Mining Industry Case: Key Audit Matters in Independent Auditor’s Report
Executive Summary
ASX listed companies are top mining companies in Australia that works in international and local markets to sell out products related to metals, gold, silver, and zinc. Present work discusses the implementation of accounting standards, including ASA 701 and ASA 570 in top mining companies of Australia. Accounting standard 701 is concerned with providing appropriate and detailed information to the shareholders of the company. ASA 701 covers key audit matters of the company that should be considered by the investors while making decisions about the investment. ASA 701 and 570 are discussed in this assignment about the Lehman Brother’s case. Lehman brother business went bankrupt in 2008 because of the inefficiency of managerial and audit committee decisions about the subprime-related securities in the global financial crisis. Bankruptcy presented some key reasons that were later addressed by these standards.
MINING INDUSTRY
Introduction
Accounting standards are a set of principles and procedures based on which companies define practices and policies. Effective implementation of accounting standard ensures several benefits and advantages for a company. Accounting standards enable a company to fairly and accurately present its financial performance in the fiscal year and historical perspective in appropriate financial statements. Stakeholders, particularly prospective shareholders, are the key concerning point of the financial statement. Inaccurate and manipulated financial data presentation can cause legal consequences. Effective implementation of accounting standards makes the report authentic and reliable for stakeholders and shareholders. In organization ASA 701 has key importance for implementation after the identification of fraud cases such as Lehman brother case. Present work will discuss Lehman brother case, relevant accounting standards, and key audit matter in the mining industry of Australia.
Lehman Brothers Case
The collapse of Lehman Brothers is the biggest collapse of history that shook the economy to its core. In 2008, Lehman Brothers went bankrupt. The giant bankruptcy was against the assets of $639 billion. Somehow, total debt at the time of collapse was around 619 billion dollars. Lehman Brother’s case was mainly caused by the inefficiency of the managerial staff and lack of concentration given to the concept of going concern business (Fernandez & Wigger, 2016). The collapse was initiated by subprime-related securities. In the global financial crisis, Lehman brothers survived with their strong strategies of business operations and financial management. Financial and executive managers were capable of dealing with all issues, excluding the risk management of subprime-related securities that caused bankruptcy (Haas & Horen, 2012). The auditing team did not recognize enhancement in the subprime-related securities when the financial market of securities was facing decline because of the global financial crisis or US housing bubbles.
In this case, auditors of the Lehman brothers had the responsibility to communicate and predict the future outcomes of the audited company to support appropriate investment decisions of stakeholders and shareholders. Investors decide based on the presented financial position and project financial condition of the company (Christopoulos et al., 2011). Auditors in Lehman Brother’s case did not present the possibility of a potential collapse in the future that could prevent the investors from investing in these securities. In response to this collapse, shareholders started requiring more details about the companies, particularly about the possibility of risk associated the investment opportunities. In response, these shareholders call ASA 701 was introduced for auditing committees to disclose risk and other important key audit matters in the annual reports to communicate with risks or matters with the proposed shareholders (Altman, 2012). Thus, Lehman Brothers collapse is the key reason for the introduction of ASA 701 communicating Key Audit matter in the financial or independent auditor’s reports.
ASA 701
Implementation of ASA 701 in the independent auditor’s reports enables the company to communicate the crucial matters in the annual reports of the company to support investors take the right and accurate decision about investment. Auditing and assurance standard board (AUASB) give authority to the companies to take decisions independently about adding communicating key audit matters in the report or not. ASA standard also covers the analysis of important governance-related matters and governance implemented in the company (MAK et al., 2002). ASA 701 Standard analyzes and discusses in detail possible risks associated with financial transactions. Auditors analyze all these matters and events and take the decision whether they should add this information or disclose this matter in the auditor’s report or not. Considering the importance of this accounting standard, it is made essential for the auditors take into consideration ASA 701 while auditing report and at least adds one paragraph regarding key auditing matters (Altawalbeh & Alhajaya, 2019).
ASA 570
Companies commonly work on a going concern basis. ASA 570 standard relates to going concern concept in businesses. ASA 570 was introduced in 2009 as a revised ISA 570. Companies have to remain to continue after the completion of the fiscal year. ASA 570 addition in the auditing report projects that financial statement is not limited to this fiscal year only (Ishak, 2016). The business will remain to continue even after the completion of the next fiscal year; therefore, financial reports are also the projection of future business outcomes in financial terms. Auditors sometimes make specific assessments for the capability of the business to work as going concern and disclose this information in the financial reports and summaries to enable investors to understand expected future of the company (Gimbar et al., 2016).
Key Audit matters in selected industry
The presented below companies all relate to the selected industry of mining for analysis of key audit matters (Altawalbeh & Alhajaya, 2019). Selected companies are listed in the Australian Stock exchange as top 100 companies of ASX.
1. Alumina Limited
Alumina Limited is one of the top companies listed in the Australian stock exchange. According to the company, more than 5000 people are working at alumina workplace to accomplish tasks related to drilling, mining, and management. In 2002, Alumina limited started its operations independently after demerged from WMC (Annualreports.com, 2016). Currently, Alumina limited is producing 14.1 million tons of aluminum. The company offers its shares for public investors at the stock exchange to earn financial resources to facilitate current project and production-related operations in the company. Alumina Limited has a total of 49, 000 shareholders. As an ASX listed company, Alumina limited follow up rules and regulations of ASX and international accounting standards to make financial reports authentic and fair for stakeholders.
In the independent auditor’s report section, key audit matters are enlisted and discussed in brief detail. These key audit matters relate to the impact of Alco Inc. separation or demerging into Arconic Inc. and Alcoa Corporation on alumina. Moreover, the audit and risk management committee also presented other key audit matters in this report that relates to the impairment indicator assessment and equity accounting for the company’s investment in AWAC. Committee also clearly stated in the key audit matter section that their opinion about risk is derived from their auditing of financial statements (Annualreports.com, 2016). Key audit matter also presented indicator for impairment of next fiscal year. Also, the directors report part also discloses that all financial reports and directors analyzed matters are presented while considering the accounting concept of going concern business.
2. Evolution Mining Limited
Evolution Mining Limited is an Australian gold company listed in ASX stock exchange for the public offering of its common stock. Evolution Mining Limited has a capacity of 770000-ounce gold production in a year. By the records of the company, Evolution Mining Limited produces around 720000–770000-ounce gold annually. Evolution Mining Limited is new in the market. In 2011, the company was started after the merger of Conquest Mining Limited and Catalpa Resources Limited. According to the annual report of Evolution mining, the limited company earned a profit of $250,762,000 in 2018 after paying income taxes and all other expenses (Evolutionmining.com.au, 2018). Annual reports and financial statements of Evolution Mining Limited are fairly presented through the following accounting standards by the auditing committee.
In the annual report 2018, the independent auditing committee presented a complete section of key audit matter. Key audit matters are presented in point form that later discussed in detail for further information. Auditing committee addressed the valuation of assets at Cowal and Mungari in the key audit matter. Excluding this, the committee also presented an assessment of the carrying values of the company’s assets. In the key audit matters, auditors also discussed the reasons for presenting each point in the key audit matter (Evolutionmining.com.au, 2018). For instance, the committee claims that valuation-related information is presented in the key audit matters to provide a significant judgment of income tax assessment and impact of income tax on the future financial position of the company. The auditing committee presented, in detail, the methods employed by the auditing committee in evaluating the financial aspects and statements to select the key audit matters.
3. Newcrest Mining
Newcrest mining company was started in 1966 as Newmont Mining Limited Company. In 1990, the BHP group acquired Newmont Mining Limited Company and merged company changed its name. Newcrest Mining is the new name of this subsidiary company. Currently, Newcrest mining is working in Indonesia, New Ireland, and New South Wales Australia to produce gold to be sold in the international and local market of Australia. Company is listed in the top 50 ASX companies from the last few years. Newcrest mining produced 1613000-ounce gold from all its gold mines. Excluding gold, Newcrest mining company also produces copper and other metals. According to the annual financial statement of 2018, the company earned a profit of 459 million dollars. Total dividend given to the shareholders was around $18.5 per share (Newcrest.com.au, 2018).
Specifically focusing on the key audit matter of Newcrest Mining Company, the independent report section is analyzed in the annual report of 2018. According to the independent auditor’s section analysis, key audit matter is presented separately with detailed information about significance and way how auditor address that key audit matter (Newcrest.com.au, 2018). Three main matters are discussed in key audit matters. The first one is the assessment of the carrying value of fixed or plant assets. In this key audit matter, the auditing committee described that they evaluated the recoverable amount of each CGU with the support of valuation specialists. Key audit matters cover details about CGU assets, including financial position and value of property, equipment, and plant in 2018. Fulfilling the requirements of ASA 701, the company also disclosed possible impact and risk factors in the next fiscal years to support the idea of going concern business. Auditing company adequately discussed each key audit matter that will require information by the shareholders and stakeholders (Newcrest.com.au, 2018).
4. BHP Group Limited
BHP group is one of the top companies of Australia that are working in mining and covering the whole global market. BHP group is working in the international market selling metals, onshore oil, gas assets, and various commodities including metallurgical coal and iron ore. BHP group is working in this industry for more than the last 130 years. The company was started in Australia in 1885. BHP group earned the name of BHP in 1885 during the discovery of oil, gas, lead, iron ore, diamonds, and copper from Broken Hill Proprietary. According to the annual financial statements of BHP group, the company earned $4.823 billion during the last fiscal year. BHP group follows accounting standards in formulating its financial and annual reports (Bhp.com, 2018).
They are considering accounting standards; ASA 701 BHP group has presented key audit matters in its annual reports. In independent auditor’s report 2018, BHP group disclosed 4 key audit matters in detail. Key audit matters are related to the valuation of Onshore US assets, losses attributed to the dam failure, taxation, and valuation of the fixed assets in the company. Shareholders take an interest in the key audit matters to analyze possible expected returns on investment and risk factors. Therefore, there is a need to also present method utilized in the valuation of assets and other audit key matters analysis (Bhp.com, 2018). The audit committee of BHP also presented a brief and concise explanation of the procedure carried out in analyzing key audit matters. In short, key audit matter disclosures provide required information to the users. Moreover, BHP also added a complete section on “going concern” (following accounting standard ASA 570) in the director’s report.
5. RIO Tinto Limited
RIO Tinto limited is headquartered in the UK. The company mainly operates in a global market; therefore, companies listed in different stock exchanges, including the New York Stock Exchange and Australian stock exchange (Riotinto.com, 2018). RIO Tinto limited follows international accounting standards for the presentation of financial details in the annual reports. By the annual report 2018, the company presented detailed information about key audit matters in Independent auditors report section. The report includes two main sections: key audit matter detail section and how the audit addressed the key audit matter section. Analysis of key audit matters in the light of accounting standards it is clear that RIO Tinto limited fully addressed required information for shareholders and other stakeholders. Moreover, the report also discussed the accounting concept of going concern business to show that business will remain to continue even after the completion of this fiscal year.
6. Orica Limited
Orica Limited is the leading global metals and gold selling company in Australia. Orica operates in the international and local market to sell out expensive metals at a mass level. Orica mainly operates in more than 100 countries around the world including New Zealand, India, Australia, Zambia, Norway, South Africa, Turkey, Japan, China, Thailand, United Kingdom, and Malaysia. According to the records of the companytotal diverse workforce working in Orica limited are more than 11500 employees. World Largest mining company is listed in Australian stock exchange for the public offering of its common stock. To analyze the disclosure related to key audit matters, the annual report for Orica limited published in 2018 is analyzed (Orica.com, 2018). The company presented a separate part for key audit matters. In 2018, the committee disclosed three key matters for the consideration of stakeholders. Matter provides information about environmental accounting practices and carrying values of assets in detail. The committee presented detailed information that makes this section helpful for shareholders and investors.
Conclusion and Recommendations
Concluding the whole discussion, we can conclude that accounting standards support the organizations to present financial reports in such a way that provide all required information to the shareholder and stakeholders of the company in a fair and authentic way. Lehman Brothers did not give enough attention to the declining securities, and thus they ended up with an increase in debt and bankruptcy. Accounting standards 701 and 750 were the two standards that were introduced to save organizations from having problems similar to Lehman Brothers. Analysis of key audit matters in the Australian company concludes that top successful companies are fully following these accounting standards that benefit proposed shareholders and investors while making an investment decision.
References
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