The current report would critically assess the auditing standard, “ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report”, from the perspective of Amcor Energy, Bluescope Limited and Newcrest Mining. Key audit matters could be found in the annual report of the three above-stated organisations. The risks that could arise out of material misstatements in accordance with ASA 315 are assessed from the organisational perspective. In addition, the paper would lay significant emphasis on recommending some actions, which is necessary for all the three stated organisations to adopt while representing its financial statements so that the investors have a fair overview of any material misstatement inherent in the same.
The global financial crisis has mandated the need for the business organisations to incorporate key audit matters in their financial reports, as the needed information is not disclosed adequately in the same (Adrian, 2014). After this standard is implemented, the accounting authorities have made it mandatory for all types of business organisations in Australia to adhere to the regulations for reducing the chance of any further financial crisis that could occur in future. Moreover, it is the accountability of the organisations to reveal the supporting materials in their independent audit reports. Such disclosure is conducted primarily because of the standard mentioned in ASA 701 for representing the actual financial condition to the shareholders.
Key audit matters (KAM):
KAM is introduced with the intent to add increased value to the audit report so that the investors and other users could have a better overview of the reasons and ways of issuing the audit opinion. However, the audit opinion could not be relied upon completely. This is because it lacks information in identifying the significant events taking place in the organisation that might change the directions of the organisation materially. Basically, four types of audit opinion are deemed to be observed, which include qualified opinion, unqualified opinion, disclaimer opinion and adverse opinion. Therefore, these categories cover up all the organisations. However, the opinions are made from the industrial perspective and not from the business perspective. However, the inclusion of KAM would help in making the opinion specific towards the organisation.
Ways of identifying KAM
If any particular event is to be acknowledged as KAM, it would depend on the judgement of the auditor only. At the time of evaluating the financial statements, it is possible that the auditor might identify several significant incidents. The auditor raises concern and it would be discussed with the relevant authority for justifying and gauging the incident. If the statement provided lacks justification, the incident would be considered as immaterial and it would be included in KAM.
In accordance with ASA 570, the financial report is developed on the assumption that an organisation is a going concern and it is expected to continue its operations in the upcoming years. All the business organisations prepare general purpose financial reports in accordance with the going concern method, the only exception is if the management decides of liquidation or ceases operations. If the financial information is not provided accordingly to the shareholders, it leads to expectation gap among them. The shareholders often look for published and qualified audit reports to verify the accuracy of the financial statements. ASA 570 lays stress on providing key audit matters in the annual reports, as they would help in identifying the material misstatements related to conditions that might pose doubt on the ability of the organisations to operate as going concern in future, as laid out in “Paragraph A1 of ASA 570 Going Concern”. For the selected organisations, key audit matters are not present in their annual reports and they are evaluated critically in the below-stated sections.
Cash flow concept:
In case, an event is probable to influence the future cash flow at a material level, it would be included in the form of a KAM. For instance, if the auditor believes that a short financial note related to a contingent liability has the ability of causing cash outflow in future; it would be reported under KAM (Simnett and Huggins, 2014).
Assessment of the mining industry:
Evidences have been gathered regarding the material misstatements after careful scrutiny of the latest annual reports of Amcor Energy, Bluescope Limited and Newcrest Mining and these are likely to create issues for the organisations. After the financial crisis, issues could be detected in the financial statements of the entities where the necessary information was not disclosed adequately. For overcoming such issues, ASA 701 has been developed for disclosure purpose and it is to be communicated in the financial reports. Hence, the organisations are left with no other option rather than disclosing the key audit matters in their published financial reports (Annualreports.com, 2018). After evaluating the annual reports of the three organisations in 2017, significant risk is inherent in compliance with ASA 315 having effect on business operations. In the words of Bielby, et al., (2016), projections and analyses of future issues could be carried out with the help of material misstatements. Moreover, the evaluation of the annual report would help in estimating those issues that could hamper the business activities. Such estimation paves the path for the investors to detect any problem happening within the organisation.
However, it has been argued that non-disclosure of material misstatements, if any, could help in raising the unethical practices of the organisation (Bunn, Pilcher and Gilchrist, 2018). With the help of critical dissection of the annual reports of the organisations, the risks could be identified, if the material misstatements are disclosed in accordance with ASA 315. Such analysis primarily includes the following:
Material misstatement areas having higher risk:
By evaluating the annual report, the disclosures that the organisation has made could be represented significantly to the users of the financial statements. Since there is compliance with the ASA 701 norms on the part of the three organisations, their annual reports could be adjudged as feasible. In addition, it denotes that there is presence of conformance to ASA 315, which is followed on the parts of the auditors as well as the entities. Thus, the use of ASA 315 has enabled the investors of Bluescope Limited and Newcrest Mining to detect material misstatement risk prevalent in the entities (Carson, Fargher and Zhang, 2016). However, in the three organisations, significant disclosures have been made in carrying value of evaluation and exploration assets of Amcor Energy. Therefore, it analyses and identifies impairment indicators for exploration and evaluation assets by testing the key control of the management. Accordingly, the budget for future expense is prepared to carry out the ongoing exploration.
The three organisations have enforced certain accounting policies, which help in depicting the actual financial condition. In addition, they have adhered to ASA 701 by disclosing the key audit matter in its annual report. Along with this, incidents could be identified regarding different corporate scandals that have taken place in the past where the auditors have adopted unethical measures to represent strong financial health of the organisations for their self-interest (Carson, Redmayne and Liao, 2014). As a result, questions could be raised regarding the integrity of the independent auditor reports, if key audit matter is not present. It is necessary for the auditors of the three organisations to understand the business risk where the identification of material misstatement is essential. In addition, it is necessary for the auditors in evaluating the risks associated with business environment, business activities and others before the evaluation of the audit procedures. Therefore, the firms are required to obtain overview of business risk, since it might take place as audit risk in future. In this regard, Czerney, Schmidt and Thompson (2017) remarked that the auditors are required to dissect all the business processes of the organisation to gain an insight of actual risk leading to material misstatements.
After the financial crisis of 2007, ASA 701 is implemented, as the crisis has compelled the audit assurance board to identify unethical measures that the independent auditors and organisations carry out while preparing their financial statements. These unethical practices have helped in representing sound financial health of the organisation for raising share value. Hence, the three organisations are able to raise excess capital from the market (Pandit, et al., 2017). When the financial crisis occurred, the entities that adopted unscrupulous practices collapsed and the investors were not motivated to purchase their shares. Due to this, the international economy and the financial solidity in the capital market were taken aback. Hence, it is inherent that ASA 701 is implemented so that the audit assurance board could minimise the unethical practices of the business entities. Moreover, debts were used heavily as revenue in order to hide their positions of insolvency from the potential investors (Duncan, 2014). ASA 701 intends to limit the organisations in taking up unethical measures for preparing their financial reports so that transparency could be ensured in financial information.
Risks identified in accordance with ASA:
Based on the independent audit report of Amcor Energy, Bluescope Limited and Newcrest Mining, adequate disclosures are made like impairment of non-current assets and for dealing with this issue, it has determined considerable change in recoverable amounts along with identifying any discrepancy between budgeted cost and actual operating cost. However, with adherence to ASA 315 carried out on the part of the audit assurance board, material misstatement risk could be recognised in the books of accounts of the organisation (Fleming, Hee and Romanus, 2014). Moreover, ASA 315 states that the auditors are needed to follow the guidelines represented in the paragraphs A9 to A11 and A27 to A30. As a result, material misstatements could be identified on the part of the auditors that raise the total audit risk. Such relevant analysis would help the auditors to detect frauds, which the three organisations might undertake in order to overstate its balance sheet statement. In this context, Hardy (2014) advocated that frauds could be identified through ASA measures that the organisations undertake in preparing their financial statements.
Moreover, the auditors are needed to follow certain paragraphs in ASA 315 from A105 to A108, since the risk related to material misstatement could be identified within the business operations of the organisation. Furthermore, the evaluation could help to assert different levels of transaction classes when the performance of the audit process is identified. The auditors could detect the financial risks when the financial statements are assessed for identifying the material misstatement, which limit the financial stability of the three organisations. Hence, by implementing the process of audit, the auditors could evaluate the viability of the annual reports of the entities (Harrison, 2015).
Research extent and application:
According to the annual report of the three organisations in 2017, Amcor Energy, Newcrest Mining and Bluescope Limited have complied with ASA 701. Due to such compliance, key audit matter is developed and this has minimised the overall audit risk of the organisations. The audit risk could be identified with the help of the audit processes, which are to be followed on the part of the auditors. In this context, special attention could be provided to the railways processes in order to evaluate risk pertaining to the business operations of the organisation (Knechel and Salterio, 2016). In the initial stage, risks are required to be analysed in relation to the business goals, which could be found from the annual reports of the three organisations. This enables in identifying the material misstatements and as a result, it might lead to wrong depiction of the financial position and performance of the organisations. Secondly, the approximation of risk significance is needed for the auditors to the management of the entities, which should comply with the norms laid down in the board of audit assurance. Moreover, it is vital for the auditors to detect those risks that are likely to take place in future, as these could lead to material misstatements (Pearson, 2014). Along with this, all the performed activities of the organisations should be assessed in order to identify any kind of risk aroused due to such actions.
From the annual reports of the three organisations, it could be observed that PwC is the auditor of Amcor Energy, while EY is the auditor of both Bluescope Limited and Newcrest Mining. All of them have added a section of KAM in their annual reports, in which the auditors provide explanation about the reasons behind significant events. Despite the fact that they adhered to all the auditing standards, their unqualified audit opinion do not belong to the same platform in contrast to their financial positions. Thus, there is limited scope of understanding the financial compatibility and stability of these three organisations in the absence of KAM. The reason is that the significant difference between these organisations could be evaluated with the help of KAM (Ragothaman, Mock and Srivastava, 2014). For instance, EY in its audit report of Bluescope Limited have included accounting for tax positions in KAM (Assets.ctfassets.net, 2018). The recoverability related to deferred tax asset is a KAM because of the financial importance of the asset, which is $85 million in the consolidated tax group of Australia. PwC in its audit report of Amcor Energy has identified impairment risk related to carrying amount of investment in AMVIG to detect whether share price is reflected in the recoverable investment amount. Finally, EY in its audit report of Newcrest Mining have included the taxation policy of its Indonesian subsidiaries from the tax office of Indonesia with respect to the applicable rate of income tax (Annualreports.com, 2018). It seeks to recover the payment of additional tax amounting to $96 million. All the amounts are considered to be material and thus, additional estimations are needed (Sanusi, et al., 2014).
Conclusion and recommendations:
After critical assessment of the relevant ASA standards such as ASA 701, ASA 315 and ISA 260, it is crucial for the organisations in representing their actual financial conditions in the financial reports. Moreover, compliance with ASA 701 and ASA 315 is to be ensured in its operations for conforming to the board of audit assurance. Along with this, Amcor Energy, Bluescope Limited and Newcrest Mining are needed to gain an understanding of the relevant standards and policies, which require being finished for representing the real financial reports. The flow of information from the auditors to the investors could help in obtaining an insight of the actual financial position of the organisations in order to undertake relevant decisions related to investment. By evaluating the annual reports, the disclosures that the organisations have made could be represented significantly to the users of the financial statements.. In addition, it denotes that there is presence of conformance to ASA 315, which is followed on the parts of the auditors as well as the entities. Thus, the use of ASA 315 has enabled the investors of the organisations to detect material misstatement risk prevalent in the entities.
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