Assessing and Analyzing BHP from an Auditing Perspective
With a view to assessing and analyzing the significant events in the financial statement of the BHP group for the audit period ending 30th September 2018 the annual report, Investor Analysis brief and report on its operational results along with other relevant documents are studied. The purpose of the study is to decide that how the audit objectives shall be decided based on the significant events identified bearing the risk on the financial statement of the group covered by the audit period together with the determination of the impact of these risks on the evidence mix for the planning of the audit of the BHP group (Delone & Mclean, 2004). This report is intended to bring to the notice of major stakeholders of the BHP those Key events which have been identified and adequately disclosed after conducting a detailed study and analysis of the financial statement of the Group for the year ending 30th September 2018 bearing a significant impact on the audit of the relevant period along with the future period. Our report attempts to emphasize how these events may create the risk of potential risk of misstatements in the financial treatment along with the audit objective chosen to deal with such risk. After identification of these risks, their impact on the planning of the audit evidence mix along with the identification of critical areas of the accounting system has been discussed in detail together with the appropriate audit procedure followed in this regard.
a). Key or significant events and appropriate Audit Objective :
The four critical events that have been identified from detailed study of the relevant documents are as follows:
- Samarco dam failure
- Onshore US Divestment
- Approval of Two major projects- the South Flank sustaining mine in Western Australia, and the Spence Growth Option in Chile
- Extension of MAD DOG Field:
BHP Billiton Brasil Ltd (BHP Billiton Brasil) and Vale S.A. (Vale) jointly owned the Samarco and BHP Billiton Brasil Ltd have the 50% stake.
The reason of considering it a significant event can be summarized hereunder:
- BHP group’s financial statement 100% accounts for any type of charges resulted from the Samarco dam failure.
- This has been reported as an exceptional item in the Consolidated Financial statement of the Group.
- BHP Billiton Brasil Ltd identifying the uncertainties associated with the nature and future ongoing operation of the Samarco made a provision against its obligation worth US $1.3 billion in its financial statement year ending 30thJune, 2018.
The reason why it may create potential material misstatement in the financial statement
- The BHP group in its annual return has made a number of significant disclosures along with the Complex accounting judgments in relation the Samarco(Coughlan & Schmidt, 1985).
- The group through its financial statement recognized the legal status of the claim to be raised against BHP and Samarco by reflecting the same through the correct accounting treatment.
- The exposure to the BHP and Samarco as a result of disclosures of various contingent liabilities associated with them due to the various claims and circumstance, but the reliable estimation of these liabilities can be assured.
In this case the significant audit objective was nothing but to ascertain whether adequate disclosures as per the relevant accounting standards are made in respect of the contingent liabilities and provisions recognized by the Group in its financial statement and the validity of the assumptions used to determine the legal status of the BHP and Samarco while determining the amount of provision (Coate & Mitschow, 2017). Disclosures are important s it helps the management in drawing the attention of the users of the financial statement to the matters that hold significance importance to them when they are deciding whether they want to invest in the company or not. So any such event or activity that affects the financial position of the company should be adequately disclosed.
The reason of considering it a significant event can be summarized hereunder:
- At the end of the financial year the BHP group recognized that it has onshore US assets held for sale and the same has been recognized as a result from discontinuing operation as per the relevant accounting standard(Grundy, Held, & Bero, 2017)
- It entered into a share purchase agreement for selling these shares after the year end that could be seen as evidence to reflect the market value of these shares and the transaction of this divestment resulted into the pre-tax impairment charge of US $2.9billion, which is a significant figure.
The reason why it may create potential material misstatement in the financial statement
- This divestment can significantly affect the financial performance along with the financial status of the BHP by making inappropriate disclosure relating to the value, classification and presentation of assets or of the discontinuing operation(Charles H, Giovanna, Dennis M, & Robin W, 2015).
- Our audit objective was to ensure the existence of the effective system to internal control to ensure the accuracy and adequacy of the value, classification and presentation of assets or of the discontinuing operation.
- Approval of two major projects- the South Flank sustaining mine in Western Australia, and the Spence Growth Option in Chile The reason of considering it a significant event can be summarized hereunder
- An investment worth US $3.06 billion was made in the South Flank project that shall produce iron ore since 2021.
- Spence Growth Option in Chile shall start paying 185kilotonnes per annum of copper in concrete and 4kilotonnes per annum of molybdenum since 2021 with the investible figure of US $2.46 billion.
The reason why it may create potential material misstatement in the financial statement
- It can possess risk of wrong valuation of the investment to be made for the aforesaid project or the wrong estimation of the future economic returns to be generated from it.
- In this case the audit objective is to ensure the correct valuation of these proposed project investment along with the tentative rate of return on these investments.
- The ascertainment of the feasibility of taking over these projects that can improve the Growth rate of the BHP group(Cayon, Thorp, & Wu, 2017).
- The Proper disclosure in relation to these future acquisitions has been made or not
The reason of considering it a significant event can be summarized hereunder:
- The proposed investment figure in the Mad Dog Phase 2 is US$9 billion on a 100 per cent basis (US$2.2 billion BHP share).
- The project is expected to be effective from the financial with the target to produce year 2022 , upto140,000 gross barrels of crude oil per day
The reason why it may create potential material misstatement in the financial statement
- There is possibility of material misstatement relating to the disclosure, tentative benefits associated with the acquisition along with its correct valuation(Dan, 1995).
Our audit objective is to:
- Evaluate the feasibility of taking over the phase 2 of the MAD DOG Field
- Evaluate the control process to determine the correct value of the investment in the project.
- The impact of the risk associated with the Samarco dam failure on planning the audit evidence mix is summarized below.As per AASB 110 Events after the reporting period applicable for all the annual reporting to be made on or after 1st January 2005.Hence all of above significant events have been disclosed in the Annual report, 2018 of the BHP group
- It calls for the tests of control relating to the accounting treatment of the obligations and liabilities associated with the Samarco dam failure along with the disclosures made in this behalf(Bouret, 2017).
- It demands the use of detailed analytical procedure to ascertain the assumptions made based on which the amount of obligations in the financial statement of BHP and Samarco were recognized. The analytical procedure requires to be performed to ascertain the discount rate, foreign exchange rates and the ability of Samarco to meet its obligations; assessment of the amount and timing of forecast cash flows(Henriksen, 2018).
- The impact of the risk associated with the OnshoreUS Divestment on planning the audit evidence mix is summarized hereunder. The disclosure of Samarco dam failure is in compliance with the requirements of AASB 137 relating to provision, contingent liability as per which the consequent provision for the BHP group and the Samarco have been made
- In this case testing of control over the classification, presentation and valuation of the onshore US assets and impairment charge determination are to be tested
- The Tests of control is also to be used for ensuring that the assets and liabilities of the onshore unit have been classified in tune with details terms of the share purchase agreement(Boghossian, 2017).
- The analytical procedure is to be used to compare the recoverable value of assets and liabilities with their carrying value to ensure about the impairment charges
- The impact of the risk associated with the Approvalof Two major projects- the South Flank sustaining mine in Western Australia, and the Spence Growth Option in Chile on planning the audit evidence mix is summarized hereunder (Kusnadi & Wei, 2017). The disclosure of divestment of Us Onshore unit in which noncurrent Asset held for sale and considering the same as discontinuing operation complies with the requirements of AASB 5.
- It needs the use of the analytical procedure of sensitivity analysis in order to evaluate the feasibility of the investment to be made in the aforesaid projects.
- Tests of control are to be applied to ensure the correct valuation of the proposed investments in these projects along with the proper disclosure of this proposed investment in the financial statement of the BHP group(Abdullah & Said, 2017)
- Tests of details are to be performed so that the proposed investment should sound fit with the tentative benefits projected with the proposed investment.
- The impact of the risk associated with the Extension of MAD DOG Field on planning the audit evidence mix is summarized hereunder.The disclosure of approval of the two projects and extension of second phase of another project again comply with the requirements of AASB 137.
- In this case tests of control are to be applied in order to evaluate the appropriate disclosure relating to extension of the MAD Dog fields phase two project(Henriksen, 2018).
- An analytical procedure is to be performed to make the comparison of the proposed benefits of the new project with the proposed investment in the project.
- Analytical procedure is also required to be performed to check the historical accuracy of prior year cash flow projections made in order to justify the extension(Antle & Smith, 1985).
Conclusion
Based on the above analysis it is hereby concluded that each of the above significant events associated with the financial statement of the BHP group during the year ending 30th September 2018 have the sufficient capacity to cause risk of material misstatement in its financial statement of the relevant period (Ghofiqi, 2018). Because of which careful consideration has been made to justify the choice to appropriate audit evidence to nullify the effect of these risks. Our report attempts to emphasize how these events may create the risk of potential risk of misstatements in the financial treatment along with the audit objective chosen to deal with such risk. After identification of these risks, their impact on the planning of the audit evidence mix along with the identification of critical areas of the accounting system has been discussed in detail together with the appropriate audit procedure followed in this regard. All necessary events should be disclosed and stated in the annual report so that stakeholders can have a clear picture.
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