where
one of the Big Four audit companies in Australia came under scrutiny for its incorrect
audit findings. For this purpose, the case of Discovery Metals is selected where the
involvement of KPMG can be seen as the audit partner.
Answer to Requirement 1
KPMG that is considered as one of the Big Four accounting and consulting firms
in Australia had to face major regulatory scrutiny from the audit regulatory authorities for
its major oversight error in the audit of Discovery Metals. The main allegation on KPMG
was that it provided Discovery Metals with false advice through inflating the total value
of its principal assets by 40%. More specifically, the shareholders of the company filed a
class action against the audit firm for providing the misleading advice on a joint-venture
takeover offer for buying shares at $1.70 per share (afr.com, 2020).
As per the advice of KPMG to Discovery Metals, the company should not accept
the offer of the take-over for buying shares at $1.70 per share as the fair market value
of Discovery Metals’s shares were between $1.74 to $2.22 per share. However, in
actual, the market price per share of Discovery Metals at that time was $1.65 per share.
The shareholders of Discovery Metals rejected the offer based on KPMG’s advice. After
this incident, the share price of Discovery Metals dropped to $0.34 per share and the
company went into liquidation leaving noting to the shareholders (afr.com, 2020).
This particular incident indicates towards the oversight error of the audit firm
where the auditors failed in gaining an accurate and deep understanding of the market
conditions which contributed to the misleading advice. Moreover, providing advice on
take-over demonstrates the involvement of KPMG in providing non-audit services to

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Discovery Metals which might create conflict of interest by posing threat to audit
independence (Trotman & Duncan, 2018).
Answer to Requirement 2
Auditors provide their clients with three types of assurance on the basis of the
assessment of collected audit evidence. In case the assessment of audit evidence
shows the sign of no material misstatements, then absolute assurance is provided by
the auditors; when assessing the audit evidence demonstrates the presence of distant
likelihood of the presence of material misstatements in the financial statements, then
reasonable assurance is provided to the audit clients; and, when examination of the
audit evidence indicates towards the high possibility of the presence of material
misstatements, then limited assurance is provided by the auditors to its clients.
The case of KPMG and Discovery Metals demonstrates the issue of absolute
assurance to the client by the auditor because the audit firm was confident on its advice
and it did not mention the likelihood of the presence of any doubt about its advice to the
client. KPMG was sure that there was nothing incorrect about their valuation of
Discovery Metals’s shares (Brown-Liburd & Vasarhelyi, 2015).
Conclusive nature of audit evidence is connected with providing absolute
assurance and this is such type of evidence that does not need any additional enquiry
to become completed. Therefore, it can be said that KPMG likely to be collected
conclusive evidence on the share prices of Discovery Metals for providing the advice to
the company (Yoon, Hoogduin & Zhang, 2015).
Answer to Requirement 3
Since this particular wrong advice of Discovery Metals attracted major regulatory
attention, the regulators require certain remedies for this. They are discussed below:
1. It is needed for the audit firms to continue work on enhancing the quality of audit
while majorly reducing the number of instances where reasonable assurance
was not obtained by the auditors on the fact that there is not any material
misstatement in the financial statements. There is a greater need for audit firms

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to improve the present initiatives and to focus on new as well as sustainable
initiatives for enhancing audit quality (asic.gov.au, 2020).
2. Directors of the companies have the responsibility of financial reports and thus,
they are required to ensure that timely, useful and important information is
provided to the investors and other users of the financial statements through the
financial statements. This will reduce the dependence of the investors and other
users on the advice of auditors (asic.gov.au, 2020).
3. It is needed for the managements of the companies to produce information on a
timely manner that is supported by appropriate assessment and documentation
for audit. Therefore, the managements of the companies are needed to ensure
correct processes and records for supporting information in the financial
statements and to apply proper experience and expertise for producing quality
financial information and financial reports (asic.gov.au, 2020).
Answer to Requirement 4
Apart from the regulatory agencies, the stakeholders of Discovery Metals
required certain remedies against this action of KPMG. The main affected stakeholder
of this case is the shareholders. The remedies are discussed below:
1. The affected shareholders of Discovery Metals filed a class action against
KPMG for its misleading advice; and the ASX-listed Litigation Capital
Management provided the total fund for continuing the class action against the
audit firm with the aim to settle the claim. It was filed in a Supreme Court in NSW
(afr.com, 2020).
2. The main aim of this class action by the shareholders of Discovery Metals
against the audit firm was to recover a total amount of $830 million. This
particular amount is the total value of the off-market bid to takeover (afr.com,
2020).
3. After the continuation of this class action, the verdict of the court went into the
favor of the shareholders of Discovery Metals and KPMG was instructed to pay
the amount of $830 million to the shareholders as compensation for its
misleading advice (afr.com, 2020).

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Answer to Requirement 5
The post-Banking Royal Commission regulatory environment has created certain
challenges and opportunities in providing assurance services and these are discussed
below:
Challenges
1. There has been key expansion in the Office of Enforcement of ASIC; and this
has increased its surveillance on the audit firms in providing assurance services
which is a key challenge (de Wit & Luck, 2020).
2. There has been major increase in the role of ASIC in the process of regulatory
reforms for the audit companies in Australia which increases the presence of
more regulations to comply for the audit firms.
3. Royal Banking Commission has handed over key powers to ASIC to recognize
and address audit misconduct by the audit firms in providing assurance services.
This creates challenge for the audit firms (Maxwell, 2019).
Opportunities
1. The presence of increased regulations has increased the transparency in the
delivery of assurance services to the audit clients.
2. Increased regulatory power of ASIC has reduced the possibility of misconduct in
providing assurance services to the audit clients by the auditors.
3. All these regulatory actions play crucial roles in enhancing the independence of
the auditors in providing the assurance services to the audit clients (Fu, Carson &
Simnett, 2015).
Conclusion
The above discussion shows that delivery of inappropriate audit findings based
on incorrect assessment of audit evidence is a serious offence for the auditors. It shows
incompetency of the auditors in the presence of conflict of interest and threat to
independence as KMPG was involved in providing advisory services to its client. In
order to reduce these types of inconsistencies in auditing, major regulatory steps have
been taken by the authorities like ASIC, Royal Banking Commission and others.

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Complying with these remedies helps in reducing these errors in auditing by increasing
the overall audit quality.

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References
Brown-Liburd, H., & Vasarhelyi, M. A. (2015). Big Data and audit evidence. Journal of
Emerging Technologies in Accounting, 12(1), 1-16.
de Wit, E., & Luck, K. (2020). The emerging threat of climate-related litigation for
company directors. Precedent (Sydney, NSW), (156), 45.
Download.asic.gov.au. (2020). Audit inspection report for 2018–19. Retrieved 5 April
2020, from https://download.asic.gov.au/media/5409276/rep648-published-12-
december-2019.pdf
Fu, Y., Carson, E., & Simnett, R. (2015). Transparency report disclosure by Australian
audit firms and opportunities for research. Managerial Auditing Journal.
KPMG faces class action over 'misleading' advice to Discovery Metals.
(2017). Australian Financial Review. Retrieved 5 April 2020, from
https://www.afr.com/companies/professional-services/kpmg-faces-class-action-
over-misleading-advice-to-discovery-metals-20170616-gws88n
Maxwell, C. (2019). Strategy for engaging with regulators. Governance
Directions, 71(7), 367.
Trotman, A. J., & Duncan, K. R. (2018). Internal audit quality: Insights from audit
committee members, senior management, and internal auditors. Auditing: A
Journal of Practice & Theory, 37(4), 235-259.
Yoon, K., Hoogduin, L., & Zhang, L. (2015). Big Data as complementary audit
evidence. Accounting Horizons, 29(2), 431-438.