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Compliance with statutory requirements

Topic: How is Enhanced Auditor Reporting being embraced in Australia?

Since 2016, there has been a strong push to improve the quality of audit reporting. Listed entities now have to report on “key audit matters” and improve the way material information is communicated using “plain English”. As mentioned in the CPA Australia podcast “How is Enhanced Auditor Reporting being Embraced around the Globe?” (available at CPA Australia website):

“The IAASB’s new auditor reporting requirements commenced in December 2016. Standard setters in many jurisdictions, including Australia and New Zealand, have issued the new requirements with the same effective date, whilst others have committed to issue the standards but have not yet done so. The UK have had similar requirements in place since 2013 and some firms in other countries have early adopted the IAASB’s requirements. Jim Sylph, Co-chairman of the IAASB’s Auditor Reporting Implementation Working Group, and Merran Kelsall, IAASB member and AUASB Chairman spoke to CPA Australia about the uptake and impact of enhanced auditor reporting around the globe.”

Download an annual report of an ASX listed company that is in the S&P/ASX 300 list. Review all the sections within the selected company’s annual report, which relate to the Auditor’s role in providing assurance over the entity’s financial statements and control environment. Students will need to review and analyse the following key areas included in the company’s Annual Report:

Auditor’s Independence Declaration Independent auditor’s report

Non-Audit services performed by the Auditor

Auditors’ remuneration

Role, functions and composition of the Audit Committee

Independent Auditors report to the members (shareholders)

Review all Key Audit Matters noted and the associated audit procedures

Based on your analysis of the auditors’ sections and other areas pertaining to the auditor, as included within the Annual Report, submit a report which summarises and evaluates the auditor’s assurance services performed for the client company.

As part of your review of the assurance services provided, consider the following:

Has the auditor complied with Independence requirements?

If there were non-audit services provided, what was the nature of such services?

Provide an analysis of the Auditor’s remuneration in a table with prior year comparisons. Include percentage changes and explanations of the remuneration.

In relation to the key audit matters, which audit procedures were performed to provide assurance over each matter? Summarise and paraphrase each key audit matter. Correctly classify each audit procedure listed as: tests of controls, substantive tests of detail, substantive test of balances or analytical procedures.

Is there an Audit committee? Are there any non-executive directors on the audit committee? Is there an Audit Committee Charter? If so, summarise the main points of the charter including: the structure, function and responsibilities of the Audit Committee.

What type of Audit Opinion was expressed?

How do the Directors’ and Management’s responsibilities differ from the Auditor’s responsibilities in relation to the financial report?

Were there any material subsequent events? If so, briefly outline them and paraphrase and summarise how they were treated.

As an interested third party stakeholder, make an assessment of the effectiveness of the material information reported by the Auditor in your conclusion.

Consider whether there is any material information which could be missing, under-reported and/or not fully explained or disclosed in an effective way for the intended users?

What follow-up questions would you ask the Auditor at the company’s Annual General Meeting?

Compliance with statutory requirements

If the auditors emphasise their focus on the internal control mechanisms of an organization, detection of material fabrication and misstatements becomes easier. From the audit report of Rio Tinto, it can be easily seen that the same reflected a transparent picture of its financial performance. The audit reports of Rio Tinto projected a true and fair picture of the organizational performance related to finances. This is due to the quality of audit performed in the company. The audit functioning of Rio Tinto should be given due credit for the purpose of the quality of audit programmed in the company. Also, the company has been in compliance with all the required statutory requirements such as Corporations Act, 2001 which was verified by the auditors of the company.

For a company to survive in its industry in the era of rapid globalization and changing technologies where there is neck to neck competition, it is required for the same to comply with all the necessary statutory requirements. Rio Tinto is seemed to have adhered to all the statutory requirements that has paved way for it to not only survive in the market but also allowed it to expand. The company has complied with all the statutory requirements which is in itself a positive indicator. The audit reports and financial statements of Rio Tinto highlights the fact that the company has adhered to every independent requirement such as Corporations Act, 2001 which reflects a clear and a transparent picture of its financial performance.

The non-audit services performed by Rio Tinto were well guided by the audit committee of the company. The audit experts from the audit committee have extended support in context of non-audit services by means of providing legal and ethical suggestions on the same matter. The suggestions are provided in a written form so as to comply with the resolution that was made for the audit committee. Apart from this, the risk is taken care of by the risk committee. The Board of the company is extremely contended with its choice of letting the auditors take care of the non-audit services considering their suggestions on the same. The efficiency of the auditors in delivering the best of audit services along with non-audit services are mentioned in the annual reports of the company for the users to evaluate it and take appropriate decisions. Below are the standards described in detail that are necessary for decision making under the Corporations Act, 2001:

  1. Non-audit services are adequately scrutinized by the audit committee of Rio Tinto so as to make them more objective for the organization. It is due to the fact that non-audit services shall not impact the policies of corporate governance installed by the company. Also, being unsure of the effectiveness of the suggestions provided by an auditor is not a good thing to do.
  2. Self-review is disallowed. The auditors are not allowed to review their own work so as to eliminate the risks of self review threats.

Non-audit services

The Audit Committee of the Rio takes care of its compliance system, internal and external audit, control mechanism and financial reporting as well. It not only extends support in the governance of various mechanisms in the company but also at the same time takes care of the functioning of the same (Rio Tinto, 2017). The records of Rio Tinto are easily accessible to its audit committee that assists the managements in performing its duties with ease. There are powers and limitations bestowed upon the audit committee of the company and it works according to such powers and within its boundaries which assists the management and at the same time does not really interferes with their work at the same time (Petty et. al, 2012).

The audit committee of the company has planned its tender and evaluated it prior hand since year, 2017. It has allowed prepared a timetable for the purpose of allowing non-audit services to be transferred from the firm being replaced to the newly designated firm adequately and effectively (Porter & Norton, 2014).

The leading audit management partners in United Kingdom and Australia from the leading firms Deloitte, KPMG and EY are also interviewed (Rio Tinto, 2017).

The audit committee appointed by Rio has also traced the selection criteria on the basis of which the roles and responsibilities of the management and the committee are defined.

Significant audit matters are of concern for the auditors. These are matters that are the deriving points of the auditors overall judgment, opinions and suggestions. These are significant and hold utmost importance in the audit of current year’s financial statements that reflects the risks arising due to frauds, errors, fabrication or manipulation of the material information that are required to be identified, assessed and evaluated for the period by the auditors. The auditors also will have to look for the audit strategies that could work in the company where they are appointed, allocation and utilization of its resources and gathering the efforts from the team (Parrion, Kidwell & Bates, 2012)

All such key matters along with the feedbacks were based on the opinion gathered entirely during the audit of the financial statements and reports of Rio Tinto and separate opinion on the same are not provided by the audit committee. The audit committee of Rio Tinto believed that the list of risks in the company shall go on and on and yet the key audit matters might not be applied on the company.

Audit Committee

Overall Group materiality: $350 million (2016: $275 million) while Overall Rio Tinto plc materiality: US$325 million (2016: US$250 million)

Pilbara business unit was kept as a base for the need of audit to be applied to its overall financial information as it is significant to the Group in matters of finance.

A report has been obtained using the 21 reporting units aside from Pilbara for the assessment of data. There was also conduction of audit procedures for specific transaction and balances using the information of the 16 reporting units of which ten were operating units and the other six were central reporting units like the treasury entities. With the increase in financial transactions of the organisation, the risks of financial misstatements and obligations have increased (Rio Tinto, 2017). Therefore an elaborate research was made in respect for the analysis of any such risks present in the key audit matters conducted in the year 2017:

  • Analysis of all the impairment losses and charges was conducted in order to find out the actual values if the assets like properties, plant & equipment and many other intangible assets that are a part of the Rio Tinto Aluminium (Rio Tinto, 2017).
  • Provisions were created in relation to the fall, restoration and the environmental obligation that may be faced by the organisation in future.
  • Also provisions were said to be created for the uncertain tax proportions in relation to the transactions that are carried out by the commercial centre located in Singapore.

In relation to the data of the previous year, it was noticed that the assessment of risks of material misstatements will not consider defined benefit plan surpluses and deficits as the audit matters of concern (Rio Tinto, 2017). The final assessment details were also to be conveyed to the Audit committee stating that there were no new risks or misstatements conveyed in this year.

Reversal of the impairment assessment

The company was stated to have goodwill valued US$1,037 million, intangible assets amounting to US$3,119 million and assets like plant & machinery, property amounting to US$62,093 million as at 31 December, 2017. It was observed that impairment charges were deducted for each and every asset category in the last year. It is very necessary for each and every organisation to recognize all assets for any impairment costs on an annual basis (Rio Tinto, 2017). It should also be clearly assessed by the management that the assets are having any recoverable values or not as the impairments reversals are being identified.

Oyu Tolgoi- It was observed that the development process of the underground mine was to be started by the year 2017. It was also noticed that the total value of the operating assets of the Oyu Tolgoi amounted to US$8.3billion as at 31 December, 2017.

Argyle- it was observed that an impairment charge was triggered after it was noticed that the production values at the Argyle CGU were very low, also low prices were received for the bulk diamonds which resulted in the fall of contribution from productivity. The management was also observed to increase the cost estimates on the basis of the ongoing technical studies. Further it was noticed that the cash flow requirements of the business are not being fulfilled, thus making it unsupportive for the carrying value of the long term assets. At last, a total of US$172 million was charged as the pre-tax impairment charges in relation to Argyle (Rio Tinto, 2017).

Amount of non-audit services

Grasberg-  new agreements were to be made in relation to the Contact of works agreement between the Indonesian Government and the Freeport. This may cause the overall performance and financial condition of the PT Freeport to fall and negatively impact the production. Impairment charges may also be triggered because of the illegal activities (Rio Tinto, 2017).

The auditors are required to evaluate and assess the financial statements of the company and conduct the audit process and then provide his best opinions and suggestions based on his findings and developments. The management of Rio Tinto initially looks after the preparation of its financial statements and reports which are then evaluated by the auditor for the purpose of reviewing the same and offering the best of decisions based on the same. The auditors perform audit with a goal of deriving at the fairness and transparency maintained by the company in its financial statements (Hoffelder, 2012). The auditors in Rio Tinto are responsible for examining the financial statements of the company adequately in order to eradicate data manipulation or errors and maintaining its genuineness which would be of be great help for the users in deriving appropriate decisions.

The management of Rio Tinto is responsible towards making and formulating appropriate decisions and implementing policies that could be of great help for the company for the purpose of installation of internal control mechanisms which would further allow the company in recording and processing transactions in its financials. The operations, related assets, liabilities including equities are controlled and looked after by the management of the Rio Tinto. Therefore, due to such internal control mechanisms in the company facilitated by the management, the auditors appointed are most likely to have knowledge only of those transactions and matters that are either disclosed by the management or discovered by them in the course of exercising audit in the company (Geoffrey et. al, 2016). This highlights the duty of the management of the company to disclose all the transactions and such other matters to the auditors for their purpose of audit whereas the restrictions of the auditors in providing findings, explanations and suggestions on the statements and details that underwent audit (Gay & Simnet, 2015).

It was observed that the auditors at Rio Tinto were less efficient in their audit work.  This is due to the failure on the auditor’s part owing to his casualness in classifying the shortcomings in financial statements as errors and frauds. This brings out the contrast between the responsibilities of the management to that of the auditor.

The auditor’s report of Rio Tinto was ineffective. It was clarified by the auditors that they have performed audit to the best of requirements and have also complied with all the statutory obligations like AAS and the Corporations Act, 2001 which was barely seen. This was due to the fact that the auditors found it more important to identify certain minimal audit matters as well as projecting the audit process undertaken by them for accounting such key matters (Rio Tinto, 2017). The auditors did not provide any explanations on such matters and has just highlighted the fact as to why such key matters were projected in their reports. There were chances for the users to come across certain difficulties with regards to the way such key audit matters were dealt with by the company (Deegan, 2011). This also makes it complicated on the part of users so as to ascertain the nature of such matters which will in turn affect them from deriving at decisions based on the same. However, the efforts of the auditors could be seen as they at least took the initiative of providing explanations regarding the process adopted by them. Certain significant issues that were important to be labelled as material information were not disclosed in the audit reports. Failure to offer backup details for area of concern was also seen. The auditors of Rio Tinto failed to label certain issues as significant information in their audit report. This shall confuse the users and can also complicate decision making for them (Ross et. al, 2014).

It can be clearly seen that the audit reports of Rio Tinto were devoid of significant aspects and certain matters that were vital in nature. Not disclosing such aspects and matters can impact the users in their decision making ability. This can confuse the users and they might find it complicated enough to come to a decision. The goodwill of the company is also impacted due to such practices (Rio Tinto, 2017). The credibility of the organization raise eyeballs. This makes it difficult for the users to evaluate the financial performance of the organization and fairness of its statements. Non-disclosure of footnotes and non-attachment of notes is one significant loophole of the audit reports.

The presence of notes attached with the financial statements of the organization is a positive indicator. It is prominent that there have been under reporting of information. Rio Tinto has not disclosed the significant affairs of entities with regards to its consolidated group. Just fewer details and minimal information of the activities are mentioned that is insufficient for the users to derive at their decisions. The diversity of the organization is also not disclosed in its reports (Davies & Crawford, 2012). Rio Tinto has disclosed details related to corporate governance, sustainability, risk factors, etc in its statements that could be of little help for the users so as to make investment decisions.


The positive side of the report and the audit process was the presence of notes and footnotes attached by the auditors to their audit reports and financial statements so as to help the users in reviewing some important information quickly. Overall the effectiveness of Rio Tinto’s audit report can be termed as poor as it is complex in nature and allows room for confusion which will hamper the decision making ability of the users. To summarise it can be rightly said that the goodwill of the company along with the decisions of the users to invest in the company hugely depends on the key audit matters addressed by auditors in their reports. So it is highly important to make reports that are reliable and represent true and fair view of the company’s financials.

Follow up questions

The questions that can be asked to the auditor’ are:

  1. Was the auditor able to address the severe issues that concerns accounting and internal control measures. Provide justification on that for a better understanding
  2. Was major deficiency seen in the internal control mechanism? How has the audit committee reacted to this?


Davies, T. and Crawford, I. (2012)  Financial accounting. Harlow, England: Pearson.

Deegan, C. M. (2011)  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.

Gay, G & Simnet, R. (2015)  Auditing and Assurance Services. McGraw Hill

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online] 30(1), pp. 143-156. Available from  [Accessed 9 September 2018]

Hoffelder, K. (2012)  New Audit Standard Encourages More Talking. Harvard Press.

Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,

Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.

Porter, G. and  Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning

Rio Tinto. (2017)  Rio Tinto Annual Report and accounts 2017 [online]. Available from: [Accessed 16 September 2018]

Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)

Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.

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