Financial Accounting Concepts

Audit, Assurance and Compliance – A case study of BHP Billiton

The report provides insight into the annual report of BHP Billiton for assessing, analyzing and evaluating the role, responsibilities and duties of the auditor.

The report has developed the requirement for maintaining the independence and the nature of non-audit services. The report has also provided the reason for considering some matters to be key areas for auditor judgement.

Material information is the information that affects the decision of users of accounts and financial statements. The auditor of the Company has covered the material information inappropriate manner.


With the increase in corporate accounting scandals in the last decades, the accounting and auditing bodies continuously make strict efforts to improve the quality of audit reporting. Accounting scandals such as the collapse of WorldCom, Enron and Lehman Brothers were a great shock to the whole world. It has resulted in the enhancement of reporting standards and requirements of auditing.

This report seeks to analyze and evaluate the auditor’s role in assuring entities’ financial statements and controlling the environment. The report will cover all the sections about the auditor role of ASX listed Company and will discuss the independent auditor’s report, remuneration, role, functions, responsibilities, and key audit matters.

About the Company

 BHP Billiton is a multinational mining company headquartered in Melbourne, Australia. The Company is engaged in trading mining, petroleum, and metals. Presently, the company is working with more than 60000 employees and earned revenue of US $38.285 billion in 2017 (BHP, 2017). The auditor of the Company is KPMG.

Auditor independence refers to the audit process, which includes integrity and objectivity. Auditor independence requires an auditor to carry out its responsibilities freely and objectively.

As per section 307C of the Corporation Act, 2001, an auditor must declare in writing that the auditor has not contravened the independent requirement of the auditor as per the act and code of professional conduct.

Furthermore, the auditor of BHP Billiton has not engaged in audit activity concerning Company at any particular time. The auditor must disclose no conflict of interest. The auditor did not commit any offence under subsection (2) of Section-324CA (BHP, 2017).

Non-audit Services

Non-audit services are services that have no connection with the audit process of an auditor and are provided by the auditor during the engagement of the audit period. Non-audit services of BHP Billiton are anti-corruption, insurance and security (Trompeter and Wright, 2010). The auditor of BHP Billiton may also provide other services such as the role of advocate, activities which normally take place under the function of management and may be required by the auditor to perform its own job.

Non-audit services of the Company have been approved under the process set for the provision of audit and other services by the external auditor. The Company did not avail of any non-audit services out of the policy. The company performs non-audit services with the prior approval of RAC. The services are incompatible with the general standards for maintaining an auditor’s independence.

Analysis of the Auditor’s remuneration

As per the annual report of BHP Billiton, 2017, the auditor’s remuneration includes the fees payable to the group’s auditor for assurance services and fees payable to the group’s auditors for other services (Norman et al., 2010). All amounts are paid to KPMG and the affiliated firm of KPMG. The auditor’s fees as per the above table are presented in the dollar and billed in US dollars after considering the exchange rate at the beginning of the relevant financial year.

Furthermore, other services are related to corporate finance services, such as divestment, rising debt and acquisitions transactions. Other services also include non-statutory assurance-based procedures, services related to tax compliances and advice on accounting matters.

Key audit matters

The auditing standard 701 is for communication of key audit matters under the independent Auditor’s report. Key audit matters are those matters which require the significant judgment of the auditor (Mock and Turner, 2013).

This matter offers additional information for the users of financial statements and is critically important for auditing financial statements.

The matters explain the vital management judgment in terms of financial statements being audited. The matters are assessed to be risky of material misstatement. The key audit matters as per the auditor’s report of BHP Billiton are here presented below:-

Key audit matterRationaleProcedure adopted
Asset valuation Because of the size of balances and requirement of level of judgment in evaluating reasonableness in inputs and for evaluating the recoverable value of assets.Auditor adopted testing key controls for the valuation of BHP Billiton property, equipment and plant. This also includes the determination of reversals and impairments of the asset.
Assessment of prices of forecast commodities with comparison value as per the market.Comparison of future capital expenditure with operating and reserve life data associated with the latest approved budgets and plans. Assessment of the impact of the changes in the value of assets on the carrying value of assets.
TaxationDue to the multiple reach and size of the Company and the application of a number of the tax legislation in different countries. The legislation is complex and specialized, requiring judgment for evaluating the tax exposure and contingent liabilities.Testing key control procedure was adopted for the evaluation of disclosures of tax and accounting (Larcker, et. al., 2015).
Assessment of the assumptions made, provision and contingent liabilities and comparison of assumption with the public statements and disclosure.  
SamarcoThe number of complex accounting judgments involved the Samarco dam’s failure. There were significant claims and uncertainty in the estimation required level of judgment for ascertaining the legal claim and obligations of Billiton Brazil.Testing key controls were performed as auditor procedure. The assessment made for the existence of legal and constructive obligations. Evaluation of Key assumptions made for the recording of potential funding obligation.
Assessing the discount rate, foreign exchange rate and timing of forecasting of cash flows. Ascertainment of the completeness of the disclosures about the contingent liabilities via inspection and observation of internal documents, senior management, and legal personnel.
Closure and rehabilitation provisionDue to size and level of judgment need for estimation of management’s quantum and timing involved for future cost and assessing the rate applied to discount the cost back to the present value.Testing key controls auditor procedure adopted for assessing the work of BHP Billiton such as rehabilitation and legislative requirements and methodology against the industry practice.
Assessment of key economic assumptions in relation to the calculation including the discount rate and net present value (Hammersley, et. al., 2011). Further, comparing the assumptions of market observable data with risk-free rates.

Audit Committee

BHP Billiton has an audit and risk committee comprising three members having two non-executive directors and one chairperson who is not the board chair. The members are Frank Cooper (Chairman), David Crawford (Non-executive director) and Futhi Mtoba(Non-executive director). All the members are financial and accounting experts and have a great understanding of the industry to discharge the mandate of the committee effectively.

The responsibilities of the committee include the following:-

  • Overseeing the reporting process of corporate to safeguard the integrity of financial reporting.
  • Monitoring and examining the related party transactions (Dechow, et. al., 2011).
  • Reviewing and monitoring the independence of external auditors and performance.
  • Giving consent on the fees of external auditors and policy containing the non-audit services. Further, monitoring those services.
  • Administrating and overseeing the effectiveness, objectivity, and independence of internal audit function and findings of the internal audit.
  • Giving consent on the appointment, engagement terms, and removal of the head of risk and assurance that is answerable to both the CEO and committee.
  • The arrangement of meeting with the head of risk and assurance at least once a year.
  • Overseeing the establishment, development, and management of the risk management system in the light of the risk appetite set by the board and appraising the effectiveness of the framework for risk management.

Auditor Opinion

The auditor of BHP Billiton has provided an unqualified opinion concerning the financial statements and other compliances. Consolidated financial statements also give a true and fair picture of the group and are properly prepared for international financial reporting standards.

The financial instruments and going concerning accounting are materially inconsistent as per the auditors and they have nothing to report. The remuneration report of the Company complies with section 300A of the Corporation Act, 2001.

Difference between Directors’ and Management’s responsibilities and auditor’s responsibilities

Directors are responsible for preparing financial statements and providing an accurate and fair picture of their financial position. Directors must also ensure that the financial statements are per the relevant financial reporting framework. Further, directors are also responsible for implementing the necessary internal control, which can enable the preparation of financial statements free from any fraud and error and does not contain any material misstatement (Arens, et al., 2013).

Directors have to evaluate the ability of BHP Billiton to continue as a common concern. For this proper disclosure on matters related to going concerned and use of accounting of going concerned unless they intend to cease the operations or liquidate the BHP Billiton and have no alternative realistic but to do so.

Auditors are responsible for obtaining reasonable assurance of fairness and truthfulness of financial statements and to ensure that financial statements are not materially misstated, whether due to fraud, error or irregularities. Auditors are also required to issue auditor reports containing their opinion on the operations of BHP Billiton, internal control, risk management and other aspects required under the act.

Material subsequent events

In the year 2015, Company faced the Samarco dam failure, which is in Minas Gerais, Brazil. There was the release of mine tailings and flooding, which resulted in charges for the Company, such as legal, and advisory charges and a loss of million amounted to $134 million (BHP, 2017). Dam failure impacted the communities of Gesteria, Bento Rodrigues, Paracatu and other downstream communities. BHP Billiton has jointly owned Samarco and has an equity investment of 50%.

The Company identified contingent liabilities and provisions as a consequence of the failure of the Dam. The Company enters into a framework and preliminary agreement with Brazil’s federal government and prosecutors. This was executed with the purpose of developing and executive socio-economic programs in remediating the damage and outlining the negotiation for $20 billion.

Assessment of auditor report

The auditor report of BHP Billiton has demonstrated a clear view of the material and non-material information. Risk strategies, internal control system, operations and provision of remuneration have been observed by the auditor and presented in the report effectively (Murphy and Sandino, 2010).

Auditor has covered more on the financial statements and accounting but failed to put more light on the other non-financial information which can be material for the users of financial statements. The information in relation to the investment, divestment or risk management strategies could have also been stipulated in a more effective manner.

Effectiveness of material information

The failure of the Samarco dam seems to be under-reported. Although, Company has covered this material information in the annual report but failed to make it transparent. After such an incident, for an intended user, this information is extremely significant to understanding the company’s financial position.

Nevertheless, the annual report of BHP Billiton has covered useful information fully explained. But all the information should be included with simple statements understandable by an intended user. The Company has complied with each regulation to cover up all material information.  

At the annual general meeting, I would like to ask the auditor of BHP Billiton about the matters about the internal investigation of whistleblowers. I will also ask about the results of the mechanism. I will also for any deficiency in the internal control and if it is there, I will ask for an explanation in detail and any material weakness (Spira and Page, 2010). I will also ask for any unadjusted error schedule that management has disagreed with and the reason for not correcting such an error.


The report went into the annual report and revealed many aspects of the auditor included in the annual report of BHP Billiton. The report covered the requirement of independence, non-audit services, remuneration, responsibilities, key audit matters, and the audit committee. From the report, it has been learned that the auditor of the Company has performed its duty independently and effectively to a great extent. Material information should be provided with clarity by the auditor and must also get equal support from the director in doing so.

List of References

Arens, A.A., Elder, R.J. and Beasley, M.S., 2013. Auditing and assurance services. Pearson Higher Ed.

BHP, 2017.BHP Billiton annual report, 2017.

Boiral, O., Heras-Saizarbitoria, I. and Brotherton, M.C., 2017. Assessing and improving the quality of sustainability reports: The auditors’ perspective. Journal of Business Ethics, pp.1-19.

Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Dechow, P.M., Ge, W., Larson, C.R. and Sloan, R.G., 2011. Predicting material accounting misstatements. Contemporary accounting research28(1), pp.17-82.

Fiolleau, K., Hoang, K., Jamal, K. and Sunder, S., 2013. How do regulatory reforms to enhance auditor independence work in practice?. Contemporary Accounting Research30(3), pp.864-890.

Hammersley, J.S., Johnstone, K.M. and Kadous, K., 2011. How do audit seniors respond to heightened fraud risk?. Auditing: A Journal of Practice & Theory30(3), pp.81-101.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.

Larcker, D.F., McCall, A.L. and Ormazabal, G., 2015. Outsourcing shareholder voting to proxy advisory firms. The Journal of Law and Economics58(1), pp.173-204.

Mock, T.J. and Turner, J.L., 2013. Internal Accounting Control Evaluation and Auditor Judgement: An Anthology. Routledge.

Murphy, K.J. and Sandino, T., 2010. Executive pay and “independent” compensation consultants. Journal of Accounting and Economics49(3), pp.247-262.

Norman, C.S., Rose, A.M. and Rose, J.M., 2010. Internal audit reporting lines, fraud risk decomposition, and assessments of fraud risk. Accounting, Organizations and Society35(5), pp.546-557.

Spira, L.F. and Page, M., 2010. Regulation by disclosure: the case of internal control. Journal of Management & Governance14(4), pp.409-433.

Trompeter, G. and Wright, A., 2010. The world has changed—Have analytical procedure practices?. Contemporary Accounting Research27(2), pp.669-700.

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