Critical Analysis On The Assurance And Auditing Case Study

Question

Task: 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 and explain clearly what it is. Each student selects an industry, eg. banking, mining, etc and analyse key audit matters in the independent auditor’s reports in the latest Annual Reports (i.e. for the year ended in 2019) of all companies in that industry in ASX Top 100 listed companies to evaluate the efficacy of reporting key audit matters in the independent auditor’s reports.

Answer

Executive Summary
The company must establish a strong link with the stakeholders and provide financial statements with adequate disclosures. The proposed auditing case study highlights and stresses the need for Key Audit matter in the report as it will provide a complete analysis regarding any issue in the company’s operation. To conduct this study, the help of mining companies listed on the ASX is considered. The report begins with the importance of ASA 701 and 570 in the light of the auditing environment followed by the evolution and challenges of the audit. The report further presents the background on ASA 701 together with the reason for the failure of Lehman Brothers. Five mining companies are discussed in the light of KAM. The report on auditing case study analysis reflects that the annual report of the companies in the present scenario adheres to the concept of ASA 701 signifying proper disclosure.

Introduction
The financial crisis in the past two decades led to the emergence of different issues. The entire corporate sector was heavily impacted and the crisis took a contagious nature. One of the major downfalls was seen in the case of Lehman Brothers because it contained an unqualified report. This gave rise to the new auditing standard ASA 701 that is communicating key audit matter in the auditor’s report. The main aim is to provide shareholders adequate information about the company they would like to invest in. Moreover, the investors even raised the concern of the potential issues that might crop up in terms of going concern and hence it resulted in the ASA 570 implying a going concern uncertainty paragraph needs to be included (Murphy, 2015). ASA 570 assumes a place of special importance because the stakeholders are more concerned about the organization that has a going concern principle and this needs to be remarked by the auditor in the report. The critical analysis on auditing case study will cover the new audit standard that is ASA 701 and the manner in which the mining companies listed in the ASX follow it.

What are the Issue, challenges, and Evolution of Auditing basis the auditing case study?
The main aim of auditing is to get an expert opinion. The history of auditing can be linked to the history of accounting that arises from the split of the responsibilities of agents from the principal. When the principal provides the fund, the agents utilize the fund and prepare a report in the manner the funds are used to the auditor who ascertains the validity of such a report and provides opinion before such is provided to the principal (Drew, 2015). 

The auditing at present is facing some new challenges that include computer ability, communication, skills of presentation and business ethics. Such an aspect comprises cost involvement impacting the recruitment of the firm, training, and staff retention and this, in turn, influences the fee of the audit. 

ASA 701 and case of Lehman brothers
Important facts and figures based on the auditing case study have been stated in the ASA 701 that should be kept in mind by the Accountants while maintaining the financial accounts of an organization. The standard application will not only help the organization to improve the quality of the financial statements but also at the same time will be helpful for increasing the Goodwill in the market. If it is observed in the auditing case study that the standards are not being followed by a particular organization then it may face different kind of problems like miscommunication, concealment of facts and figures and also at the same time it may also lead the organization to collapse because of the restricted information available (Andon, Free and Scard 2015). The various loopholes in the accounting statements were affecting the business of Lehman brothers majorly.

Irresponsible recording of facts and issues of concern while drafting the financial statements of the organization as illustrated in the auditing case study were:

The Organization was trying to improvise its business and earn huge loads of profit between the years 2001 to 2008. Huge loans were undertaken to have a well-established capital structure that may help to increase the revenue-generating capacity. The market uniformity made it hard for the organization to survive while performing the functions of mortgages Deals And other Investments (Cernusca and Balaciu, 2015). The management function of the organization was compromised because of which it was necessary for it to get private financing, real estate, and other loans (Man & Seow, 2019).

Leverage ratio misstated
Their difference is observed in the actual values of the leverage ratio in the years 2007 and 2008 and the decline happened owing to loans that were willingly borrowed by the organization. The organization was required to show several securities in the balance sheet but because of the repetitive nature of the transactions, the ratio and compromise of the balance sheet (Traistaru, 2016). The organization has also faced the time when the figures of transactions were completely stated in the financial statements and the level of ratio was decreasing constantly.

Non-disclosure or non-approval of Crusade opinion in the United States
The organization explored in the auditing case study opted for a sales permit for carrying out the transactions which were clearly denied by the US. Afterward, it was observed that the organization tried to crack a deal with the UK financial department in order to carry out the transactions and take the securities by using the same methods (Traistaru, 2016).

Rationale behind the change in the auditing standard
The new auditing standard that is ASA 701 was introduced by the IAASB following the financial crisis to prevent any such activities and provide transparency. The key audit matters discussed in the auditing case study are of vital importance and need to be stated as it has a dominating impact on the functioning of the company. The standards were issued so that the auditors, as well as directors, pay heed to the matter of projecting the KAM and shed light on the matters that are critical with the auditors that will help in maintaining consistency in the annual report. The presence of ASA 701 will boast about the commitment of the firm with the current developments and audit reporting designed by the IAASB. The standard examined in the context of auditing case study will comprise of different features such as:

• Determination of the manner in which the auditor ascertain the KAM
• Scenario in which matter linked to KAM should be used
• Mandating the use of KAM communication in the annual report

Mining industry
In order to understand the application of ASA 701, four different organizations from the mining Industries have been studied and a clear analysis has been made in accordance with the financial statements for the year 2019.

1. Rio Tinto
Provisions for uncertain tax positions
It has been observed in the proposed auditing case study that this organization has various territories and is facing a lot of challenges in terms of taxation, laws, and regulations because of the vastness of its Empire. Various important factors like indirect taxes, transactions that are linked to matters of tax and transfer pricing have affected the day to day business of the organization because of which the management of the organization is being compromised. The total current and noncurrent taxes that were needed to be paid by the organization amounted to US$2190 million as of 31st December 2019. Various provisions have been made by the company to deal with the problems present in the amount of tax that is needed to be paid by it (Rio 2019) There were various kinds of special transactions of transfer pricing taking place between the commercial Centre present in Singapore and Australian based entities which required more attention because of the specific tax structures. The organization is holding regular discussions on various matters related to the Australian taxation office (Welsh, 2015).

The auditing case study analysis signifies that there were different kinds of tax provisions to which the company was exposed and hence various accounting policies were needed in order to deal with them. The latest updates of the tax policies are evaluated by various tax specialists in order to resolve the disputes present in the organization. The tax specialist stated that the company was preparing the statements in accordance with the tax laws and have given due respect to all the tax provisions while maintaining the accounts.

Provisions for close down, Restoration and environmental obligations
According to the financial statements of the organization stated as on 31st December 2019, the company was having provisions worth US dollar 9975 million with respect to the financial obligations. The management of the organization needs to determine all the facts and figures before determining the actual figures of provision. Therefore, considering the readings obtained from the auditing case study, it is clear that it is also very important for the management to identify different discount rates in accordance with the future so as to calculate these provisions.

2. BHP Billiton
Various key audit matters had a huge impact on the audit process performed by the auditors for the given organization:

Asset valuation
The organization needs to value the assets properly in order to maintain the balance sheet properly. Also, it will help to trace the presence of KAM in the financial statements if the valuation of assets is taking place correctly. For this particular organization examined in the auditing case study, the organization stated the presence of material misstatement present in the financial statements with respect to impairment of the value of assets. A detailed analysis was being conducted by the organization in order to identify various mishaps that were being made by the accountants while realizing the actual impairment values of the assets (BHP 2019). The serialization of the commodity prices was also made in order to determine the aspects that could have led the Accountants to inappropriately assess the actual value of the assets.

Taxation
It has been observed in the proposed auditing case study that the organization is operating on a global platform and hence is facing different kinds of challenges while maintaining the taxation structures. The organization is also involved in various kinds of cross-border deals because of which there have been various changes in the taxation policies. The organization should ascertain the provision for all the taxes, expenses and contingent liabilities so that they can be properly posted in the financial statements and later be assessed by the auditors (BHP 2019). The auditors were observed to work with different tax specialists in order to estimate the actual value of the taxes. Various tests were conducted by them in order to make proper disclosures that were being present in the financial statements of the organization. A lot of difficulties were faced by the auditors in order to determine the taxation policies because of the business that is being conducted in different territories.

3. Metals Bank Ltd
Carrying values of evaluation and capitalized exploration
Metals Bank Ltd has various assets out of which carrying values of evaluation and capitalized exploration is regarded as one of the most significant ones. The company’s capability to explore all its assets in order to ascertain the carrying values of assets evaluation and capitalized exploration must be duly taken into account. Further, if the asset’s carrying value cannot be effectively reimbursed through appropriate development or sale or the mineral resources and reserves are financially capable for extraction, then such carrying values of evaluation and capitalized exploration shall be affected (Metal Bank Ltd 2019). Hence, findings obtained from the auditing case study mentions that this plays a key role in shedding light on the risks related to the recovery of figures depicted in the company’s financial statements. Nevertheless, such prevalence of risk must be duly mitigated by the auditors through their efficient audit procedures.

Metals Bank Ltd had evaluation expenses and capitalized exploration of $79,84,603 as of June 30, 2019. The procedures of the audit of the company were undertaken by assessing its intention to continue assets evaluation and exploration in all the desired places. For such purpose, the forecasts of future flows of cash were effectively assessed. Besides, the company’s right to function in all the exploration places that included evaluation and procurement of independent investigation of its tenement holdings was also assessed in such procedures of the audit. Furthermore, the auditors also evaluated the company’s capability to finance its future planned evaluation and exploration activities so that all the negative aspects could be easily recognized through assessment of outcomes of the company’s recent exploration activities (Henry & Hicks, 2015). With such audit processes, the company could easily pave a path for its future growth and development as all negative aspects related to evaluation and capitalized exploration could be mitigated.

4. Samarco
The failure of this project was very damaging for the BHP Billiton organization. Therefore, it is very important for the auditors to determine each and every factor that led to such failure. The financial statements mentioned in the auditing case study must provide adequate emphasis on contingent liabilities, claims, and other factors so as to evaluate any such unexpected failure that may take place in the future. This particular area of the financial statements depicted severe uncertainties because of which it was stated to be one of the most important key audit matters (Samarco 2019). Various comprehensive measures were being adopted by the organization in order to evaluate the failure of the Samarco dam project. The auditors were observed to analyze the disclosures made by the organization and also various other assumptions were made by the organization in order to ensure the disclosures that have been presented by them in the financial statements.

Rehabilitation provisions and closure
It was observed in the auditing case study evaluation that the organization was having a lot of engagement in rehabilitation, Restoration, and closing of the sides because of which the financial statements were showing significant volumes of such businesses. Therefore it was important for the audit committee to carefully analyze it and present it as a key audit matter for the organization because of its tendency to impact the future cash flows. The employees were asked to engage in the task of mine closure so as to evaluate the cost of timing, reserves and mines (Samarco 2019). In order to clearly depict the impacts of rehabilitation, restore ration and closing of states, various concepts of foreign exchange rates and the time value of money worth being checked in order to confirm that the task of valuation was being carried out smoothly.

5. Hawkstone Mining
In the segment of exploitation of natural resources within the auditing case study, Hawkstone Mining is on the verge of creating newer opportunities. With respect to evaluation and exploration activities, the company is primarily dependent on capital raising and other tools like debt instruments (Hawkstone, 2018). The directors of the company play a key role in ascertaining the availability of ample resources so that all the debt instruments are easily paid off without incurring any further liabilities. Therefore, this can allow the company to counter all its obligations as and when they are accrued.

In the company’s going concern concept, the presence of evaluation of the director’s assessment was incorporated in relation to the company’s requirements of cash flow and committed forecast expenses for more than twelve months. 

Carrying value of evaluation expenses and mineral exploration
In relation to mineral exploration and evaluation expenses, Hawkstone Mining has incurred various costs for its Kangwane South Anthracite Project based in South Africa. There is a probability that the efficiency of the accounting aspect in relation to capitalization of evaluation expenses and mineral exploration is lost at one particular time period and the capitalized amount can also surpass the value in use. Besides, the procedures of an audit can also be ascertained based on the industry’s nature. Such procedures of audit, especially for the mining industries, comprises of assessment of a project’s viability and the prevalence of impairment aspects to all capitalized expenses during the period. Furthermore, the critical analysis on the auditing case study signifies that it also includes evaluation of the director’s assessment in relation to capitalization of mineral exploration and evaluation expenses, thereby assisting in confirmation of impairment aspects to such capitalization expenses. Hence, with such measures, all indicators of impairment can be easily identified.

Recommendations/Conclusion
The preparation of an audit report based on the auditing case study should be done after ascertaining all key audit matters and the methods utilized for financial statements preparation must also be considered so that investors and other stakeholders can make relevant decisions by relying on the same. Further, auditors must take efficient steps to ensure whether an organization’s financials reflect a genuine view. The incorporation of ASA 701 in the auditing standards plays a key role in ensuring proper safeguards to the interests of all investors and other stakeholders. Such standard also assists in the issuance of key audit matters in the company’s financials, thereby allowing users to rely on the same for effective decision-making. Hence, the application of ASA 701 while maintaining the accounts of the organization will be very helpful because it will maintain transparency and help the audit process to be completed with much ease. The main focus of the standard should be to provide relevant disclosures to the transactions in the accounting statement so as to prevent the scam that are taking place in the corporate world recently. As seen from the discussion done on the auditing case study considering the mining companies, the companies have meet with the ASA 701 requirement and has provided clear and relevant disclosure of the key audit matter. The application will be more pronounced if the auditors are paying heed to the standards and ensuring that no key audit matter is left behind as it may lead to flouting of the standards and will ultimately lead to concealment of facts. This in turn can hamper the movement of disclosures. Further, the auditor should introspect the matters and provide the going concern tag (ASA 570) that will provide a clear picture regarding the existence of the organization for an indefinite time period. Overall, the standards is a great scope for the auditors and the stakeholders because the relevant matter will be disclosed and at the same time the stakeholders will be able to know the matter that are impacting audit and is vital for the organization as a whole.

References
Andon, P., Free, C. and Scard, B., 2015. Pathways to accountant fraud: Australian evidence and analysis. Auditing case study Accounting Research Journal, 28(1), pp.10-44.

BHP 2019. BHP 2019 annual report and accounts, [online] Available at: http://hawkstonemining.com.au/annual-report-to-shareholders/ [Accessed 21 January 2019]

Cernusca, L. and Balaciu, D.E., 2015. The Perception of the Accounting Students on the Image of the Accountant and the Accounting Profession. Journal of Economics and Business Research, 21(1), pp.7-24.

Drew, J., 2015. Keep Pace with Tech Changes. Journal of Accountancy, 220(4), p.20.

Hawkstone 2019 Hawkstone 2019 annual report and accounts, [online] Available at: http://www.investi.com.au/api/announcements/hwk/a50734b7-1d2.pdf [Accessed 21 January 2019]

Henry, B. and Hicks, M., 2015. A Survey of Perspectives on the Future of the Accounting Profession. The CPA Journal, 85(8), p.6.

Metal Bank Ltd 2019. Metal Bank Ltd2019 annual report and accounts, [online] auditing case study Available at: http://www.metalbank.com.au/wp1/wp-content/uploads/2019/09/20190927-Annual-Report.pdf [Accessed 21 January 2019]

Murphy, G., 2015. A vision for the future: by using the most current technology and keeping their skills up to date, management accountants can enhance their careers and their organizations. Strategic Finance, 97(4), pp.62-64.

Pan, G. and Seow, P.S., 2016. Preparing accounting graduates for digital revolution: A critical review of information technology competencies and skills development. Journal of Education for Business, pp.1-10.

Rio 2019. Rio 2019 annual report and accounts, [online] auditing case study Available at https://www.riotinto.com/en/invest/reports [Accessed 21 January 2019]

SamarCo 2019. SamarCo 2019 annual report and accounts, [online] Available at: https://www.samarco.com/wp-content/uploads/2019/05/Samarco_Financial-Statements-2018-vf.pdf

Traistaru, D.A., 2016. Perceptions concerning professional judgement and ethics in the evolution of the accounting profession. European Journal of Business and Social Sciences, 4(10), pp.126-135.

Welsh, D.T., Ordonez, L.D., Snyder, D.G. and Christian, M.S., 2015. Auditing case study The slippery slope: How small ethical transgressions pave the way for larger future transgressions. Journal of Applied Psychology, 100(1), p.114.