ACCT3005 - Auditing Theory: Key Events in the Auditing of BHP Group

This report provides an analysis of the key events in the auditing of BHP Group for the year ended 30 September 2018, as identified by KPMG Australia. The key events discussed include onshore US assets and liabilities, the Samarco dam incident, taxation risks, and asset valuation. The report assesses the adherence of BHP's financial reporting to International Financial Reporting Standards (IFRS) and Australian Accounting Standards, focusing on materiality and full disclosure principles. It examines the audit procedures used to identify these key events and their potential impact on the financial statements, referencing relevant accounting standards to evaluate the reliability and relevance of the financial information. The auditor's responsibilities in ensuring accurate financial reporting are highlighted, and a comparison with the 2007 annual report is made to demonstrate the relevance of the financial report. The report concludes that the auditors were in agreement with BHP's report, finding no significant risk of material misstatement.

Key Events in the Auditing of BHP Group 1
KEY EVENTS IN THE AUDITING OF BHP GROUP
By (Student’s Name)
ACCT3OO5 Auditing Theory and Practice
Study Period 5, 2018
Course Coordinator: Chris Kandunias
University of South Australia

Key Events in the Auditing of BHP Group 2
‘Key’ Events in Auditing of the BHP Group for the year Ended 30 September 2018
I. Executive Summery
This paper was done with the major reference from the 2018 Annual report of BHP
group. The key events explained were obtained from the annual reports and news which were
listed by the auditing company KPMG Australia, which edited the financial statements of the
group. The key events reported by the auditors are: Onshore US assets and liabilities, Samarco,
taxation risk and Valuation of assets. The assignment considered the adherence of the report to
the International Financial Reporting standards (IFRS) and the Australia Accounting Standards.
It focused of the materiality and the full disclosure principle of the contingent assets and
liabilities with regards to the risks which the event could cause to the users of the financial
information when making decisions.
Keen analysis of the audit procedures were made to determine why the event was
considered as a Key event and explain clearly the reasons why the events stated could create a
potential material misstatement of the information in the financial statement. Relevant
accounting standards where made while assessing the relevant and reliability of the financial
information. The procedures helped to determine the key responsibility of the auditor on the
financial reporting of the company and relating the objective of the audit with the various tasks
followed in achieving such objectives. In all the Key events, the auditors were in agreement with
the report has it has not had a significant risk of material misstatement.
A comparison was made between the current annual reports with the 2007 in order to
justify the relevance of the financial report. Various Accounting standards were important were

Key Events in the Auditing of BHP Group 3
followed in preparing the financial statement and the work of the auditor is to ascertain that there
this matters did not deviate from the accounting principles and standards.
II. Introduction
In the auditing of the financial statement, the auditor considers certain specific events
which are suspected to have a risk of misstatement in the financial report of a client company. In
the audit report section in the financial report, the auditor, auditor provides the information on
the events which are considered to have a risk of misstatement in the financial information and
would change the decision of the users of the financial statement when the event is corrected.
(Firas Al-Dalabih, 2018 pp. 14).
After identifying the key events, the auditing team will, therefore, find evidence, risks
and the assertions that are pertaining the important effects which in one way or another leads to
the misstatement and misrepresentation of the financial statements. According to (Bychkova and
Itygilova 2015 pp 18) on justifying classification and financial misstatements, the auditor in
charge of the auditing operations need to state in the financial reports on the auditor's opinion
which will help the users of the financial statement to believe in the information presented by the
many through the financial statement reporting.
The critical events listed by the auditor, KPMG Australia on the audit report of the
financial statements of BHB Bilton Pcl helps the auditor to have with a substantive procedure on
the auditing of the financial statements. Imperatively, the auditor matters in the current year
which have an impact on the; allocation of resources, and the company’s strategy the financial
matters. In the list, the auditor is required to list the key events in with reducing importance
(Shchadilova 2015 pp 50). The key matters arise solely from the auditor’s professional judgment

Key Events in the Auditing of BHP Group 4
of whether the financial statement represents honest information about the company. The
auditing team uses the important matters to come up with the audit opinion about the financial
and no separate information about the same matters is produced (Gorodilov 2013 pp 60).
Among the key events listed by the KPMG as the “Key” events in the auditing of the financial
books of the period ended September 2018 included: 1) Onshore US assets 2) Samarico 3)
Taxation 4) Asset valuation.
III. Key Events
1.
1) Inherent risk 1
Onshore US Assets and Liabilities.
The auditing team analyzed the valuation, classification, and presentation of these assets.
The company engaged in the Onshore activities which make the new event to be among the
important matters in the in the auditing of the financial statements of the BHB Bilton Plc. The
assets were classified and valued as follows; the assets held for sale was US$11.9 billion in 2018,
held for sale liabilities were amounted to 1.2 billion and the loss after the sale from the
discontinued operations amounted to US 2.9 million compared to the US $0.5 billion loss in the
previous year. There was nil record of such assets in the year 2017 apart from the US$0.5 billion
of the discontinued operations (Murcia et al 2017 pp 217).
Events on the onshore assets were considered as a key audit matter because;
 The proposed divestment was important in generating the financial statements for
the BHB group.
 The significant charge on the impairment

Key Events in the Auditing of BHP Group 5
 The application of the judgment in consideration of treating specific items as
discontinued using the accounting standards criteria.
2) Inherent risk 2
Samarco dam
The losses in the income statement which was attributed to the Samarco amounted to
US$0.6 billion compared to US$ 0.3 billion. The books provision on the contingent disclosure
was US $ 1.3 billion which were US$1.1 billion in the year 2017. The auditing team followed
critical accounting judgments and disclosures when determining the truthfulness of the financial
about the losses from the Samarico dam. The amount of the losses could be material if found to
be misrepresented by the company and the auditors would want to disclose the reasons why there
was such loss from the dam (Open payments total $6.5 billion in US, 2015 pp 24).
There was a need to determine the legal claims against Samarco and BHP and their
impact on the accounting judgment and disclosure and how the activity was disclosed. It was
important to determine the impact of a legal obligation of BHP Billiton Brasil Ltd's of providing
funding to the project and how that obligation was treated in the accounting books with reference
to the governance, framework and preliminary agreements. The auditing team wanted to also
disclose accounting judgment on disclosing the contingent liabilities relating to various claims
and other disclosures about Samarco and BHP that could not be reliably estimated (Hennes 2014
pp 40).
Therefore; events on the Samarco is considered key because;

Key Events in the Auditing of BHP Group 6
 The amount of potential claims deemed significant.
 The degree of uncertainty of the various estimations relating to the matter was
high.
 The level of application of professional judgment by the auditing team; when
assessing legal claims, and obligations of the BHP Brasil ltd.
3) Inherent risk 3
Taxation
The books of accounts of BHP Ltd reported the amount of income tax expense to be
US$7.0 billion in 2018: US$4.4 billion and current tax payable at US$1.8billion in 2018: US 2.1
billion in 2017. This results required audit assertions to determine the truthfulness of the
information provided. Since the company operates in different countries, there might be a risk of
misstatement of the financial information owing from the various taxation obligations in
different countries which might not be uniform across the scope of control of the company (US
3D printing market to reach US$17.2 billion mark by 2020, 2018 pp 124).
Complexities also can be created in the cross boarder sales resulting from the effect of the
transfer pricing which will raise the risk of misstatement. Much concern was put on the US Tax
Reform enforced in December 2017 which impacted the corporate tax law through reduction of
the corporate tax rate form (35-21) %, the creation of territorial tax system and allowing
immediate expensing of qualified property to broaden the tax base (Kyungseok 2015 pp 420).

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The taxation was a key event due to; the application of taxation legislation to the affairs
of the group and the level of judgment used by the audit team in determining the reasonableness
of the tax information.
4) Inherent risk 4
Asset Valuation
The team focused on the property, plant, and equipment (PPE) in 2018 US$62.2 billion:
USD$80.5 billion in 2017, Impairment of PPE and intangible assets at US$0.3 billion in 2018:
US$ 0.2 billion in 2017. Although this was still a key significant event, the audit would report
that the consideration of the asset valuation risk is less in 2018 18 as a result of the separation of
the Onshore assets (US$202.5 billion needed to control US wastewater, 2008 pp 8). It is still a
Key event because; there was a balance of 60% on the group’s assets and the application of
judgment in determining the reasonableness of inputs in the assessment of recoverable assets
value in the group.
2. Evident Mix
1) Impact of Onshore US Assets and Liabilities.
The information from the onshore activities has a risk of misstatement since the activity
was the first one, the company divesting to onshore activity. Separation of the onshore activities
from the assets of the company will impact on the disclosure of the assets of the organization
(Каткова, 2014 pp. 35).
The critical events conducted based on the onshore activities.
 The auditors tested the Key controls of the Onshore US assets.

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 Share purchase agreement evaluation.
 Comparison of the carrying costs of the assets and liabilities to their recoverable
amounts basing on the share purchase agreement.
 Comparing the share purchase agreement with the assets and liabilities classified
as held for sale.
 Checking the relative disclosure accuracy with the accounting standards
requirement where the discontinued operations where discontinued.
 Presentation of held for sale assets as discontinued operations were challenged by
the team, terming the two as serving different purposes in the continuing business.
The classifications and the carrying amount of the underlying assets with reference to the
Onshore held for sale assets and liabilities were considered to be acceptable (Chiu and Wong,
2013 pp 100). The auditors focused on the full disclosure principle and materiality principle in
identifying the events which affected the assets and liabilities over the in the period.
2) Impact of Samarco Dam
Samarco has a possibility of misstatement risk on the disclosure of the contingent
liabilities (Habbash, 2015). The auditors should assess the disclosure of the liability of Samarco
company according to the Framework, governance, and preliminary agreement so that to ensure
that the company is able to meet its obligations.
The critical events conducted based on the Samarco activities.
 The auditors tested the Key controls of the Samarco dam.

Key Events in the Auditing of BHP Group 9
 The auditors assessed whether there was a legal obligation known by the
shareholders of Samarco with the Brazilian authorities or the disclosure was based on the
relevant accounting standards.
 There was an assessment of any reliable information about the funding obligation
from the BHP Billiton Brasil. The assessment was done on the available information on
the framework agreement in comparison with the information presented by the group on
the statement of cash flows. This involves the evaluation of the discount rate, current
ratio; foreign exchange rate and the need of Samarco o meet its obligations.
 The auditing team required to work hand in hand with Samarco internal audit
team in ensuring that Samarco works according to the framework, governance, and
preliminary agreements and ensure that the internal auditors provide states clearly the
outcome of such procedures.
 The auditing team relates the cash flows in the financial statements with the
historical accuracy of the cash flow.
 The team assessed the completeness of the liability disclosures with thorough
reference in the book’s legal procedures by getting information from the legal personal,
the company’s management and the external legal counsel. The audit team also required
the auditing team in the Samarco dam to provide independent audit information about the
contingent liabilities and evaluate the outcome of such procedures under the auditing
standards.
 The auditing team also did an assessment of the company’s legal procedures and
determined the potential liabilities of the company.

Key Events in the Auditing of BHP Group 10
The team used expert information when determining the legal procedures in relation to
the framework, governance and preliminary agreement of the Samarco obligations. The team
used required accounting and auditing standards in developing independent judgment and
disclosures of the Samarco liabilities. The results of the procedures conducted by the audit team,
a consideration of provisioning level and disclosure were acceptable (Appelbaum, et al 2018 pp
90).
3) Taxation Risk
The audit team should assess into the disclosure of tax liability of BHP limited. There is a
possibility of risk on the company’s contingent liability disclosure. This is as a result of different
tax laws across borders.
The procedures needed to achieve these assertions include;
 The auditor’s testing of controls on matters relating to taxation and the accounting
standards of the current financial statements.
 The team relies on information from experts in different countries to obtain tax
information relevant to the audit to determine the accuracy and truthfulness of the tax
report in the books.
 The team also must assess the various assumptions leading to the tax liability for
the BHP Company and assessing disclosures in relation to current tax and the ongoing tax
matters.
 The team performs the procedures specific to the US tax reform such as; working
with specialists in the United States, testing the completeness of tax information and

Key Events in the Auditing of BHP Group 11
testing of the mathematical accuracy of the information provided in the financial books
(Duliba, 2015 np).
The above procedures results show that the provision of tax and relevant disclosures are
acceptable according to the auditors' independent judgment.
Asset valuation Impact
Asset valuation risk affects the impairment of assets and reversal impairment. This will
impact the cash flow of the in the financial statements. To critical events to achieve this assertion
include;
 The team tested the key controls on the property, plant, and equipment of the
group to include reversal and asset impairment.
 The team evaluated the factors that triggered the impairment and the indicators
that would trigger reversal impairment by evaluation of forecast assessment prices,
comparison of operations, evaluation of competency and conducting sensitivity analysis
among the key assumptions.
 The team also assessed the changes in the carrying amount of the BHP ltd assets.
IV. Conclusion
The key events received unqualified opinion from the auditors of the company. The
separations of the onshore assets and liabilities from the assets and liabilities of the company
made it a potential risk to the material misstatement because it was the first operation of the
company outside Australia. The taxation, valuation of assets was key events because auditor
wanted to determine the truthfulness in the financial information on assets and liabilities and how

Key Events in the Auditing of BHP Group 12
the company reported income taxes. Samarco dam failure raised a concern on the legal liability
of the company with the auditors referring to the Framework, governance and preliminary
agreements while assessing the failure. The auditors agreed with the financial statements as do
not create risk material of material misstatement.