Auditing Report

Question 1:    

To assist your audit partner, you have been asked to provide a brief report (maximum 300 words) outlining the impact of commodity prices on the assessment of ‘going concern’ for BHP for the year ending 30/6/21. Your written report must focus on the period 1/7/20–30/6/21. 

Question 1 guidelines:

You are undertaking the audit of BHP for the period ending 30/6/21 and your task is to provide a report to your audit partner to assess the impact of commodity prices on the going concern assessment of BHP for the reporting period ending 30/6/21. That is, you are in phase 1 of the audit. You are required to focus on the commodity prices of products mined and sold by BHP (eg Iron Ore, Uranium amongst others) and how the prices of these commodities impact on the assessment of going concern.

Ensure your discussion is from an auditing perspective. This is the most critical requirement of your answer. Discuss the impact of commodity prices in the context of assessing going concern for the period ending 30/6/21. Just as in Part A of the assignment, assessing going concern establishes that an entity has sufficient resources and capabilities to meet all obligations for the next 12 months. You should therefore discuss how the changes in the prices of commodities has impacted BHP’s ability to generate sufficient cashflow to meet all obligations for the following 12 months.

You may use tables/graphs to present any information that you see is relevant in establishing the connection between commodity prices and the assessment of going concern. Treat the word limit as an approximate figure – the intention is to keep your discussion succinct but if you do go over the 300 words, don’t panic – if you write 400 words, it is not the end of the world! Do not, however, go too far over. Remember, the report is going to your audit partner who wants to be able to read through the discussion and have an immediate understanding of the key issues associated with commodity prices and their impact on the assessment of going concern.

Question 2:
Using the Inherent Risk Factors listed on pages 77–78 of ASA315, identify what you consider to be four (4) inherent risks that could have an impact on the audit of BHP for the reporting period ending 30th June 2020.

(Again, remember, we are focused on the period ending 30/6/21 so it is assumed you are doing the audit for the period ending 30/6/21 and will focus on the period 1/7/20–30/6/21).

Question 2 guidelines:

In lectures and tutorials you were introduced to inherent risks and how they impact on the planning of an audit. You were told that there are different “levels” of inherent risk analysis starting with the general inherent risk analysis which identifies a series of general inherent risks which may exist in an entity which could cause material misstatement. These can be found in the Auditing Standards, specifically ASA315.

The recently updated of ASA315 has identified five broad inherent risk factors that the auditor may consider in identifying and assessing the risks of material misstatements in the financial reports.

These general inherent risk factors can be found on pages 77-78 of the ASA315 Standard (Appendix 2). There are five listed on these two pages. However, I want you to focus on the first 4 inherent risk factors for this assignment (these are the only four inherent risk factors you can look at for this assignment):

• Complexity
• Subjectivity
• Change
• Uncertainty

You are not required to discuss the fifth inherent risk factor identified in ASA315, Susceptibility. Your assignment should not address this inherent risk factor.

The next “level” of inherent risk assessment is to identify whether there are specific examples of these risk factors that are applicable to an entity that is being audited (identifying specific examples of these inherent risks that are relevant to the entity) for the reporting period. This means you need to identify specific events related to BHP that have occurred during the period ending 30/6/21 which represent specific examples of the 4 inherent risk factors identified in Appendix 2 of ASA315.

At this level of assessment that you need to focus on. You need to look for specific examples of inherent risks that illustrate the general inherent risks identified in Appendix 2 of ASA315. These examples are what you believe can create the possibility of material misstatement. Note the word material is underlined. This is because you need to find specific examples of inherent risks (events) that, potentially could result in material misstatement in the financial reports and hence will require investigation by the audit team. You are trying to find specific areas of the financial reports where you want the audit team to focus their attention because you have deemed these areas as having a higher risk of misstatement due to the presence of inherent risk factors.

Using your research skills, look for one event that illustrates each of the 4 inherent risks from Appendix 2 of ASA315. That is, you must identify one event that illustrates each of the following:

• Complexity
• Subjectivity
• Change
• Uncertainty

Do not identify more than one inherent risk for each of the above categories. You must only submit one example of an event for each of the four categories.

The events need to have occurred during the period 1/7/20 – 30/6/21. Do not go outside of these dates. You are not required to look for any events occurring in July 2021 (ie potentially post balance day events) for this assignment. You are asked to keep strictly to these dates for identifying events that have occurred and therefore you should not consider or discuss post balance day events.

The events identified in your answer must represent events that will require recognition and/or disclosure in the financial reports (ie the events need to be material in nature). This means a court case involving $250,000 is not relevant as it will not be material in nature.

As the auditor you would be focusing on events that are considered material – this can mean material by amount or material by nature and you would be looking for the possibility that the numbers are wrong, or the disclosure is wrong.

REMEMBER: YOU WILL NEED TO FIND AT LEAST ONE EXAMPLE (EVENT) FOR EACH OF THE FOUR INHERENT RISKS LISTED ON PAGE 77-78 OF ASA315. (NOT INCLUDING SUSCEPTIBILITY)

We are using BHP for this assignment. The annual reports for BHP for 2020/21 have not yet been published. Therefore, you are not required to access any formal published financial information or Annual reports for the period ending 30/6/21 to prepare this assignment. Focus on identifying the events that have occurred during the period 1/7/20–30/6/21.

One of the inherent risks you have to examine specific to BHP is complexity. How do you find example(s) of this? Think about where you would find the formal announcements of significant events impacting BHP. It is a legal requirement for a listed entity to formally announce events that have a material impact on the entity. You now need to find where these formal announcements are made.

The inherent risk factors you identify must come from events that have occurred in the period 1/7/20 – 30/6/21. The events must occur during this period to be relevant to the assignment. However, some events occurring in the relevant reporting period may have been announced in the previous reporting period (prior to 1/7/20). You are encouraged to look at the period prior to 1/7/20 for events that have been announced but occurred in the reporting period ending 30/6/21.

If you find an announcement from a previous reporting period which resulted in recognition and disclosure of an event in the current reporting period, this is allowed. You will find that the lag between an announcement of an event and the event actually occurring may go across more than one reporting period. The key is to find when the event occurs – if the event occurs during the period, the event is relevant.

By way of example, if you found that in May 2021, an announcement was made to sell of a major component of the operations in late 2021, this would not be a relevant event as the event has not happened for the period ending 30/6/21. However, if you found an announcement was made in April 2020 to spend $100million on the purchase of Property Plant and Equipment in September 2020, this would be relevant because the acquisition of the PPE has occurred during the period under investigation (even though the announcement was made in the prior period).

Presentation of your answer

The audit partner is very pedantic about how the answer should be set out – this will make it easier for the audit partner when using your report to begin the planning of the audit.

The audit partner would like you to set out your answer as follows for question 2:

1. Use a heading to show which of the four inherent risk factors you are discussing. Eg If you were looking at the first risk factor your heading will be “Complexity”.
2. Use a heading to identify a specific example (event) which illustrates the inherent risk factor (for example an event that illustrates complexity). There is no annual report to identify the events that have occurred during the period ending 30/6/21 so you must think about where you can find information that relates to material events occurring for a listed entity. Think about what the legal processes are in relation to listed entities. If something material has occurred, what is BHP required to do in terms of announcing this event(s)? This should help you find where to look for events. In your answer provide a brief explanation of the event you have chosen that illustrates the inherent risk factor(s).
3. Once you identify the inherent risk you must identify the appropriate Accounting Standard that would be used to recognise and disclose this event. For example, if you had identified an event associated with the revaluation of Property Plant and Equipment (PPE) you would identify AASB116. You must then use the Accounting Standard and identify the appropriate recognition and disclosures outlined in AASB116.

In the case of our example and PPE, you would need to identify what you consider appropriate recognition of the event (eg paragraphs xx and xx of AASB116 require the entity to recognise xxxx relating to the revaluation of PPE). In your answer provide a brief description of the requirements from the relevant paragraph(s). Don’t copy out the contents of the paragraph(s) – explain what the requirements are of the paragraphs chosen. If more than one paragraph is relevant, identify all of the relevant paragraphs in your answer. Once you have identified that something needs to be recognised, you must then indicate how it would be disclosed in accordance with the Accounting Standards. In this case, revaluations would need to be disclosed in accordance with paragraphs xx and xx – the xx is inserted for illustrative

purposes – you will need to identify the specific paragraph(s) from within the Accounting Standard.

If you are still unsure – recognition relates to what element(s) needs to be recorded in the financial reports (ie asset, liability, equity, income, expense) – look for paragraphs in the Accounting Standards that tell you what needs to be recognised (recorded). Disclosure relates to how the element(s) should then be shown in the financial reports. This is relatively easier to identify as most Accounting Standard have specific sections titled “Disclosure”. Eg Page 14 of AASB116.

A reminder (hint) how to find the events

The process relating to the announcement of major events means you must be careful – as previously explained, the event must have occurred during the reporting period under investigation. If the event has been announced in the current period, but will not occur until the next period, this will not represent a relevant inherent risk. For example, BHP may have entered into a merger commitment in May 2021 (for illustrative purposes). This event has not yet occurred and so at this stage, there would be nothing to record or disclose in the financial reports for the period ending 30/6/21. Therefore, have a think about the lag between when announcements are made and when the event in the announcement occurs (and hence impacts the financial reports). This will guide you in terms of the when to look for the announcements of relevant events (ie you may need to focus on the period prior to 1/7/20 to identify events that are announced in a prior period but will occur in the relevant period. Look for events that you know will have occurred during the period 1/7/20–30/6/21 even though they may not necessarily have been announced during the period. (This has been covered twice in the assignment booklet to give you as much guidance as possible in terms of knowing where and when to look for events that are relevant).

Remember you do not need to include an introduction or a summary for this assignment. In relation to the word limit, use your judgement. The focus is on making sure you address the questions with sufficient detail. If you can answer both questions well within the 1,500 words don’t panic. As long as you are addressing the questions, that is how you will get a good grade.

PRESENTATION, USE OF APPROPRIATE REFERENCING CONVENTIONS, GRAMMAR AND SPELLING AND FOLLOWING DIRECTIONS