Essay: Risk-Based Auditing Approach For BCI Minerals - Key Findings And Recommendations.

You need to use the risk-based auditing approach, auditing concepts, auditing standards and case laws which you have learnt in this unit and apply them to this company.

 The key areas of your research can cover issues, such as:

• Business risk, inherent risk, control risk and otherrisks
• Corporate Governance, directors and non-compliance oflaws
• Going concern, administration andliquidation
• Role, reporting obligations and negligence ofauditors
• Fraud, aggressive accounting policies and other misappropriations to derive your conclusions and

The above list is only illustrative and your case study report is not required to address all the above mentioned areas. You can include other topics of this unit, as related to the company assigned to you for investigation.

Learning Outcomes and Graduate Attributes

 Completing this assignment will help you achieve the Learning Outcomes and ECU Graduate Attributes as described on page 11 of the unit plan.

 Preparation and Instructions

 This assignment is focussed on understanding the facts of the case study and using the relevant accounting standards, regulations, case law and other information to arrive at your conclusions and recommendations. Please use the Australian Auditing Standards even if they are NOT Australian companies, as they are based on international standards in order to derive your conclusions and recommendations.

Report structure

 The main headings of the case study written report are:

• ExecutiveSummary
• Introduction
• Methodology
• Findings
• Implications offindings
• Conclusions andrecommendations

 Marking criteria

 The marking criteria for the case study written report is:

• ReportConventions : 5 marks
  • ExecutiveSummary
  • Introduction
• Research : 5marks
  • Methodology
  • Findings
• Application : 5marks
  • Implications offindings
  • Conclusions andrecommendations
• Written CommunicationSkills : 5 marks Total : 20 marks

Resources

Please refer to the resources available in “Annotated reading list”, “Other significant references and resources” and “Blackboard” on pages 6 of the Unit Plan. The resources which can be used are numerous, such as company annual reports; websites; professional and business magazines; textbooks; academic papers, newspaper and video clips. Please research the information and its logical flow, as it will also assist you in structuring this case study report. 

Key Areas of Research

A company faces various kinds of risks in its entire business cycle. These risks differ in their nature and implications. It is the responsibility of the management as well as the auditor to investigate these risks and ensure the company’s overall well-being. (Refer to Appendix 1 for types of business risks)  Some of these risks have been explained below:

• Business riskrefers to those kinds of risks which may result in decreasing of profits or a probable loss which is influenced by a gamut of factors which may or may not be within the sphere of control of the company (Lobo and Zhao 2013). These factors can be government policies, economic health, price fluctuations etc. In the mineral and iron ore industry, lack of supply, threat of substitutes, exhaustion of resources are some of the most potent factors which influence business risk. It is normally recommended that a company experiencing business risks should apply a capital structure which has a lower debt ratio, in order to meet its financial needs at all times.
• Inherent risk, as the word implies is inherent in any company or industry. It includes the probability of arising out of some situations or circumstances which generally is a part of the company’s operational environment. The iron ore and mineral industry is faced by a continuous inherent risk which is the risk of causing damage to the environment due to quick depletion of resources and increasing pollutants.
• According to ASA 200, Control riskrefers to the risk of material misstatement which could occur due to any kind fraud, errors and is one of the foremost causes of material misstatement.  It is majorly detected by the company’s internal management.

 Methodology:

Risk-based auditing approach:

In the concerned project, the risk based auditing approach has been employed. In this method, the audit resources are directed and targeted towards those areas of the financial statements of a company which might contain misstatements which might have occurred due to any errors or omission as a results of the risks faced by the business. In this case, auditors not only take into account the varying degree of risks faced by the company but also look into the internal operations and controls of the company. They help the management to indicate the risks faced by the company and assist them to make extensive use of the main control operatives such as preventive, directive, detective which remain at their disposal (Coetzee and Lubbe 2014). This requires the auditors to assess the risks of material misstatements of the company after taking into account the intricacies and the environment of the concerned company which is BCI minerals in this case. To conduct this approach, secondary and qualitative data have been used as the accepted methodology (Bentley, Omer and Sharp 2013). 

Procedures:

According to ASA 315, there are certain requirements which needs to be adhered to by the auditor in order to efficiently perform the audit function. These requirements are as follows:

• Enquiries need to be conducted with the management and other experts of the company, who according to the auditor has the best knowledge regarding material misstatements and other financial matters of the company.
• Analytical procedures and inspection also need to be conducted by the auditor.
• Information to be obtained from the client, the engagement partner or any other past auditors who have performed audit functions of the client in the past. This shall help the auditors to have a better background information of BCI minerals and conduct a swift and efficient auditing operation (Krishnan and Wang 2014).

Identifying and assessing the risk of material misstatement:

The auditor must identify and assess the risk of material misstatement at two levels:

• Financial reporting level
• The assertion level for varying classes of transactions, account balances, and disclosures which are generally implied to be true.

To perform this function, the auditor must perform the following duties as per ASA 315:

• Identify the risks associated with the company’s material misstatement and other risks by incessantly analysing the company’s environment, the controls associated with these risks.
• Then assess the identified risks and find out whether they are prevalent to the financial reports and statements as a whole.
• After necessary assessment, the auditor must relate the identified risks to the various wrongdoings which might take place at the assertion level. Here the auditor must also take into consideration the related control measures which he/she intends to test in order to assess the risks of the company.

Findings:

Significant Audit matter:

Certain important audit matters were disclosed during the audit operations conducted by the auditor. These findings are crucial from the BCI minerals LTD’s point of view and the future performance and profitability depends on it. Some of the prominent areas of explored during the audit are as follows:

• Intangible assets impairment: There are some reservations regarding the carrying value of the intangible assets. It stood at $23.532 million.  The thorough assessment of the carrying value of the intangible assets of the company is necessary on the part of the management to make accounting judgements and in determining if the assets require impairment. The auditor has found sufficient reservation because of the absence of explanation on this part.
• Provisions maintenance: The maintenance of provisions is necessary from the company’s point of view. Being operative in the iron ore and mineral industry, employee protection and safety is of paramount importance. As a result of which adequate maintenance of provisions has to be kept. The provisions regarding employee benefits had decreased significantly by a large number from 295 in 2016 to 415 in 2017. This is a cause of concern for the company and its work force and has a moral bearing upon their employees. The provision amount for rehabilitation has also been considerable low when compared with last year’s figures.
• Financial health and going concern concept: On careful scrutiny of BCI minerals’ consolidated financial statements and cash flow for the year 2017, some alarming issues have come into the forefront. There has been a significant decline in some of the areas cash flow from operating activities specifically in receipts from customers from 1, 55,173 to 66,588 in 2016. (Refer to Appendix 4 for cash flow from operating  activities of BCI)   Similar trends have been seen in the cash flow from the financing activities because of the increase in the payment of royalty rebate. These financial implication s could severely hamper the sustainability of the company in the long run, thus questioning its going concern principle of accounting (Asic.gov.au, 2018).
• Foreign exchange risk: It has also brought significant level of misery to this iron ore company. This kind of risk arises from varying kinds of future commitments, various kinds of liabilities and assets which are labelled in a certain currency which is not the actual working currency which is generally used for its measurement. The company deals with foreign currency through cash and cash equivalents, borrowings and loans. The company as per its policies, tries to settle the foreign claims and settlements in the respective currencies of that very own country with whom it has engaged in trade. In the last year there have been no trade in terms of foreign currency when compared to the 2016’s figures, which stood at $ 6,713 (Bciminerals.com.au, 2018). This is a grave concern for the company.
• Inconsistency in earning of profits: BCI Minerals LTD has been consistently producing inconsistent results in the financial frontier of their business. The company had reported a loss of about $ 43,862 after taking into account the income tax expenses for the year 2016. Whereas the company has recently reported a profit of $7064 in the year 2017. As one can see, the company has been very inconsistent in its financial operations and rendering of profits. Such kind of inconsistency can result from lack of supply of iron ore reserves in its erstwhile reserves of ores or due to exhaustion in its previous natural resources sites. The company’s long term sustainability and survival may be in question, if these trends continue to develop. (Refer to Appendix 3 for a brief overview of BCI’s financial results).
• Impairment issue: Impairment refers to a permanent deduction in the value of an asset when its carrying value in the balance sheet of the company becomes more than the actual recovery value of the asset (Aasb.gov.au, 2018). This majorly happens for fixed assets of the company. It happens when the book value of an asset exceeds the actual cash flow from the asset. In the case of BCI minerals ltd, the iron prices had a fall in the previous financial year, the company had decided that the need for initiating impairment policies in the company’s accounting records and policies is not needed.  This is a cause of concern as per the financial well-being of the company. AASB 136, an asset cannot be carried at more than its recoverable amount in terms of its market face value.
• Increased competition from big players: The Company has been facing an uphill task of competing with the major players in the iron ore and mining business in the Australian market. The iron prices have significantly decreased over the span of last four years and as of now they are the lowest. The market for iron ore is only growing at the rate of mere 10-15% in the Australian market, whereas the companies have increased their production of iron ore related products with the aim of earning higher profits, even though the market is already oversupplied because of their incessant supply (Theaustralian.com.au, 2018).The big two in the Australian market Rio Tinto and BHP Billiton also hope that the decreased prices would eventually throw out the companies with high prices in the market. BCI has to remain cautious if it has to survive these kind of market problems and the management must plan out better ways in dealing with the surging problems ahead. (Refer to appendix 2 for a precise diagrammatic presentation of the findings).

Implications of the Findings:

The auditor after careful analyses and scrutiny has found out various important aspects regarding BCI minerals on the basis of its past performances. Acting on these findings must be the immediate objective of the management of the company. The various implications of these findings have been discussed below:

1. The impairment of the intangible assets has not been properly made by the company. The need of undertaking this impairment policy is necessary for ensuring the financial well-being of the company. The impairment of intangible assets whose carrying value has exceeded its actual market fair value must be immediately treated as per the Australian Auditing standards and must be off the books of the company to ensure a fair financial statement presentation (Czerney, Schmidt and Thompson 2014). If it is not done, it is certainly projecting a negative impact on the financial statements of the company as a result of which the stakeholders of the company are being duped.
2. The maintenance of provisions are also necessary for the company. As it is operating in the iron ore and mining industry, the maintenance of provision becomes all the more important and indispensable. The provisions for rehabilitation of iron ore extraction sites, employees of the company and their well-being, on site workers is the duty of the company. It has been observed that the company has not been maintaining adequate provisions for all the above mentioned areas, which as per the Australian Auditing standards are all the more essential and important. It is a grave violation of fair financial policies of the Auditing standards as well as protection policies of the workers and employees of the companies working down under mines and ores.
3. The company must immediately aim for sustaining its financial well-being. The cash from operating activities have been consistently low (Buuren et al. 2014). It is not a good indicator for the company’s all round financial performance and it needs to be addressed at the earliest, otherwise the going concern principle of the company would be compromised in the long run.
4. Foreign exchange risks are and always will be there because of the volatile exchange rates which remain at the mercy of the international trade and other myriad factors which are entirely out of the company’s sphere of influence. For the last year, there have been no trade involving foreign exchange. If the issue is not addressed, the company would not be able to settle its claims in the import arenas in the foreign currencies, which would consequently would be paid in its own currency.
5. The iron ore company has been posting inconsistent financial results in the past couple of years. It had incurred a loss in the FY-15, and FY-16. It had earned a profit after two years in FY-17 of around $7064. If this trend continues, the company would eventually be in great danger. As a result of which the company, the company would be dissolved in the near future, if adequate measures are not taken and implemented.
6. The prices of iron ore related products have been at an all-time low sine the past four years. BCI has been suffering from incessant competition from the past four years from the big players of the Australian iron ore industry. These major players such as Rio Tinto and BHP Billiton expect companies like BCI would not be able to compete with the because of the low output costs and its high cost of production. BCI has to put a fight and take proper steps to address these issues.

Learning Outcomes and Graduate Attributes

Recommendations and conclusion:

BCI minerals LTD is one of the most promising companies in the iron ore segment of the island nation of Australia. The company has been looked into in detail and certain findings and their implications have been reported through this report. There are certain major concerns which the company faces, which should be looked into by the senior management of the company at the earliest. The company must stringently follow the financial guidelines of the ASIC as well as the ASA in order to ensure proper reporting of financial statements to its stakeholders. The company must also decrease its cost of production and procurement of materials in order to decrease its overall cost of production. Otherwise it will be impossible to compete with the big players who are consistently producing goods at low prices.

The company needs to increase its foreign exchange transactions which would enable them to conduct business with the foreign nations in those foreign currencies rather than their own currency. The company must also explore other areas of business such as petroleum, gold reserves and agro based industries to earn more revenue and combat the issues faced by its parent business which is engaged in producing iron ore related products. The overall financial health of the company must also be looked into in details. The management must look into ways to improve its operations so that the profitability of the company improves and increases. As the company has been incurring losses for the past couple of years, the company must look into ways to increase its performance. The company must look into strategic ways to improve its performances and operations. Joint Ventures, partnerships, exploring new iron fields and sites must be religiously looked into by the company, if it has any intention of ensuring its long term sustainability.

BCI Minerals limited is an Australian iron ore mining and development company. The principal activities of the company includes exploration and development of mineral and iron reserves and projects. They have focused chiefly on iron ore deposits in the Pilbara region of Western Australia, which is famously known as the ‘Silicon Valley’ of Mining. The company mainly operates through its four area of operations which are Nullagine Joint venture, Buckland project and its other operative areas located in Pilbara and South Koodaideri (Bciminerals.com.au, 2018) .It is registered under the Australian Stock Exchange. It has a diverse product portfolio among the iron ore based companies in Australia which includes iron ore exploration and extraction, gold reserves, agricultural operations etc. Gradually, the company is expanding its operations in the agriculture and gold reserves section. 2017 has been one of the most successful year in the history of the company. It has earned a staggering $ 7.64 million profit after a long period of time and has been at a great pace since then. It is one of the most stable and promising iron ore and mineral based company, which is actively operating in the island nation.  

In this report, a risk based auditing approach has been employed in order to analyse BCI Minerals. The report tells us about the varying degree of risks faced by the company, the functioning of the key result areas of the company, any kind of misappropriations as well as risks of any probable frauds in the company. The report has been prepared after taking into account the internationally acclaimed Australian Auditing standards as the benchmark for conducting the necessary research and analysis. After careful observation and analysis, recommendations have been provided after taking into account the varying degree of risks, frauds and other misappropriations of the company.

References: 

Aasb.gov.au. (2018). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed 6 Apr. 2018].

Asic.gov.au. (2018). [online] Available at: https://www.asic.gov.au/media/1238138/rg43-published-27-5-2011.pdf [Accessed 6 Apr. 2018].

Bciminerals.com.au. (2018). Home - BCI Minerals. [online] Available at: https://www.bciminerals.com.au/ [Accessed 6 Apr. 2018].

Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.

CODE, S.M., 2014. Financial risk management.

Coetzee, P. and Lubbe, D., 2014. Improving the efficiency and effectiveness of risk?based internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.

Czerney, K., Schmidt, J.J. and Thompson, A.M., 2014. Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?. The Accounting Review, 89(6), pp.2115-2149.

Guénin-Paracini, H., Malsch, B. and Paillé, A.M., 2014. Fear and risk in the audit process. Accounting, Organizations and Society, 39(4), pp.264-288.

Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.

Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), pp.1385-1412.

Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), pp.1385-1412.

Reserve Bank of Australia. (2018). Box A: The Effects of Changes in Iron Ore Prices | Statement on Monetary Policy – February 2015 | RBA. [online] Available at: https://www.rba.gov.au/publications/smp/2015/feb/box-a.html [Accessed 6 Apr. 2018].

Theaustralian.com.au. (2018). Iron ore market risks 'disaster'. [online] Available at: https://www.theaustralian.com.au/business/latest/iron-ore-market-risks-disaster/news-story/ccbb9205b04970924218fec58b65f230?sv=c6ffd8f81bfb8644ce1d31e0cab4ffec [Accessed 6 Apr. 2018].

van Buuren, J., Koch, C., van Nieuw Amerongen, N. and Wright, A.M., 2014. The use of business risk audit perspectives by non-big 4 audit firms. Auditing: A Journal of Practice & Theory, 33(3), pp.105-128.