The new auditing standard ASA701 Communicating Key Audit Matters in the Independent Auditor’s Report is developed in the wake of the global financial crisis. This development is in response to calls from shareholders to know more about the companies they invest in. Further, investors have also requested earlier warnings of potential issues that may exist with respect to an entity’s ability to continue as a Going Concern which resulted in the revision of ASA 570 (ISA 570) Going Concern.
Students are required to research into the rationale for the new auditing standard ASA 701, explain clearly what it is and select an industry, eg. Banking, mining, etc. and analyses Key Audit Matters in the Independent Auditor’s reports of all companies in that industry in ASX Top 100 listed companies as part of your evaluation of this new standard.
The Key audit matters as defined by this new standard ASA 701 of the AUASB committee are those matters which as per the personal judgment of the auditor were of crucial importance in the audit of the financial report of the company in that particular period. The key audit matters are those which are selected form many to those who manage the governance of the company. This new standard is made so that the audit companies and the directors pay more attention to the matter of showing key audit matters and also discuss the important matters with the auditors so that a consistency can be maintained in the annual reports.
The introduction of ISA 701 tells about the commitment to confirm with the recent enhancements and developments in relation to auditor reporting which is developed by International Auditing and Assurance Standards Board (Legislation.gov.au, 2018). This standard involves many new features like that of:
The ASA 701 would be implemented in the annual reports of the companies which would come with their financial reports for the period after 15th December 2016. The aim of the report is on the basis of which this new standard is being developed is to increase the confidence which the public has on the company in the financial statements of the company and in the audit processes (Auasb.gov.au, 2018). This is done to provide the investors with:
The main purpose behind all this is to present the people with better disclosures by the companies so that they can make decisions in an easy way. The new standard has been made so that the auditing standards can conform with the international auditing standards ISA 701. This is the main purpose behind the starting of this new standard by the companies.
The industry which is chosen is mining and in this the annual reports of some of the companies would be looked into to know about that how the companies have analyzed the key audit matters in their reports. All the analysis is done based on the annual reports of the companies for the year ending 2017.
Some of the key audit matters which have been highlighted in the report are:
The auditors have specified the procedure they followed for ascertaining the 40% investment of the company in AWAC. The auditors checked the completeness and appropriateness of the US GAAP which was started by the company to have done. Then they considered all the differences which existed between US GAAP and that of AAS. They considered this as a key audit matter as the magnitude of the investment made by the company was high and also the complexity was involved in the conversion of the amounts to US GAAP (Aluminalimited.com, 2018).
The investment made by the company was $2.3 billion in this so the auditors checked that the amount invested in this could be impaired and for this they performed many processes and they assumed the long term price of alumina for this. They also compared the Group’s value with that of the market value and studied about any internal or external sources using which the values could be impaired. But the auditors found no such evidence in the impairment of such investment by Alumina.
The auditors have stated some of the key audit matters which they believe had the greatest effect on the audit conducted by them:
They valued the assets and this was done as this constituted to about 72% of the assets of the Group. Even the Group reported of having some kind of material weaknesses in relation to the processes and the controls involved in the impairment of the assets (Bhp.com, 2018). This also increased the focus of threadworms on such valuation. They did this by following a detailed process in which they tested the key controls in the valuation of the assets, evaluated the commodity prices which could be forecasted, exalted the objectivity and competency of the experts and considered many other factors which affected the valuation of the assets of the company.
This is another key audit matter as the company has its operations in many parts of the world which have different tax structures. Then the company also engages in doing cross border sales. So the auditors were cautious in relation to the estimation of the associated provision of tax, expenses and the contingent liabilities. They used procedures like tested key controls, worked with tax specialists of the countries in which the company had its major operations. They also tried to study the consistency among different countries and assesses that whether Group has made significant discourses to the interest of the investors.
BHP Billiton has reported losses due to failure of dam project in the company. So many accounting judgement actions of the company needed to be judged which included the determination of the legal status of claims, legal obligation of BHP Billiton, contingent liabilities disclosures and many more. There was high degree of uncertainty involved in this case so this became part of key audit matter the company. They followed a comprehensive policy to check about all the things which went in this Samarco case. They assessed the key assumptions which were made by the company, checked the completeness of the disclosures made by both the companies in the process. They after the process found out that level of disclosures and the provision to be acceptable.
The Group is also involved in the restoring, rehabilitation and closing the sites. As the volume of such transaction was very high and this was expected to have huge effect on the result of the company so this needed to be considered as a key audit matter as this is bound to affect the future cash flows of the company. They worked with specialists to ascertain about the life of the reserves and mines and assessed the work of the specialists of mine closures to assess the likely and timing cost. They even checked the time value of money and foreign exchange rates for checking the effects and after this they found that the rehabilitation provisioning was acceptable.
The auditors have stated that they have studied the accounting treatment for the interest which the company acquired in another mine. The acquisition had a lot of financial significance on the company. The auditors focused on all the assessments on the key transaction documents which needed to be studied in this. They also checked that sufficient disclosures were made by the company or not as the company applied judgements as to when the sales of different commodities could be considered as revenue (Evolutionmining.com.au, 2018). They used a revenue recognition policy in which they assessed the terms of all the transaction documents.
The Group recognized deferred tax assets of an amount of about $57.74 million and this as per the Australian Standards has to be recognized only to a certain extent. So the auditors have to check this as this was used in the recognition of the deferred tax assists. They assessed the ability of the Group by following steps like they assessed the reasonability of the taxable income, revaluated the balances of deferred tax assets and many more.
Impairment reversal of Mt Carlton’s non-current assets: The Group in past in 2003 has reported impairment losses of $148.6 million in relation to Mt Carlton’s assets but now they’re considering the reversal of such impairment. This matter was significantly considered by the auditors as it had bound to effect the financial statements of the company significantly. They then came up with a conclusion of not doing impairment testing by using many procedures in which they analyzed the market data, compared gold rates and many more steps were taken to do this.
The company has recognized a product liability provision to the amount of $ 312.4 million and such a provision was subject to many judgments. The auditors considered examining the complexity and the size of the provision. They assessed the independence and the competence of the external experts in this matter. They made enquiries, broke down the liabilities sarong Australia and USA and assured them about every single component of such provision.
Then the company also recorded their assets at a very high price which was subject to the application of many assumptions like inflation, growth rates, forecast changes and many more. They took this as an audit key matter as a lot of judgments were involved in the forecasting of the future cash flows of such assets. The auditors along with many valuation specialists did many procedures in evaluating the process which the management of the company in the impairment of such assets and the key assumption were also checked. Some of the rates were also tested on the sample basis. They assessment the appropriateness of the impairment testing models which are used by the companies. This way the company’s auditors took all the care to check the ammeters which may materially effect the performance of the company.
The Group in the year 2017 had reported a revenue of $8335 million from the sale of iron ore. This was so taken up as a key matter as the amount involved was significant. They used an audit approach in which they included a focus on two of the non-cash adjustment made to the revenue. They remeasured the provisional sales and also the deferred income accruing to the Group (Fmgl.com.au, 2018). They related some of the provisional pricing adjustment and found them to be consisting with the commodity data prevailing externally. Even for the prepayments they obtained the confirmations from the customers of the Group.
Then the Group has entered into a contract for getting a financing arrangement to be of the carrier of the company. In this arrangement the Group received a funding of about $234Million and as the financial tarnation involved a huge money so it had found to effect the company in a material form. The authors have stated that they checked the transaction costs, inspected the financial arrangements between the companies.
Then the group also recognized an asset of about $813 million in 2017 and such recognitions often involve a lot of judgement by the people. they focused on the judgment of the Group that IBJV has remained an evaluation and exploration asset which has not been categories as a development asset. The auditors held discussions with the Group management and checked that if the Group had a right to tenure the assets or not. They also visited many of the IBJV sites to know about the current status of the project. They found that the treatment of the company with such assets are consistent to the existing status of this.
The report highlights a new auditing standard named ASA 701 Communicating key audit matters which has been developed an as result of the global financial crisis (Hay, 2014). The report discusses the reasons behind this new standard and how this new standard is trying to protect the interests of the investors by getting them aware for the important audit matters. This has definitely increased the responsibilities of the auditors but ultimately people would develop more faith in the audited reports as they would be able to present better picture to the people interested in such reports