ACCT3005 Auditing Theory And Practice

Introduction: 

BHP Billiton Limited is an Anglo-Australian multi-national mining and material company established and incorporated in Australia. Identification of four key events with potential of increasing the risk of material misstatements in the financial statements of the company along with the impact of these events on audit mix for the audit of the company are discussed here.

Requirement 1: 

The risk of error in translating foreign operations:

The company is one of the largest mining companies on the planet with substantial portion of its operations spreading to different parts of the world. Transactions of the company related to the worldwide operations of the group are conducted in number of foreign currencies. Translating these transactions into US$ requires in-depth knowledge in foreign exchange rate fluctuations and appropriate financial reporting standards to ensure these are correctly translated using appropriate foreign exchange rates (Louwers et. al. 2015).

The gains and losses from translation of foreign exchange operations must be correctly classified and reported in the financial statements to ensure that the financial statements correctly disclose the impact of these transactions on the financial performance and position of the company. International Accounting Standard (IAS) 21 contains all necessary provisions to be followed in reporting the changes in foreign exchange rates. An auditor must conduct necessary audit procedures to verify that the changes in foreign exchange rates have been correctly presented in the financial statements of the Group (Cohen and Simnett, 2014).  

Disclosure of exceptional items:

Significant amount of loss has been disclosed in the income statement of the Group under exceptional items. In total a net loss of $2,970 million has been recorded in the income statement of the company in 2018. The net loss of $2,970 consists of loss for US tax reforms to the tune of $2,320 million and loss of $650 million for Samarco dam failure. Considering the extent of loss reported on exceptional items, the financial statements must properly disclose the fact in the financial statements to ensure that the users of financial statements can correctly measure the impact of these items on financial performance and position of the company as at the period to which such loss has been reported (Simnett, Carson and Vanstraelen, 2016).

The measurement technique and method used to estimate the loss for US tax reforms and Samarco dam failure must be verified to ensure these amounts reflect the expected loss correctly for the exceptional items. The estimates and assumptions made by the company while quantifying the financial impact of US tax reforms and Samarco dam failure shall be checked by the auditor to ensure that there is no error in estimating the amount of loss from these items and the financial statements are not materially misstated (Chan and Vasarhelyi, 2018). Miscalculation or error in calculating the amount of loss from exceptional items would materially affect the income or loss reflected in the income statement thus, auditor must conduct necessary procedures on the items to come to a correct conclusion as to the justification of the amount reported under exceptional items.

Recognition of intangible assets:

Intangible assets often comprises of significant amount of total assets. The standard procedure followed by an entity to identify and measure intangible assets in the books of accounts would determine the amount of intangible assets to be recorded in the books of accounts. BHP Billiton Limited has disclosed a net of $3,968 million in intangible assets in 2018. The procedure followed in identifying and measuring the amount of intangible assets in the books of accounts of the company must be verified by the auditor to ensure there is no risk of material misstatement in the financial statements of the company in relation to the items of intangible assets and attached value to these items of intangible assets (Junior, Best and Cotter, 2014). The auditor must assess whether IAS 38 has been followed by the Group while disclosing the amount of intangible assets in the books of accounts. Necessary substantive procedures shall help the auditor to come to a particular conclusion in relation to the items and amount disclosed as intangible assets in the books of accounts of the company. Error in recording to intangible assets would materially misstate the financial position of the company in the financial statements of the company.

Recognition of Impairment loss:

In 2018, the Group has recorded impairment loss of $2,339 million against the goodwill. Such huge amount of impairment loss has impacted the resultant profit or loss disclosed in the income statement of the company. An entity operating in Australia must record the impairment loss in the books of accounts in accordance with AASB 136, Impairment loss. In case the entity is complying with the International Financial Reporting Standards (IFRSs) then IAS 36 shall be complied with to ensure disclosure of appropriate amount of impairment loss in the books of accounts. An auditor is responsible to conduct all necessary substantive procedures to verify the amount disclosed as impairment loss in the books of accounts (Cannon and Bedard, 2016). Considering the quantum of amount recorded by BHP as impairment loss in 2018, i.e. $2,339 million against goodwill and $14 million against other intangible assets, the auditor must conduct all necessary procedures to ensure that the financial statements are not materially misstated in relation to the amount of impairment loss. Error, fraud or mistake in recording the amount of impairment loss would materially misstate the income statement of the company and will not reflect the actual amount of profit or loss resulted from the business operations of the company (Cao, Chychyla and Stewart, 2015).    

Requirement 2:

Translation of foreign operations:

BHP Billiton Limited follows international accountings standards and IFRSs to prepare and present financial statements. IAS 21 is to be followed by the accountants while recoding changes in foreign exchange rates at the time of translation of foreign operations. Auditor requires to use appropriate audit evidence mix to conduct substantive audit procedures to verify the procedure followed by the company in translating foreign operations (Visvanathan, 2017). The foreign exchange rates used for translating different items in the financial statements shall be checked and verified by the auditor to ensure that IAS 21 has been correctly followed by the accountant. The foreign exchange rates applicable for translation of items of revenue, expenditures, assets and liabilities are different. The auditor must evaluate that the accountants have used appropriate foreign exchange rates for translation of these elements in the financial statements of the company. The following table would help in deciding the evidence mix for foreign exchange translation:

Disclosure of exceptional items:

Subsequent to the signature of the US President on the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, BHP Billiton has restated its deferred tax position by charging $2,320 million as income tax. The corporate tax rate in US has reduced from 35 per cent to 21 per cent subsequent to the implementation of TCJA. Despite the reduction in corporate tax rate the reason for such huge charge as income tax in the books of accounts must be verified and assessed by using substantive audit procedures including verifying the impact of the US Tax reforms on the deferred tax position and foreign tax credits of the company (Ayres et. al. 2016). The following table would help in deciding the evidence mix for exceptional items:

Recognition of intangible assets:

The standard procedure that the Group has followed to recognize and measure the amount of intangible assets shall be verified in significant detail to ensure that the requirements of IAS 38 has been correctly followed by the company in disclosing the intangible assets in its financial statements (Golden, Sun and Zhang, 2017).

The policy of recognizing goodwill and other intangible assets of the company must be thoroughly checked by using an appropriate mix of test of controls and substantive procedures to ensure that the amount of goodwill and other intangible assets correctly reflect the expected future economic benefits for the company. In 2018 a net of $3,968 million has been disclosed as intangible assets of the company. The standard process and procedures followed by the accountants must be followed correctly to ensure true valuation of goodwill and other intangible assets in the books of accounts of the company (Chen, Shroff, P.K. and Zhang, I., 2017). The following table would help in deciding the evidence mix for recognition of intangible assets:    

Recognition of Impairment loss:

A total of $2,353 million has been recorded as impairment loss in the books of accounts of the Group in 2018. The significance of the amount can be understood from the fact that the combined profit or loss from continuous business operations in 2018 is $7,744 million after taxation. Thus, the amount of impairment loss of $2,353 million is almost one third of total profit after tax from continuous business operations. Thus, the auditor must use a detailed analytical and substantive testing on the item of impairment loss recorded in the books of accounts to ensure that the amount of loss is justified. IAS 36 must be complied with by the accountants while recognizing impairment loss in the books of accounts of the company. The following table would help in deciding the evidence mix for recognition of impairment loss (Specifically due to the quantity of loss reported):  

Conclusion: 

Out of impairment loss of $2,353 million, $2,339 million is due to the sale of US onshore operations. As a result the entire goodwill of US Onshore has impaired subsequent to the disposal of US onshore operations. However, sue of appropriate audit procedures including analytical and substantive testing of different account balances would help in ascertaining the risk of material misstatements in the financial statements of BHP Billiton Limited.      

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