AUDITING STANDARD ASA 701
Table of Contents
Executive Summary 4
Mining Industry 6
BHP Billiton 6
Alumina Limited 8
Evolution Mining 9
Fortescue Metals Group 9
Recommendations and Conclusion 11
Auditing Standard ASA 701
The wake of the financial crisis all around the world is a characteristic of the changing era within companies and their investor (Xu et al., 2013). It led to the creation of the new auditing standard ASA701 Communication Key Audit Matters in the Independent Auditor’s Report that is responsible for the disclosure of essential auditing information in companies’ annual audit reports. N the recent past, there has been an increase in the number of fraudulent activities with regards to financial statements. The reports deliver a detailed overview of the company in accordance with the ASA 701 standards (Cordoş, 2015). Different industry sectors, including the mining sector, are explained in order to have a detailed understanding as to how the key matters of the audit are to be disclosed by the companies (Xu et al., 2013). According to the ASA 701 of the AUASB committee, the Key Audit Matters characterizes the matters that are of significant importance during an audit of the annual report of a company (Cordoş, 2015). The critical nature of the information is determined by the personal judgment of the auditor undertaking the process. The selection of the key audit matters is chosen from the numerous of those that are mandated to manage the overall functionality and governance of the company.
The new audit is designed in a manner that will allow the individual auditors or audit companies, as well as the directors of the company, can shift their attention to the identification and selection of key audit matters. The directors are required to hold a discussion on the significance of the key matters with the audit companies so that to eliminate inconsistencies when the final annual report is drafted and presented (Xu et al., 2013). The onset of the International Standard on Auditing ISA 701 identifies the various commitment that each company has to conform with the recent developments and enhancements with regards to the auditor report designed and developed by the International Auditing and Assurance Standards Board (IAASB) (Carson, Fargher, and Zhang, 2016). According to the standards, the inclusion of new features will enable the audit companies to capture Key Audit Matters (KAM).
To begin with, the new standard incorporates the feature to mandate the communication of Key Audit Matters regarding the auditors of the identified entities (Cordoş, 2015). The standard also involves the powers to facilitate the auditors of varied entities to come up with a decision on what should be identified as a KAM, which will also be included in the final audit report (Azim, 2013). In order to create uniformity and a baseline for selection, the standard also provides the guidelines with which the auditors can use to determine the KAM with respect to urgency and level of importance.
In retrospect, the auditors also need to identify and consider the areas of risk that are in need of additional and more critical assessment compared to the rest and recommend the best viable course of action. The determination also takes into account the judgment of both the management of the company and that of the auditors and their ability to decipher the KAM to be included in the final report (Carson, Fargher, and Zhang, 2016). Similarly, the standard also includes a succinct definition of what the auditors are to consider a Key Audit Matter. Other inclusions to the standard include different documentation required in support of the identified KAM and the statement of concepts that lead to a matter being identified as a KAM to be stated and included in the annual audit report.
The implementation of the ASA 701 requires that the company come with the provision of its annual financial year report (Carson, Fargher, and Zhang, 2016). The primary objective is to create a basis that the public or investors can develop towards increasing confidence with the company. The financial statements and thorough audit reports can create a sense of openness and sincerity between shareholders and potential investors (Azim, 2013). To achieve high confidence levels, the standards strive to inform the investors as well as the public on the transparency regarding the responsibilities of the auditors and shed insight on the key areas of the key audit matter, including how the assigned auditors have been able to combat the issue.
As such, the main purpose of the new auditing standard ASA 701 Communicating Key Audit Matters is to provide informed and critically analyzed information regarding financial standpoints of companies so that investors can come up with informed decisions (Carson, Fargher, and Zhang, 2016). Additionally, the new standards facilitate the auditors to align their audits with the international ISA 701 standards easily (Azim, 2013). The new standard is then beneficial to both the company in identifying their key matters and to the investors by informing them of the financial statements of the company that they wish to invest with.
In order to create a change into perspective, the chosen industry is mining, where some of the financial report’s statements based on the annual reports of some companies will be evaluated. The analysis will mainly major on the identified key audit matters and the criteria that the audit team used to identify the matters. The analysis for all the companies is a reflection of the audit findings for the financial year that ended in 2019.
The first key audit matter for BHP Billiton, according to the auditors, was the asset valuation. The auditors were able to evaluate the assets since they make up the greater majority of the company (BHP, 2020). The asset valuation was in line with a chronological process from which they were able to conduct tests on the key control factors. Additionally, the auditors conducted additional valuation with regards to the commodity prices, which were calculated and their expected outcome forecasted. The company was able to provide an annual delivery of up to US$17 billion worth of returns to shareholders and up to US$10.4 on both the special dividend and off-market buy-back.
Another KAM identified by the auditors was the aspect of taxation. The company employs a minimum of 72000 employees and subcontractors who help in doing daily functions on behalf of the company (BHP, 2020). The company has multiple branches in more than 90 locations all around the world. Accordingly, the company incurred US$9.1 billion globally in paying taxes, government licenses, and royalties. However, the company was able to offer an overall economic contribution of US$46.2 billion in the financial year 2019 (BHP, 2020). The accountability for the high taxation was attributed to the massive cross border sales that the company is engaged in. The auditors worked closely with tax control experts for the different countries in order to provide accurate outcomes regarding the estimation of expenses, tax provision, and other liabilities the company would incur. The auditors also compared results from the different locations in different countries to ascertain whether the Group made the best decision in choosing the locations.
One of the liabilities that the company is still recuperating from is the Samarco Case involving the unforeseen failure of a dam project that it was working on. Numerous accounting decisions had to be determined, and the judgment would be facilitated based on the accounting figures (BHP, 2020). Some of the judgments and decisions to be met include the legal obligation of the company, the status of the claim, and other contingent liabilities that BHP Billiton would incur. Since there were significant uncertainties on the matter, it was regarded to be a key audit matter. Using the comprehensive company policy and risk mitigation frameworks, auditors were able to analyze all the events that occurred before the Samarco case, including the assumptions or omissions that were made (BHP, 2020). They also evaluated the disclosures and completeness of company processes, after which they were able to arrive at an amicable solution.
The audit team equally evaluated the rehabilitation, restoration, and final closure of the locations. Since the proliferation of the transaction was on the rise, it was anticipated to result in adverse financial effects to the company and thus prompting its inclusion into the Key Audit Matters. With the help of specialists, the auditors were able to analyze the viability of mines and reserves that were beneficial to the overall mission of the company (BHP, 2020). They used the information to decide on the probability of mine closures with regards to the variable of time and cost analysis. They additionally checked the rate of inflation over time and the variance in the rates of foreign exchange on how they would affect the cash flow of BHP Billiton. However, they were able to ascertain that the provision for rehabilitation was viable and beneficial.
The main key audit matter that is highlighted by the report is the accounting of equity for the investment the company made in AWAC (Alumina Limited, 2020). Accordingly, the auditors provide a clear specification of the process that was followed to attain the US$ 210.9 million statutory net profit for the first half-year as of the 30th of June of 2019. Due to the backdrop and ramp-up of new refineries, AWAC had to reduce their costs of production significantly. The reduced costs led to a cash margin up to at least $150 for every tonnage irrespective of the lower prices of alumina (Alumina Limited, 2020). Accordingly, the audit was able to identify how the cash margins for alumina were calculated as well as other definitions of matters such as the items regarded as a cash inflow, interest taxation, and free cash flow. Additionally, the audit team also validated the accuracy, appropriateness, and completeness of the US GAAP and its differences with the AAS (Alumina Limited, 2020). The difference was a key audit matter since the degree of investment implemented by the company was immense, including the complex nature of converting the currencies to the US GAAP.
In the report presentation, the auditors also identified additional KAM in the form of supportive documents for certain non-IFRS financial details. The essence of the report is to allow the company or investors to come up with a validated comparison between the current and previous year financial statements as well as facilitate the assessment of the business operating performance (Alumina Limited, 2020). Additionally, in the areas where there is the use of non-IFRS measures, the audit report provides a clear definition of the applied measures, ensures appropriate calculation of methods are utilized, and appropriate IFRS financial data is provided.
As a matter of first importance, the most important KAM for Evolution Mining, according to the auditors, was the acknowledgment of delayed tax assets (Evolution Mining, 2020). The tax assets were significant and supposed the minimum threshold recognized by the Australian Standards. The auditors had to analyze the data, such as the taxable income and balance sheets, to identify the deferred taxes. For instance, the group identifies a past deferred tax amounting up to $148 million after a reversal of impairment of assets belonging to Mt Carlton (Evolution Mining, 2020). On the other hand, the auditors also identified cost accounting for varied mines as another KAM that ought to be addressed. Each mine has to surpass the set targets and prove value for the money used in its operations.
The acquisition of new mines has a lot of financial strain to the company and have to be audited to ensure the amount of capital used is regained and proceeds used as dividends and for shareholders. The auditors gathered information from the various relevant transaction that consumed into the company finances and compared with how the various mines such as the Ernest Henry Mine was remitting value for the money (Evolution Mining, 2020). In addition, reference was also made to determine the disclosures made by the Evolution Mining company or how it was able to apply judgment on what type of sales can be termed as revenue.
Fortescue Metals Group
The major key audit matter for Fortescue Metals Group is the revenue collected from the sales of iron ore with a US$ 3.2 billion net profit after taxes (Fortescue, 2020). Iron ore is the primary business for the company and the main source of income, which prompted the auditors to consider the sales as one of the key audit matters for the Fortescue Metals Group. To create a perspective of the matter, the auditor had an all-inclusive focus on non-cash adjustments that were made to the collected revenue. The team measured deferred income and provisional sales data that had accrued to the Fortescue Metals Group (Fortescue, 2020). After data analysis and calculation of numbers, the auditor came to the realization that a number of the provisional pricing alterations consisted of externally prevailing commodity data. In the event of prepayments, the team was able to solicit and obtain confirmation documents from reliable customers who frequent the facility.
The auditors also discussed how the company affects the overall climate change both in terms of opportunities and related risks. The team divided the risks into two categories, including physical risks and transitional risks. Physical risks, in this case, included the rising sea level, changes in rain patterns, and extreme weather conditions (Fortescue, 2020). On the other hand, transitional risks include the damage of organizational reputation, reduction in product demand by customers, and regulatory changes. To address the issue, the auditor formulated a risk management framework that would facilitate the organization to align itself with the recommended emission levels and other legal guidelines (Fortescue, 2020). For instance, in the financial year 2019, Fortescue Metals Group alone was responsible for emitting more than 1.80 million tons of carbon dioxide gases to the atmosphere. The auditors evaluated the opportunities and risks and recommended its integration in the general company risk policy (Fortescue, 2020). Accordingly, Fortescue’s Risk Management Framework (FRMF) is able to emphasize a strict approach towards the measurement, recognition, or otherwise evaluation of all opportunities and risks with the inclusion of climate change.
The transportation of metal ore also impacted the company’s finances in a significant manner. The importance of arranging for carrier companies was crucial, and it had to be included in the key audit matters. According to the report for the financial year 2019, the company shipped ore more than 167.7 metric tons. The price of shipping the ore was calculated at US$13.11 for each metric tons (Fortescue, 2020). Apart from transportation, the Fortescue Metals Group also incurred taxes, royalties, and other legal payments amounting to A$2.8 billion (Fortescue, 2020). To arrive at the figures, the auditors had to cross-check the inspected financial transactions between the company and other parties as well as analyze the transaction costs for each monetary transaction that the company performed by itself or on behalf of another entity.
Recommendations and Conclusion
The new auditing standards ASA 701 Communicating Key Audit Matters was designed after the fatal crisis from the global financial standpoint. The standard identifies and informs on ways in which a company can communicate through its annual audit reports while at the same time aligning the internal functions with the international standard ISA 701. The paper provides the rationale for the standard and why it is beneficial if companies adopted its framework. The new standards also provide auditors with a step by step guideline on how to come up with a comprehensive annual audit that takes into account key audit matters. Not only does the standard define ways in which the auditors might select the KAM, but it also defines the aspect that can be included as key audit matters over the others. This means that auditors have increased responsibilities, but the final outcome will present a detailed presentation that captures all the elements of a company.
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