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Discuss about the Cash Flow Ratios and Traditional Ratios.

Auditor Independence

This report emphasises upon the key audit matters, independence of the auditors and their responsibilities while auditing the financial statement of company. Auditor who is auditing the financial statement of company is indulged in auditing the books of account of company. The KPMG is the audit firm which has undertaken the audit work program of the BHP Billiton Company. This report reflects the audit functions, independences, responsibilities and key audit matters which would be undertaken by the KPMG in its audit reports and functions. The key audit matters are analysed to identify the disclaimer and issues faced by the BHP Billiton Company in its audit report program.  This report, has reflected that audit remuneration paid to auditors for its audit services and other non-audit service given by auditor to company.  It helps in analysing the auditor’s responsibilities, roles and the how director’s responsibilities differ from them. The audit assurance program and key audit matters have also been discussed in this report.

It is analyzed that key auditor’s independences is based on the relation of the auditor with the company. The KPMG is the independent auditor of the BHP Billiton. It has no pecuniary relation with company and also worked in the best interest of the stakeholders of the organization. Auditor’s independences are very much needed before hiring firm as auditor in Company. At the time of appointing, KPMG as auditor, BHP Billiton Company took the auditor’s independences letter from the firm. As per the listing rules and accounting corporation laws, no auditor who has direct and indirect relation with the company could audit the financial statement of company (Louwers, et al. 2015).  Furthermore, no other member of the audit firm should have any relation with the company. Otherwise that audit firm will not be longer qualified to audit the financial statement of company.  The auditors are in the fiduciary position towards the stakeholders and it is their duty to check whether company has complied with the applicable audit program. In order to determine the eligibility of the auditor’s independences, auditors and company both needs to disclose their relation with each other on timely basis otherwise the auditors will not be able to audit the financial statement of company (BHP Billiton Company., 2017).

There are several times when KMPG had to give its non-audit services to BHP Billiton Company. it has been indulged in providing the tax planning, insurance and other accounting services which assists organisation to set up effective accounting recording system in its financial statement. However, all the non-audit services given by KPMG have been disclosed in the annual report of company. There is complete disclosure has also been made in the notes to account of company that all the non-audit services taken by company form the KPMG have been done at arm length price. This price has been determined on the basis of other external factors (Louwers, et al. 2015).   The main non-audit services provided by the auditors are tax planning and accounting services. These services have assisted BHP Billiton Company to strengthen its legal compliance program and set up strong harmonization with its domestic and international reporting frameworks (BHP Billiton Company., 2017).

Non-Audit Services provided by KPMG

Auditors are persons who audit the financial statement of company so that stakeholders could trust that all the information shown in the books of accounts of company is genuine. The audit remuneration is the amount of compensation given by the company for the audit services rendered to it by the auditors. It is fixed with the mutual agreement while the appointment of the auditor is made. KPMG has been receiving the remuneration from the BHP Billiton Company for its tax compliance services, accounting service and other non-audit services given to clients (BHP Billiton Company. 2017).

KPMG has given auditing and non-auditing services to BHP Billiton Company and the same have been paid as remuneration to it. The table has been shown for the same.

Audit remuneration to KPMG for its audit and non-audit services.   

JUNE 2017 ($) in million

JUNE 2016 ($)in million

% change

Amount of consideration paid to KPMG for the audit services (BHP Billiton Company. 2017).

$ 1587

$  1685

30%

Amount of consideration paid to KPMG for the non- audit services

.32

1.02

170%

After analysing the audit report, it is found that auditors has received good amount of consideration for its audit services. However, as compared to last year data, compensation for the non-audit services has increased by 170% as compared to last year data (BHP Billiton Company. 2017).

The key audit matters are disclosed by the auditors in its audit report. Ideally, the main key audit matters of the KPMG with the BHP Billiton is that assists in implementing the impairment test, use of the assertion test and observation to identify the right value of the assets (BHP Billiton Company. 2017).

This table has reflected the key audit matter, audit procedure and classification of the audit procedure which have been used by KPMG in its audit program (BHP Billiton Company. 2016).

KEY AUDIT MATTER

AUDIT PROCEDURE PERFORMED

CLASSIFICATION OF AUDIT PROCEDURE

1. Audit control model to evaluate and assess the inherent, detention and key audit risk in the business.

The auditors needs to set the materiality test in its books of accounts on the basis of the nature of the business, complexity of the reporting statement and viability of the financial statement which it could have undertaken in its books of accounts (Knechel, & Salterio, 2016). 

· Use of assertion test, control risk model and observation would be used by the auditors while setting up the ranking of the discrepancies in the books of accounts

2. Undertaking merger and amalgamation with other small organization

Auditor’s analysis whether BHP Billiton company has complied with the applicable laws and regulations while setting up the effective work program and business transactions (BHP Billiton Company. 2017).

· The substantive test, observation and other audit risk model would be used to assess the consideration given to other organization.

3. Impairment test as per the AASB 136

The impairment test would be followed to identify the true and fair value of the assets and liabilities. It will assist organization to disclose the right value in the books of accounts of company.

· The analytical procedure and substantive test is the true indicator for valuing the books of account of company (BHP Billiton Company. 2017). 


As per the listing rules and regulations, in Australia, every listing company needs to appoint audit committee and audit charter who could manage the audit services and internal control work in the best interest of the stakeholders (Louwers, et al, 2015).  These committee and charter check the key audit matters and issues in the financial statement of company.  The detail of the audit committee and charter could be seen in the auditors detail given in the annual report of company. These are the key authority that checks the viability of the prepared financial statements and assists auditor to form his audit report in effective manner (BHP Billiton Company. 2017).

The structure of the company for its audit compliance program is as per the listing rules and compliance laws. Company has one audit committee which is manage by the chairman of the committee name Lindsay Maxsted and one member of the audit charter named Malcom Broom. The Andrew Few and Marlay have also undertaken the audit program to evaluate the books of account of BHP Billiton (BHP Billiton Company. 2017).

Audit Remuneration


There are several audit functions which have been undertaken by the KPMG while rendering the audit services to BHP Billiton Company (BHP Billiton Company. 2017).

  • Evaluating the going concern capacity of the organization
  • Identify whether company has given proper notes to accounts and other details for supporting the data (Sirois, Bédardand, & Bera, 2018).
  • To implement the internal audit control check.
  • Ensuring whether there is any discrepancies in the recorded financial statements
  • To look into the statutory requirement and legal compliance program which company needs to comply?

There are several audit responsibilities of the KMPG which he should discharged while in the position of the auditor of company (Štangová, 2017).

  • He needs to implement the assertion test and observation while going for the internal audit program.
  • Assess whether the details shown in the books of account is reflecting the right value or not.
  • Identify the fraud, error and issues in the financial reporting frameworks.
  • Needs to identify that company has followed Australian listing rules and international accounting standards while recording the details in books of accounts.
  • Issue of the auditor report (Thompson, 2018).

The audit report is given by the auditor to reflect the audit point of view and where company has failed to comply with the listing rules and corporation laws while accounting the required details. This audit opinion is very much necessary for keeping the business more sustainable and making the stakeholders vigilant with the any discrepancies and issues in the financial statement ( Baldauf, Steller, & Steckel, 2015).

As per the audit report given by the KPMG, it is found that BHP Billiton company has complied with the all the laws and regulations and also established harmonization in its domestic and international reporting. However, due to the audit procedure and assertion test implemented by the auditor, there may be chances that company might have hidden required information. KPMG on the basis of the shared information and annual report has given non-qualified audit report which reflects that company has no discrepancies and issues in its reporting frameworks. ON the other hand, due to the sustainable business practice, it has also maintained sustainable business practice which has kept resulted to keeping the business functioning in long run (Byrnes, et al. (2018).


There are chances that some internal frauds and misstatements are forged deep intentionally that cannot be levelled up with the procedures that the auditor performed. Every kind of work that the auditor is doing in his professional capacity is bound to follow the independence requirements. The auditor has also maintained its independence while auditing the financial statement company. As per the declaration of the auditors, company will sustain its business in long run (BHP Billiton Company, 2017).  .

Auditors acts for the stakeholders and in order to make the financial statement reflecting the true value, they analysis and audit the financial statements. They identify all the invoices, supporting files and other details which they could use to identify whether the recorded assets are recorded or accountant with the proper value or not. They also use the audit risk model to determine the materiality level in the books of account of company. They identify whether the management representation letter given by the management is reflecting all the required details and invoices for the accounted details in the books of account of company. It is their responsibilities to check the material misstatement which may be there or could be found in the accounted details of company (Durrah, et al. (2016).

Key Audit Matters

The main responsibilities of auditors are to showcase any discrepancies and issues made by company in its financial statement. Passing audit report and reflecting the true and fair view of the books of accounts of company is one of the audit responsibilities of the auditors. He needs to identify whether the funds provided by the shareholder are not misused and deployed in properly (Kajananthan,& Velnampy, 2014).

On the other hand, directors works for the Organizaiton and he has to take all the decisions and strategic planning in the business interest and its long term sustainability. Furthermore, the main responsibility of the director is to give management representation letter to its auditor so that they could be satisfied that all the information shared with them is fair. Directors also has responsibilities to direct accountant to comply with the all the legal laws and accounting standards so that company could harmonize with its domestic accounting laws and international reporting framework (Agha, 2014).

The material subsequent events which have been disclosed by the Company are based on the profitability, liquidity and other events which have occurred in the last previous year. The profitability of company has negatively impacted and decreased by 12% since last year it has resulted to loss of AUD $ 7.5 million and the reason behind is based on the excess investment in this research and development department. It has also invested AUD $ 334 in its research and development department.  This investment is made in order to discharge the CSR liabilities but also negatively impacted the production cost of the business Furthermore, last year events in Brazil have also negatively impacted the business sustainability and long term brand image of company (AICPA., 2017).

There are no such material subsequent events which have been hidden and not disclosed by the company in its annual report. However, due to the high complexity of the legal compliance and listing rules, there might be inherent risk in its accounting and reporting frameworks. This may be found by implementing the audit risk model (Appelbaum, Kogan, & Vasarhelyi, 2018).

Conclusion

The audit report reflects how well company has complied with the accounting and auditing laws while formulating its financial statement. Auditors act for the best possible outcomes and works in the fiduciary duty to its stakeholders. After analyzing the facts, it is inferred that auditors has given no disclaimer on the financial statements prepared by the Organizaiton. It has given clear chit in its non-qualified audit report stating the fact that it has complied with all the applicable laws and regulations and disclosed all the material information in its books of accounts. There is no discrepancies and misstatement given by company to its stakeholders which may negatively impact the decision made by them. The key audit matters have also shown that KPMG has given several audit and non-audit services to company. The management representation letter has been taken by auditors while auditing the company and disclosed that company is working in the best interest of the stakeholders and would be more sustainable in long run.

References

Agha, H. (2014). Impact of working capital management on Profitability. European Scientific Journal, 2(2), 49-52.

AICPA. (2017). Audit guide: Audit sampling. 2nd ed, Australia: John Wiley & Sons.

Appelbaum, D. A., Kogan, A., & Vasarhelyi, M. A. (2018). Analytical procedures in external auditing: A comprehensive literature survey & framework for external audit analytics. Journal of Accounting Literature, 40, 83-101.

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

BHP Billiton Company. (2016). Annual report. Retrieved from  https://www.bhp.com/investor-centre/annual-reporting-2017.,

BHP Billiton Company. (2017). Annual report. Retrieved from  https://www.bhp.com/investor-centre/annual-reporting-2017.,

Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., & Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the Future Audit 1. In Continuous Auditing: Theory & Application (pp. 285-297). 2nd ed, Australia: Emerald Publishing Limited.

Durrah, O., Rahman, A. A. A., Jamil, S. A., & Ghafeer, N. A. (2016). Exploring the relationship between liquidity ratios & indicators of financial performance: An analytical study on food industrial companies listed in Amman Bursa. International Journal of Economics & Financial Issues, 6(2), 435-441.

Kajananthan, R., & Velnampy, T. (2014). Liquidity, Solvency & Profitability Analysis Using Cash Flow Ratios & Traditional Ratios: The Telecommunication Sector in Sri Lanka. Research Journal of Finance & Accounting, 5(23), 163-171.

Knechel, W.R. & Salterio, S.E., 2016. Auditing: Assurance & risk.3rd ed, Australia: Routledge.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. & Thibodeau, J.C., 2015. Auditing & assurance services. 2nd ed, Australia:McGraw-Hill Education.

Sirois, L.P., Bédard, J. & Bera, P., (2018). The informational value of key audit matters in the auditor's report, Evidence from an Eye-tracking study. 2nd ed, UK: Accounting Horizons.

Štangová, P. (2017). Financial Audit as a Tool for Management Control. Account & Financial Management Journal. 30(1), pp.101-121

Thompson, D., (2018). Contemporary Challenges in Audit. In Contemporary Issues in Accounting, 2nd ed, Australia: Palgrave Macmillan,

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[Accessed 22 February 2024].

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