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Requirement Question
1- Write a report on Auditing & Assurance in 2500 words with reference to APA.
Solution
Introduction:
The recent severe global financial crisis that had been felt all over the world, the importance of the concepts of audit has increased many folds. The importance and the significance of audit have increased over time due to the increase in the number of scandals that were being affected all across the globe. However, the auditing standards, the principles, and the policies of auditing have come under scrutiny because of the failure of the auditor to give the shareholders of the company at the true and fair information regarding the company’s internal affairs (Hay et al., 2017). This failure on the part fo the auditor resulted in the big scams like Enron, Satyam etc. for the purpose of increasing the effectiveness and the efficiency with which the key matter relating to the company are being reported by the auditor of the company the auditing standard 701 was introduced by AU SAB. In the present report, an understanding will be developed in respect of the standard and as well its practical implementation by the various corporate companies.
For evaluating the standard its integration is being examined in BHP Billiton Limited and the Rio Tinto Ltd. Both the companies are listed in the Australian Stock Exchange and are engaged in the energy sector.
Auditing and its objectives:
The main objective of the auditing or the auditor that is appointed by the shareholders of the company is to comment whether the financial statements of the company that comprise of the cash flow statement, income statement, balance sheet and the statement of changes in equity are showing the true and fair view of the company financial performance and the position.
ASA 701:
Several auditing standards have been issued by the AUSAB forestablishing the guidelines to be sued up by the auditor for conducting the audit. The introduction of the ASA 701 has been made for recognising the key audit matters that are required to be highlighted in the annual reports of the company. The auditors that are engaged in the audit of the companies that are listed on a stock exchange have to compulsorily abide by the guidelines of the standard.it also recommended that the auditors of the non- listed entities must also abide by the standards. All the key matters have been illustrated in an auditing standard that are needed to be communicated with the shareholders of the company (Leunget al., 2014). The key matters are also termed as KAM. An understanding needs to be developed relating to the KAM for understanding why the matters are relevant and are needed to be disclosed by the auditor.
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Key matters that are needed to be reported by the auditor in the independent auditor’s report:
The list of the matters to be reported by the auditor of the company has been listed out in the ASA 701. The main purpose of the disclosure is to make the shareholders and other stakeholders of the company aware about the financial performance and the position of the company. The KAM that have been mentioned in the ASA 701 for compulsorily disclosing the same are as follows:
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a) Matter that required the personal judgement to be exercised by the accountants: The matters that have been reported in the financial statements and make use of significant amount of judgement of the accountants of the company and the judgement made by the management are required to be disclosed as key audit matters. The reason being that these accounts are susceptible to the presence of the manipulation on the part of the management. the disclosure requirement of these items have been given out by the standard to ensure that the investors fo the company are aware about these and can take economical decision based on these data. For instance in case of the valuation of the inventory by the company the auditor must make sure that the same is done in accordance with AASB 102. This ensures that no manipulation is being conducted by the management in evaluating the inventory of the company.
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b) Depreciation method that is being used by the entity: The AASB 116 has laid down the guidelines regarding the methods and the requisite steps that are to be taken up by the management in respect of the treatment of the depreciation by the company. It has been observed that due to the uniqueness of the nature of the business the assets that are being operated hay the entity and the complexity of the operations a single deprecation rate cannot be applied for computing depreciation by all the entities that are conducting their operations within the country. Hence, the companies have to choose from the alternatives that are present before them for conducting the depreciation of the assets that are owned by them (Byrnes et al., 2017). It is the responsibility of the auditor to recognise with the help of his knowledge and judgement whether the depreciation method employed by the entity reflects the use of the assets made by the company and whether the treatment is in accordance with the AASB 116. The auditor must communicate with the shareholders of the company any matter related to the non-compliance with the provision as given out in the standard.
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Place Your OrderKey audit matters that were being reported by the auditors of the BHP Billiton Ltd. and Rio Tinto Ltd.
BHP Billiton Ltd.
As per the audit report that hasbeen presented by the auditor of the company in the financial statements the KAM has been referred to as those matters that held the most significance in the in the process of audit of the financial statements of the company. These matters included those, which in the current year included the most significant assessed risk of material misstatement. These matters included those, which had the greatest effect on the overall audit strategy that is to be adopted by the auditor, allocation of the resources by the auditor and directing the efforts of the audit engagement team (Morris&Metternicht, 2016).
The group had to undertake complex accounting judgements and disclosures in respect of the Samarco dam failure. Some of them are as follows:
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i) Determination of the legal status of the various claims that were being made in respect of the Samarco and BHP and the relevant appropriate accounting treatment that has to be adopted by it in this respect.
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ii) Determination of the extent to which the BHP Billiton BrazilLtd.’s is obliged tocontribute funds to Samarco. In addition to this, the company will have to quantify such obligation in alignment with the framework agreement and preliminary agreement.
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iii) The various amount of disclosure that is associated with the contingent liabilities of the company and all the other relevant circumstances that reflect the exposure to the Samarco and BHP and the amount cannot be reliably estimated.
The auditor chose to disclose Samarco as one of the key audit matters due to the huge size of the claims that are being made against the company, the high degree of the uncertainty involved in the estimation of the amounts. This also included that high amount of judgement that had to be exercised by the auditor for assessing the legal claims against the company and BHP Billiton’s Brazil obligations.
The company is obliged in respect of the restoration, closing and the rehabilitation of its sites. The closing and the rehabilitation activities that are undertaken by the entity are governed by legislative jurisdictions and the policies that the entity has instated in this respect within the organisation. For the purpose of establishment,FO the rehabilitation provision the management of the company has to make very significant judgements in respect of the reserves and life of the mines.
Significant judgement is required on the part of the management for calculating the closure and the rehabilitation provisions. The reason for this being the complexity that is involved in the calculation of the estimation of the quantum and the time of the incurrent of the future costs and an appropriate rate for the purpose of discounting these costs that are going to be incurred by the company in this respect for bringing them in their present value (McGain et al., 2015). Due to the long life of the majority of the assets of the entity, it increases the risk involved in the estimation of the amounts as the uncertainty involved in the future cash flows of the entity.
The closure of the rehabilitation provisions was considered a key auditing matter due to significant size that it occupies in the financial statement of the entity. in addition to this the auditor had to exercise significant amount of judgement in the process of evaluation of the estimates that had been made by the management of the company, the quantity involved and the timing of the future costs and the assessment of the rate that is to be used for the purpose of determining the rate that is to be used for the purpose of discounting of these costs for bringing them back to their present value (Carson et al., 2016).
Rio Tinto Ltd:
Forascertaining, the items that are going to form the part of the key audit matters to be reported by the auditor in the financial statements of the entity the auditor determined the materiality involved in the item and the assessed risk of material misstatement in the financial statements and the financial report of the entity. The auditors of the company specifically pinpointed those accounts that involved a significant amount of judgement on the part of the management.
Some of the accounts that were identified by the auditor for reporting the same as key audit matters are as follows:
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a) Impairment reversal of impairment assessment: It can be noticed that significant amount has been recorded in the financial statements by the management in respect FO the intangible assets such as goodwill and other indefinite lifetime intangible assets. In respect of all the cash generating units that contain goodwill within them and the indefinite intangible assets are to be tested for the process of impairment annually. It is also required on the part of the management that the life of other assets finite lived intangible assets is being estimated by it objectively. The matter was selected to be reported as a significant key audit matter because significant judgement on the part of the management was required for the identification and the estimation of the recoverable amount of the cash generating units of the entity.
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b) Provisions for close down, restoration and environmental obligations: The particular item has been selected for the purpose of being included in the key audit matters due to the fact that significant judgement is required on the part of the management for the purpose of estimating the quantum and the timing of the future costs that are going to be incurred especially due to the special nature of each of the site, the long-time that is involved and the potential associated obligations. In addition to this, the management of the company needs to calculate an appropriate discounting rate for the discounting of the future costs and bringing them back to their present value (Mackay et al., 2015).
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c) Provisions for uncertain tax position: The group is subjected to an enormous number of jurisdictions of the various countries in which it conducts its operations. The local tax authorities pose serious challenge for the company in terms of the taxation law in the daily course of business. This includes concepts like those that transfer price, indirect taxation, and other transaction related to tax matters.
Conclusion and recommendation:
After the conclusion of the detailed analysis of the key audit reports that are being presented by the auditor in the financial statements of the company, it can be concluded that the same holds immense importance in respect of the decision the understanding that is developed by the users of the financial statements regarding these matters.
Hence it is recommended that the auditor that are involved in the audit of the corporate bodies all across the globe must make sure that the relevant and important matters must be disclosed in the financial statements of the company as the key audit matters that are needed to be reported by the auditor.
Reference
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Byrnes, A., Banks, M., Mudge, A., Young, A., & Bauer, J. (2017). Enhanced Recovery After Surgery as an auditing framework for identifying improvements to perioperative nutrition care of older surgical patients. European journal of clinical nutrition, 1.
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Carson, E., Fargher, N., & Zhang, Y. (2016). Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), 226-242.
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Coghlan, M. L., Maker, G., Crighton, E., Haile, J., Murray, D. C., White, N. E., ...&Allcock, R. J. (2015). Combined DNA, toxicological and heavy metal analyses provides an auditing toolkit to improve pharmacovigilance of traditional Chinese medicine (TCM). Scientific reports, 5, 17475.
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Hay, D., Stewart, J., &BoticaRedmayne, N. (2017). The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting Review.
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Kubicki, M. A., McGain, F., O'Shea, C. J., & Bates, S. (2015). Auditing an intensive care unit recycling program. Critical Care and Resuscitation, 17(2), 135.
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Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2014). Modern Auditing and Assurance Services 6e. Wiley.
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Loke, C. H., Ismail, S., & Hamid, F. A. (2016). The perception of public sector auditors on performance audit in Malaysia: an exploratory study. Asian Review of Accounting, 24(1), 90-104.
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Mackay, W., Shan, Y. G., &Howieson, B. (2015). The effect of board and chairperson independence: an examination of CEO dismissal in Australia. International Journal of Accounting, Auditing and Performance Evaluation, 11(2), 130-160.
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