ACCT3005 Key Events in the Auditing of BHP Group for Keen Analysis

1. Identify what you consider to be four ‘key’ events that could have an impact on the audit of the BHP Group for the year ended 30 September 2018 and/or future audits. (For the purposes of this assessment we are assuming the reporting date is the 30th of September, not a traditional balance date). For each of the events identified above, describe the event clearly and state how and why you consider the event may create the risk of potential material misstatement in the financial statements of BHP for the year ended 30 September 2018. You are expected to identify four (4) critical events that have occurred within the relevant reporting period. It is expected that you will identify appropriate references to relevant Accounting Standard(s) (mandatory disclosure requirements or requirement for specific procedures related to the amounts to be shown in the financial reports) as part of your discussion of the potential misstatement. You must also identify an appropriate audit objective which you think is relevant to each of the risks you have identified and explain how you arrived at the identification of the audit objective (i.e. you must justify the identification of the audit objective).

2. Using your understanding of the audit evidence mix, discuss briefly how each of the risks you identified will impact on the evidence mix for the planning of the audit
of BHP. When referring to the evidence mix to use, reference should be made to the tests of balances, transactions and analytical procedures and the like (refer to the lectures for a complete list of types of evidence used by the auditor), indicate which specific areas in the accounting system would be critical and comment on the nature and extent of the testing required . HINT: You are only required to assess the evidence mix for each individual event identified and determine an appropriate evidence mix for that specific event. You are not required to identify an overall inherent risk and audit risk assessment for the entity. You are not required to determine an overall evidence mix for the entity. Focus only on the impact of each individual risk on the evidence mix required to assess the impact on each risk you have identified.

 ‘Key’ Events in Auditing of the BHP Group for the year Ended 30 September 2018

Executive Summery

This paper was done with the major reference from the 2018 Annual report of BHP group. The key events explained were obtained from the annual reports and news which were listed by the auditing company KPMG Australia, which edited the financial statements of the group. The key events reported by the auditors are: Onshore US assets and liabilities, Samarco, taxation risk and Valuation of assets. The assignment considered the adherence of the report to the International Financial Reporting standards (IFRS) and the Australia Accounting Standards. It focused of the materiality and the full disclosure principle of the contingent assets and liabilities with regards to the risks which the event could cause to the users of the financial information when making decisions.

Keen analysis of the audit procedures were made to determine why the event was considered as a Key event and explain clearly the reasons why the events stated could create a potential material misstatement of the information in the financial statement. Relevant accounting standards where made while assessing the relevant and reliability of the financial information. The procedures helped to determine the key responsibility of the auditor on the financial reporting of the company and relating the objective of the audit with the various tasks followed in achieving such objectives. In all the Key events, the auditors were in agreement with the report has it has not had a significant risk of material misstatement.

A comparison was made between the current annual reports with the 2007 in order to justify the relevance of the financial report. Various Accounting standards were important were followed in preparing the financial statement and the work of the auditor is to ascertain that there this matters did not deviate from the accounting principles and standards.

Introduction

In the auditing of the financial statement, the auditor considers certain specific events which are sus

After identifying the key events, the auditing team will, therefore, find evidence, risks and the assertions that are pertaining the important effects which in one way or another leads to the misstatement and misrepresentation of the financial statements. According to (Bychkova and Itygilova 2015 pp 18) on justifying classification and financial misstatements, the auditor in charge of the auditing operations need to state in the financial reports on the auditor's opinion which will help the users of the financial statement to believe in the information presented by the many through the financial statement reporting.

 The critical events listed by the auditor, KPMG Australia on the audit report of the financial statements of BHB Bilton Pcl helps the auditor to have with a substantive procedure on the auditing of the financial statements. Imperatively, the auditor matters in the current year which have an impact on the; allocation of resources, and the company’s strategy the financial matters. In the list, the auditor is required to list the key events in with reducing importance (Shchadilova 2015 pp 50). The key matters arise solely from the auditor’s professional judgment of whether the financial statement represents honest information about the company. The auditing team uses the important matters to come up with the audit opinion about the financial and no separate information about the same matters is produced (Gorodilov 2013 pp 60). Among the key events listed by the KPMG as the “Key” events in the auditing of the financial books of the period ended September 2018 included: 1) Onshore US assets 2) Samarico 3) Taxation 4) Asset valuation.

• Key Events
• Inherent risk 1

Onshore US Assets and Liabilities.

The auditing team analyzed the valuation, classification, and presentation of these assets. The company engaged in the Onshore activities which make the new event to be among the important matters in the in the auditing of the financial statements of the BHB Bilton Plc. The assets were classified and valued as follows; the assets held for sale was US$11.9 billion in 2018, held for sale liabilities were amounted to 1.2 billion and the loss after the sale from the discontinued operations amounted to US 2.9 million compared to the US $0.5 billion loss in the previous year. There was nil record of such assets in the year 2017 apart from the US$0.5 billion of the discontinued operations (Murcia et al 2017 pp 217).

Events on the onshore assets were considered as a key audit matter because;

• The proposed divestment was important in generating the financial statements for the BHB group.
• The significant charge on the impairment
• The application of the judgment in consideration of treating specific items as discontinued using the accounting standards criteria.

• Inherent risk 2

Samarco dam

The losses in the income statement which was attributed to the Samarco amounted to US$0.6 billion compared to US$ 0.3 billion. The books provision on the contingent disclosure was US $ 1.3 billion which were US$1.1 billion in the year 2017. The auditing team followed critical accounting judgments and disclosures when determining the truthfulness of the financial about the losses from the Samarico dam. The amount of the losses could be material if found to be misrepresented by the company and the auditors would want to disclose the reasons why there was such loss from the dam (Open payments total $6.5 billion in US, 2015 pp 24).

There was a need to determine the legal claims against Samarco and BHP and their impact on the accounting judgment and disclosure and how the activity was disclosed. It was important to determine the impact of a legal obligation of BHP Billiton Brasil Ltd's of providing funding to the project and how that obligation was treated in the accounting books with reference to the governance, framework and preliminary agreements. The auditing team wanted to also disclose accounting judgment on disclosing the contingent liabilities relating to various claims and other disclosures about Samarco and BHP that could not be reliably estimated (Hennes 2014 pp 40).

Therefore; events on the Samarco is considered key because;

• The amount of potential claims deemed significant.
• The degree of uncertainty of the various estimations relating to the matter was high.
• The level of application of professional judgment by the auditing team; when assessing legal claims, and obligations of the BHP Brasil ltd. 

• Inherent risk 3

Taxation

The books of accounts of BHP Ltd reported the amount of income tax expense to be US$7.0 billion in 2018: US$4.4 billion and current tax payable at US$1.8billion in 2018: US 2.1 billion in 2017. This results required audit assertions to determine the truthfulness of the information provided. Since the company operates in different countries, there might be a risk of misstatement of the financial information owing from the various taxation obligations in different countries which might not be uniform across the scope of control of the company (US 3D printing market to reach US$17.2 billion mark by 2020, 2018 pp 124).

Complexities also can be created in the cross boarder sales resulting from the effect of the transfer pricing which will raise the risk of misstatement. Much concern was put on the US Tax Reform enforced in December 2017 which impacted the corporate tax law through reduction of the corporate tax rate form (35-21) %, the creation of territorial tax system and allowing immediate expensing of qualified property to broaden the tax base (Kyungseok 2015 pp 420).

The taxation was a key event due to; the application of taxation legislation to the affairs of the group and the level of judgment used by the audit team in determining the reasonableness of the tax information.

• Inherent risk 4

Asset Valuation

The team focused on the property, plant, and equipment (PPE) in 2018 US$62.2 billion: USD$80.5 billion in 2017, Impairment of PPE and intangible assets at US$0.3 billion in 2018: US$ 0.2 billion in 2017. Although this was still a key significant event, the audit would report that the consideration of the asset valuation risk is less in 2018 18 as a result of the separation of the Onshore assets (US$202.5 billion needed to control US wastewater, 2008 pp 8). It is still a Key event because; there was a balance of 60% on the group’s assets and the application of judgment in determining the reasonableness of inputs in the assessment of recoverable assets value in the group.

2. Evident Mix

• Impact of Onshore US Assets and Liabilities.

The information from the onshore activities has a risk of misstatement since the activity was the first one, the company divesting to onshore activity. Separation of the onshore activities from the assets of the company will impact on the disclosure of the assets of the organization (???????, 2014 pp. 35). 

The critical events conducted based on the onshore activities.

• The auditors tested the Key controls of the Onshore US assets.
• Share purchase agreement evaluation.
• Comparison of the carrying costs of the assets and liabilities to their recoverable amounts basing on the share purchase agreement.
• Comparing the share purchase agreement with the assets and liabilities classified as held for sale.
• Checking the relative disclosure accuracy with the accounting standards requirement where the discontinued operations where discontinued.
• Presentation of held for sale assets as discontinued operations were challenged by the team, terming the two as serving different purposes in the continuing business.

The classifications and the carrying amount of the underlying assets with reference to the Onshore held for sale assets and liabilities were considered to be acceptable (Chiu and Wong, 2013 pp 100). The auditors focused on the full disclosure principle and materiality principle in identifying the events which affected the assets and liabilities over the in the period.

Impact of Samarco Dam

Samarco has a possibility of misstatement risk on the disclosure of the contingent liabilities (Habbash, 2015). The auditors should assess the disclosure of the liability of Samarco company according to the Framework, governance, and preliminary agreement so that to ensure that the company is able to meet its obligations.

The critical events conducted based on the Samarco activities.

• The auditors tested the Key controls of the Samarco dam.
• The auditors assessed whether there was a legal obligation known by the shareholders of Samarco with the Brazilian authorities or the disclosure was based on the relevant accounting standards.
• There was an assessment of any reliable information about the funding obligation from the BHP Billiton Brasil. The assessment was done on the available information on the framework agreement in comparison with the information presented by the group on the statement of cash flows. This involves the evaluation of the discount rate, current ratio; foreign exchange rate and the need of Samarco o meet its obligations.
• The auditing team required to work hand in hand with Samarco internal audit team in ensuring that Samarco works according to the framework, governance, and preliminary agreements and ensure that the internal auditors provide states clearly the outcome of such procedures.
• The auditing team relates the cash flows in the financial statements with the historical accuracy of the cash flow.
• The team assessed the completeness of the liability disclosures with thorough reference in the book’s legal procedures by getting information from the legal personal, the company’s management and the external legal counsel. The audit team also required the auditing team in the Samarco dam to provide independent audit information about the contingent liabilities and evaluate the outcome of such procedures under the auditing standards.
• The auditing team also did an assessment of the company’s legal procedures and determined the potential liabilities of the company.

The team used expert information when determining the legal procedures in relation to the framework, governance and preliminary agreement of the Samarco obligations. The team used required accounting and auditing standards in developing independent judgment and disclosures of the Samarco liabilities. The results of the procedures conducted by the audit team, a consideration of provisioning level and disclosure were acceptable (Appelbaum, et al 2018 pp 90).

• Taxation Risk

The audit team should assess into the disclosure of tax liability of BHP limited. There is a possibility of risk on the company’s contingent liability disclosure. This is as a result of different tax laws across borders.

The procedures needed to achieve these assertions include;

• The auditor’s testing of controls on matters relating to taxation and the accounting standards of the current financial statements.
• The team relies on information from experts in different countries to obtain tax information relevant to the audit to determine the accuracy and truthfulness of the tax report in the books.
• The team also must assess the various assumptions leading to the tax liability for the BHP Company and assessing disclosures in relation to current tax and the ongoing tax matters.
• The team performs the procedures specific to the US tax reform such as; working with specialists in the United States, testing the completeness of tax information and testing of the mathematical accuracy of the information provided in the financial books(Duliba, 2015 np). 

The above procedures results show that the provision of tax and relevant disclosures are acceptable according to the auditors' independent judgment.

Asset valuation Impact

Asset valuation risk affects the impairment of assets and reversal impairment. This will impact the cash flow of the in the financial statements. To critical events to achieve this assertion include;

• The team tested the key controls on the property, plant, and equipment of the group to include reversal and asset impairment.
• The team evaluated the factors that triggered the impairment and the indicators that would trigger reversal impairment by evaluation of forecast assessment prices, comparison of operations, evaluation of competency and conducting sensitivity analysis among the key assumptions.
• The team also assessed the changes in the carrying amount of the BHP ltd assets. 

Conclusion

The key events received unqualified opinion from the auditors of the company. The separations of the onshore assets and liabilities from the assets and liabilities of the company made it a potential risk to the material misstatement because it was the first operation of the company outside Australia. The taxation, valuation of assets was key events because auditor wanted to determine the truthfulness in the financial information on assets and liabilities and how the company reported income taxes. Samarco dam failure raised a concern on the legal liability of the company with the auditors referring to the Framework, governance and preliminary agreements while assessing the failure. The auditors agreed with the financial statements as do not create risk material of material misstatement.

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