Auditing and Assurance Globally Production

Question: Describe about the Auditing and Assurance for Globally Production. Answer: Introduction: BHP Billiton limited is a company that is engaged globally in production, exploration, development and the marketing of minerals such as manganese, aluminum, iron, and ore and metallurgical. The various sources of risks pertaining to the auditing of the company is assessed and evaluated. The impact of such potential risk is evaluated in terms of auditing conducted by the auditors. The critical inherent risk that would lead to the material misstatement of the financial statement of the company is discussed in the report. The performance of the company is affected by the various known and unknown risks and something which is beyond the internal control of the company. The actual financial statements of the company might differs from those which is expressed in the financial statements due to the inherent risks of the company. The future prospects of the company might get affected if the variations caused due to the risks factors gets materially adverse.The various sources of risks that would materially alter the financial reporting of the company as discussed here are the risks that arises due to the asset valuation, risk related to the changes in the environment of the information technology, reconciliation and risks arising from the restructuring, portfolio management and risk related to the recognition of revenue, and also due to the companys focus on regulations and laws, provisions and taxation(Haimes2015). BHP Billiton limited is one of the global resource company and is one of the major producers of the major commodities including the copper, iron ore, metallurgical coal and the unconventional and conventional gas, oil and energy coal ineptest is its substantial interest. Inherent risk is the risk that is posed by the omission or error in the financial statement of the company attributable to the factor which are not related to the control of the company. The risk arises due to the transactions that are complex or in the situation that requires a judgement in making the financial estimates. When reviewing the financial statements, the auditor of the company should look for the inherent risks apart from the detection risk and control risks. While examining the inherent risk, the auditor should have the understanding of the nature of the business for which the audit is conducted. In order to keep the overall audit risk at the lower level, the auditor needs to set the detection risk at the lower level if the inherent risk is at the higher rate(Bordereet al.2014). There are some factors of the BHP Billiton Limited that are beyond the control and this may cause the material difference between the actual results and those that is contained in the financial statements of the Annual report. Some of the examples of the inherent factors are as follows: The future revenue of the company for the year 2016 from its various projects, operations and mines are in part based upon the market price of petroleum, minerals, and the metals and this may vary from the current level. If the variations is materially adverse then the feasibility and the timing of the project may be affected The auditors needs to understand the control activities and this is sufficient to make the assessment about the factors affecting the material misstatement of the company and accordingly design the procedures of audit. The various components of the internal control over the financial reporting should be used by the auditors to gain the knowledge about the absence and presence of the activities of control (Akhtaruddin and Ohn2016). Assessment of the risk of material misstatement and the specific risk of the company relating to audit: Inherent risk Potential misstatement Process of revenue recognition has potential for fraud in accounting for revenue The requirement of the financial reporting of the BHP Billiton Limited regarding the recognition of revenue is quite complex. The provisional pricing of certain commodities in relation to BHP Billiton is done by making subsequent adjustment to the selling price and this is based on the fluctuation of the contract prices or the prices quoted in the market price and this is done up to the date of pricing which is final. Demerger of assets may impact the fair value and this would increase the likelihood of financial misstatements The assessment regarding the recoverable value of the plant, property and equipment has to make several judgments in terms of prices of commodities, cost of operations, level of future production and various assumptions such as inflation rate, discounting rates, currency fluctuations. All these factors may lead to misstate the financial reporting Assets divestments and restructuring done by BHP Billiton Limited has the tendency of manipulating the financial reporting The restructuring includes the relocation, integration of the acquisitions within the BHP Billiton limited. The disclosure and accounting of the portfolio of assets and the restructuring of the assets are very complex transactions. The timing of the assets needs or be considered and the effect of the disposal or the restructuring of the assets changes the impaired value has to be considered and is crucial area for the auditing purpose. There is a complexity related to the post acquisition of the assets such as accounting policies conversion and the alignment of such policies and the period ends. The divestment of the assets has an impact on the financial statements of the company (Chen et al.2016). The cost associated with the rehabilitation is likely to effect the financial statements The estimation of the cost of the rehabilitation activities includes several factors such as time period, associated costs and various economic factors. All these are judgmental and there may be human error in its measurement which would impact the financial statement. The group needs to make the considerable judgment relating to the estimation of the cost associated with the rehabilitation. The changes made in the provisions of accounting regarding this may not be evaluated accurately and there might be ambiguity whether the impact of rehabilitation is capitalized or expensed (Haimes2015). Complexity in the legislation of taxes of the expose the company to changes in the control environment The Company has its own regime of taxation as it operates in multiple countries. The nature of the activity of the group triggers the various obligations relating to the taxation including royalties, taxes relating to the production, and also taxes related to the employment. There is also the complexity relating to the international transfer pricing due to the sale of the commodities in the cross borders. The application relating to the legislation to the taxation of the group is inherently complex and when estimating the companys exposure toward taxation, there is a need of exercising judgment. The control environment of the company has been impacted by the changes in the information technology environment and it also impacted the system which effects the preparation of the financial statements (Gunin-Paraciniet al.2014). The market and the operation of BHP Billiton gets impacted due to regulatory focuses and the political regimes. The BHP Billiton Limited is subjected to the increasing level of regulatory focus and multi-jurisdictional legislation. The operations and the market of the company gets affected by the political regimes of the foreign countries and the decisions taken by the regulators. All this potentially impacts the operations of the company and ultimately the statements of financials and the reporting gets impacted. The Company also faces the risk with its major projects related to information technology including the accuracy of the underlying system, data integrity, and maintenance of the appropriate level of security of system. The processes of financial reporting and the accounting records of the group is dependent on the effectiveness of the platform of the information technology. The assessment of the cost with the system may be wrong which would impact the financial statements. There might be error in assessing the cost associated with the new system installed and whether it is expensed or capitalized and the mistake might happen in the accounting treatment of the same. In this regard the auditor must look very closely for the potential of the obsolete inventory The Company also has a complexity in allocating the cost between the operational expenditure and the project expenditure (Knechelet al. 2012). The materiality of the financial statements of the group has been determined with reference to the exceptional items and the companys profit before taxation. This is the principle consideration while assessing the financial performance of the company. Financial statement materiality for the year ended 2015 The internal financial control of the company suffers from the inherent limitations and this leads to the possibility of material misstatement due to the fraud or errors which may left undetected. There is a risk that the internal financial control over the financial reporting of the company is not adequate which would affect the projections of the evaluation of the internal financial control. This may be due to the changes in the conditions, or due to the deteriorate procedures and the compliance degree regarding the policies is retarded(Piper 2014). This section of the research of the will describes inherent risk with the help of audit risk model. Further, there will be an explanation of the impact if evidence mix in the audit planning process of the BHP Billiton Limited. Moreover, there will be an evaluation of the balance among the test of balances, transactions, and analytical procedures. Finally, there will be a critical evaluation of the identified areas of the nature and extent of testing the related segment of BHP Billiton Limited. Audit risk is the risk which an auditor will be expressing its problem on an incorrect suggestion upon the financial statements of the company. Audit risk model includes a combination of inherent risk, control risk, and detection risk. In the case of the BHP Billiton Limited, it can be said that firm has an only existence of inherent risk. Identified inherent risk is at the future revenue of the company which will be getting affected by the different project undertaken by the BHP Billiton, which will be further varying the current level of the company production. Moreover it has been noticed that if the company variations are adversely affecting feasibility and timing of the project. Next identified risk is in the area material misstatement and controlling activities of the companies which are directly affecting the performance of the company (Trotman and Wright 2012). Next moving on with the evidence mix concept and its impact on the areas of risk identified. Evidence mix is the combination of the entire audit test which is used in the audit cycle. In general, it can be more explained as, if an auditor is assessing the control in the accounting system, in that mix it will include more amount test of control than substantive tests. Further for explaining in more detail there will be detail explanation of audit test, which are methods to get an understanding of the internal control, tests of control, a test of balances and analytical procedures. In the given research there will be only explanation test of balances, transaction, and analytical procedures. Test of balances is considered as one of the costly audit tests which include physical examination, inquiries of a client, confirmation, and documentation. In a case of BHP Billiton the test of balances will not be an affecting approach for testing the risk audit, because it also includes too many p rocesses and time-consuming as well. Test of analytical procedures is considered to one of the cheapest way of measuring the audit risk. An analytical procedure includes calculation and comparison of relative ease, particularly when there is an employment of software. So, BHP Billiton will be applying analytical procedures for measuring the audit risk (Srivastava and Mock 2013). Evidence mix In a case of BHP Billiton identified an area of risk are in the asset valuation, recognition of revenue, portfolio management and restructuring, taxation, rehabilitation provision and closure and regulating laws. In case of evidence recognized of BHP Billiton there is case of fraud in the case revenue recognized. There are many identified evidence, in the respect of not considering the fair value The provisional pricing of certain commodities in relation to BHP Billiton is done by making subsequent adjustment to the selling price and this is based on the fluctuation of the contract prices or the prices quoted in the market price and this is done up to the date of pricing which is final (Mock et al. 2012). Acquisition of assets also had number of impact in the fair value. Due to not taking into considering fair value there are number of fluctuation in the prices of commodities, operations, future level of production and inflation rate of the company which will result in misrepresentat ion of the balance sheet. Complexity identified in the legislation of taxes will expose the company to changes in the control environment. The Company has its own rules of taxation as it operates in multiple countries. The nature of the activity of the group triggers the various obligations relating to the taxation including royalties, taxes relating to the production, and also taxes related to the employment. The basic problem arise because of the identified problem will be affecting the financial position of the company. Recommendation: The principle risks which the group faces should be reviewed as it would impact the future performance, liquidity and solvency of the group. The top management needs to ensure that the procedures and the effective standards are maintained and implemented to identify, manage and assess the risks that would be material in the achievement of the strategy, plan and the purpose of the group. The company needs to make its internal control and the management of the risks effective and monitor it periodically. The system of the group has to be effective in order to manage the risks. Conclusion: After conducting the assessment of the inherent risk factor of BHP Billiton Limited, there were several risk factors that were associated with the process of auditing. The assessment of the risk was based on the operations and the changes in the area that was applicable to the BHP Billiton. The assessment of the audit risk relating to the asset and the group of the customers sector was also analyzed. The risk profile of the financial reporting of the company is updated by the preliminary assessment of such risks. The extent and the nature of the procedures of auditing is determined by the assessment of the inherent risk which results in the material misstatement of the financial reporting due to the error and fraud and the various sources which would impact the reporting of the financial statements of the company. Reference: Akhtaruddin, M. and Ohn, J., 2016. 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