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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 (see guidance notes in appendix).


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. 

Foreign Exchange Risk

The audit of a business is a critical process and the purpose for the same is to identify material misstatements which can affect the quality of financial reporting which is used by every business for the purpose of recording and classifying financial information of a business. In many cases, the audit of a business can also be affected by certain key events or disclosures which are of significant nature. In this case, the annual report of BHP group is considered for the purpose of identifying certain key events which can impact the overall audit process of the business and the same are listed below in details:

As per the financial statement which is shown in the annual reports of the company for the year 2018 reveals that the business faces significant foreign exchange risks in relation to the debts which is taken by business. The risk is associated with the revaluation of foreign exchange of the business in relation to debts which are undertaken by the business. As per the annual report which is presented for the business for the year, the foreign exchanges transactions are covered in the income statement which is presented for the business for the year 2018. As per AASB 121, exchange rates are to be translated for the financial statements of the business. As per para 23 of AASB 121, foreign exchange for monetary items such as cash and cash equivalents will be translated as the exchange rate on the reporting date of the business (Mancini, Ranaldo and Wrampelmeyer 2013). Therefore, the business of BHP should translate its cash and cash equivalents using the exchange on the reporting date. The net foreign exchange loss is presented to be $ 93 million. While conducting the auditor needs to ensure that the provisions which are covered in AASB 121 should be adhered to and also the balances which are shown should be showing true and fair view.

As per the annual report of BHP group for the year 2018, the management effectively records the deferred tax items of the business. The deferred tax assets and liabilities of the business is shown on the basis of the temporary difference which arises between the tax bases of assets and liabilities of the business and their respective balances which are shown in the financial statement of the business (Chytis 2015). The annual reports specify the risks which the business faces in relation to deferred tax items. The income statement of the business shows deferred tax liabilities of the business and also discloses its respective treatments in the notes to account section of the annual report. As per the provisions of AASB 112, the treatment for income tax and also deferred tax valuation of the business is shown. As per para 34 of AASB 112, deferred tax asset shall be recognized for any unused tax or tax credit as long as the future taxable profit. Further the asset is considered to be measured at rates which are applicable on assets or liabilities depending on the dates when the asset is realized or the liability is settled as stated by Para 47 of AASB 112. The auditor needs to make sure that all relevant standards are followed in this respect and the tax amount which is shown in the financial statement are showing true and fair view.

Deferred Tax Assets and Liabilities

As per the annual report of the business for the year 2018, the management of the business has shown in the notes to account regarding the future taxable profits which is anticipated by the business. The provisions of AASB 112 shows that an entity should provide appropriate disclosures for deferred tax items of the business considering the future taxable profits. The auditor needs to estimate that the financial statement are prepared following the relevant standards of accounting and also the financial statement. 

The annual reports of the company for the year 2018 also reports about contingent liability which can arise for the business and the same is disclosed in the notes to account section of the annual reports of the business. The annual report of the business shows that the management has to face liability claims related to the site of BHP Billiton Brasil which is shown to be $ 20 billion for the clean up costs and the damages which is incurred by the business. In addition to this, the management also faces Federal Public Prosecution Office claim which is also of a significant amount as shown in the annual report of the business (Hendrickson 2014). As per the provisions of para 37 of AASB 137 states that a law suit would affect the confidence of the public on the company and also damage the brand image of the business. The auditor needs to check the balances of contingent liabilities of the business and also analyze how the same affect the profitability of the business. The annual report will cover relevant disclosures in this respect as contingent liabilities and lawsuits as per para 86. 

The lawsuit, which is better known as contingent liability has the higher inherent risk. Accounting identification for this contingent liability may require for BHP Billiton to suffer loss as the company is named as defendants in numerous legal proceedings that are initiated by the individuals, non-government organization and individual’s entities in the Brazil state court after the failure of Samco dam (Bhp.com 2018). The probability of loss is very judgemental and hence greater amount of inherent risk.

Additionally, the estimation of amount is also treated as the area where manipulation may take place and involves greater level of inherent risk (Hayes, Gortemaker and Wallage 2014). This can be specified by explaining that the assertions comprise of completeness and valuation of contingent liabilities. The lawsuit requires numerous remedies together with the rehabilitation costs, compensation to the injured and deceased facilities.   

Accounting for Future Tax Income

The measurement of the provision needs the use of significant estimations, assumptions and judgements that might be impacted by the potential changes in the scope of work and required funding amounts under the agreed framework.

Because of the size of company, the evidence obtained for test is low with substantive test for contingent liability is less.

AAR = CR x IR x PDR

Medium to extensive   Low  High  High 

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Extensive

Medium to Extensive

Extensive

Extensive

Small to Medium

The accounting for the future income tax is very multifaceted area of accounting. It needs the knowledge that is related to both the corporate income tax laws and the timing of accounting for determining the temporary differences (Kumar and Sharma 2015). There are difficult complex areas of accounting for BHP Billiton involves the accounting for income taxes that ultimately represents as the inherent risk for the auditor. There are numerous assertions are involved and ultimately impacts BHP Billiton several account balances however the wider set of financial statements is not effect. In other words, the risk are limited to the assertions relating to the accounts on the financial statements.

The nature of BHP Billiton being a mining company is largely exposed to the inherent risk of valuation of assertion for its inventory. It may be difficult to imagine the inventory size and quality, results obtained from drilling, price of commodity and production costs are factors that results in inherent risks in determining the estimation of the minerals, gas and oil reserves.  

AAR = CR x IR x PDR

Medium to extensive   Low  High  High 

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Medium

Medium to Extensive

Small to Medium

Extensive

Extensive

The increase in the foreign country investments and fluctuation in the exchange risks results in higher inherent risks and control risks for fluctuation is greater because of the BHP Billiton higher amount of transactions in the overseas nations (De Paula 2016). As the result of this, BHP costs and earnings may be materially and adversely impacted by the increasing costs and interruptions in the supply. These may comprise of the unavailability of the energy, water or fuel together with the fluctuations in the climate and insufficient capacity of the infrastructure (Baldauf, Steller and Steckel 2015). The foreign investment currency and fluctuation in the exchange rates requires translation in the financial report for the BHP by using the numerous different exchange rates.

The internal control on the operations over the numerous foreign nations may relatively reduce the higher control risks. The evidence for the control requirement is higher with substantive test for the transactions will be extensive since greater number of overseas transactions needs to be translated. This would ultimately impact the strategic detection risk. The analytical process is extensive because of the fluctuation in the exchange rate.

AAR = CR x IR x PDR

Medium to extensive   Low  High  High 

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Medium to Extensive

Extensive

Extensive

Low

Medium to Extensive

The inherent risk associated with the deferred tax is generally lower than the few areas of differences. The changes in the foreign tax law also includes the re-measurement of deferred tax balance. The deferred tax risks originating from the BHP cross border operations and transactions gives rise to the tax risks. The other matter that is existent in the deferred tax is the uncertainty in the implementation of the law (Arens et al. 2015). The inherent risk of the deferred tax asset states that the carrying amount might change because of the estimations relating to the recovery of the tax benefits. With the reduced corporate tax rate in US ultimately resulted in group re-measurement of the deferred tax position.

Since the inherent and the control risk is higher, the evidence of the control is lower. The analytical process is very much extensive for assessing the financial impact and the liability which will impact the balance of the BHP Billiton. The analytical process would help in reducing the substantive test and balances of the deferred tax assets.

AAR = CR x IR x PDR

Medium to extensive   Low High  High

Understanding of internal control

Test of Control

Substantive Tests of Transactions

Analytical Process

Test of Details of balances

Extensive

None

Extensive

Extensive

Small to Medium

Reference

Arens, A.A., Elder, R.J., Beasley, M.S. and Jones, J., 2015. Auditing: The Art and Science of Assurance Engagements. Pearson Canada.

Baldauf, J., Steller, M. and Steckel, R., 2015. The Influence of Audit Risk and Materiality Guidelines on Auditors’ Planning Materiality Assessment. Accounting and Finance Research, 4(4), p.97.

Bhp.com. (2018). Bhp.com. [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2018/bhpannualreport2018.pdf?la=en [Accessed 6 Oct. 2018].

Chytis, E., 2015. Deferred Tax Assets from unused Tax Losses under the prism of Financial Crisis. In International Conference on Business & Economics of the Hellenic Open University, Athens. Retrieved from https://193.108 (Vol. 160).

De Paula, F.R.M., 2016. The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919).

Hayes, R.S., Gortemaker, H. and Wallage, P., 2014. Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times.

Hendrickson, J.R., 2014. Contingent liability, capital requirements, and financial reform. Cato J., 34, p.129.

Kumar, R. and Sharma, V., 2015. Auditing: Principles and practice. PHI Learning Pvt. Ltd..

Mancini, L., Ranaldo, A. and Wrampelmeyer, J., 2013. Liquidity in the foreign exchange market: Measurement, commonality, and risk premiums. The Journal of Finance, 68(5), pp.1805-1841.

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