auditing theory and practice
Word Limit – 2,500 words**
will be applied if the assignment exceeds 2,750 words)**
reference list and appendices)
Billiton– Assignment (Audit planning case study)
Billiton (BHP) is one of the largest publicly listed companies in Australia.
The company has been in the media spotlight recently due to operational issues,
highlighting the importance of ensuring financial information is presented in a
true and fair manner. BHP provides an excellent case study for illustrating the
importance of planning an audit and in particular, assessing inherent risks in
the planning stage. (Further information relating to BHP is available from
relating to the requirements of the major assignment can be found over the
page. You will be required to assess and analyse BHP from an auditing
perspective, in the period leading up to the reporting period ended 30th
Internet is a valuable source of information for obtaining background
information on a client, as well as the UniSA Library databases (eg EBSCO)
available on the UniSA library link on the Unit Homepage. You are encouraged to
use the Internet and other media to assist you in collecting further
information relating to BHP. To do well in the assignment, it is reasonably
expected that you will undertake research on the entity beyond merely the BHP
homepage and their annual reports.
Important Note to
focus of this assignment is to illustrate the importance of assessing inherent
risks when planning the audit of a company. Although BHP is a successful and
“healthy” reporting entity during the period in question, the company provides
students with an excellent study tool in understanding the nature of inherent
That is, you will focus on collecting
information relating to assessing the inherent risks of BHP, in the period
leading up to June 30th 2012 (as a general guide, you should focus
your identification of inherent risks in the calendar period 1/7/2011 onward).
objective of this assignment is to illustrate the nature of auditing – topics
are not mutually exclusive in auditing. The identification of relevant events
in assignment 1 is relevant to the identification of inherent risks in
assignment 2. It is this integration of the topics that make auditing unique.
You are not the auditor for BHP – the company is only being used to illustrate
the importance of planning an external audit. As such, you are to assume that
you are using the BHP case like an auditing training tool rather than
undertaking the audit of BHP. (That is, this is not an initial audit of BHP).
ASSIGNMENT 2 (2,500 words)
1. Identify what you consider
to be the ‘key’ inherent risk factors that could have an impact on the audit of
BHPfor the year ended 30th
For each of the inherent risk
factors identified, state how and why
you consider the issue may create the risk of potential misstatement in the financial
statements of BHP for the year ended 30th June 2012.
[HINT: To score well in this
assignment you will be required to research BHP’s financial results, the
financial press, and other business media to obtain a better understanding of
the inherent risks. You may use the issues you identified in assignment 1 to
discuss the nature of the apparent risks]. You are expected to identify six (6) critical inherent risks.
(6 x10 = 60 Marks)
2. Using the information you
have collected to assist you in answering question 1 (above), explain and
justify your overall assessment of
inherent risk for BHP. Using the audit risk model and the risk factors
discussed above, discuss how your assessment of inherent risk will impact on
the evidence mix for the planning of
the audit of BHP in the identified areas of risk.
With regard to the evidence mix component of this question you must apply your
understanding of the elements of the audit risk model and use your best
judgement and initiative to discuss the impact on the evidence mix in the
identified area of risk. Refer to Chapter 12 of the textbook for assistance
with this concept).
(Overall assessment 8 marks,
evidence mix 12 marks = 20 Marks)
PRESENTATION, USE OF APPROPRIATE
REFERENCING CONVENTIONS (THE HARVARD REFERENCING SYSTEM), GRAMMAR AND SPELLING
Guidance notes for Assignment
should be presented in a succinct
business-like writing style and you should avoid repetition and irrelevant
information. As a broad guide, assignments 2 should absorb no more than 2,500 words respectively, though the
assignments can be completed in less words. Quality of the information presented will, however, be the important
factor rather than quantity. Penalties will be applied if you exceed the word
limits; the application of penalties is at the discretion of the unit
co-ordinators and will reflect the amount of the word limit exceeded – eg if
you exceed the word limit by 10% you will receive a penalty of 10% of your mark.
of the assignments
Having completed the
assignments, students should be able to:
inherent (or otherwise) risk factors facing the auditor and understand the
impact on audit procedures and the collection of audit evidence;
accounting knowledge (lifelong learning skills) in identifying the risk of
errors in financial reports;
the skills they have learned in previous units to think critically about the
quality of information.
judgment and learn about the investigative nature of audit tasks.
theory to a simulated real world case.
are provided with information relating to a real world entity. The issues
raised are from real-world situations and require application of accounting
knowledge and auditing theory & practice.
students find assignments based on the real world difficult because many of the
issues confronting them are practical and, therefore, unfamiliar. The following notes are intended to help
students structure their responses and also indicate how marks will be awarded.
2 GUIDANCE NOTES
what you consider are the inherent risk factors which would impact on the audit
of BHP. You are encouraged to use financial information relating to BHP and the
industry in which it operates for the period in question. Once again, simply
discussing the announcement of profits or dividends or revised financial
forecasts, of themselves, is not considered a major event nor an inherent risk.
Financial information can be a goldmine of information which can assist you in
identifying potential inherent risks by giving you clues as to what to
careful to answer the question – that is, it asks what are the “inherent risk
factors”. You should be clear about what
“inherent risk factors” mean. Another
term often used is “areas of concern”.
Overall these terms mean what areas of the financial statements are
there likely to be risks of material misstatements (which might ultimately
impact on the auditor’s opinion and report).
Specifically, the information may lead you to think that some areas may
have an error (mistake) or fraud in them as a direct result of certain events
or issues that the company has experienced or may experience. Your task is to identify that information and
how and why it may present a possible risk of material misstatement in the
you will need to clearly explain why and how you have arrived at each risk
factor. Simply stating information
without applying it to a risk factor will not attract any marks.
you set out the answer to question 1 is up to you, but you must clearly address
all three aspects of the question:
1. What is the inherent risk? (A simple
explanation will suffice for this part of the question).
2. Why is it an inherent risk? (To do
this, you need to explain and give an example of a specific misstatement that
could occur if this risk is present in BHP). Do not simply state “this will
cause potential misstatement” or ‘this may result in fraud’ or ‘the directors
will misstate the financial statements’. You must provide a specific example of
a potential misstatement that could occur. This is not as easy as it sounds.
The potential misstatement must be specifically related to BHP and be both
reasonable and plausible.
example of how to answer this question has been made available on the unit
website. Students are encouraged to download this document prior to attempting
question 1 of the assignment. Please do NOT use this example in your assignment
as this will be deemed not to be your own work (even if it is referenced
has been ample discussion of BHP (and the events impacting on BHP) in the
financial press in the last 12 months. This should provide you with a wealth of
information to use to answer the questions in the assignment. Identify what you
consider to be relevant (and specific) inherent risk factors that will impact
on the planning of the audit for the reporting period ended 30th June 2012.
Please note the year. You may find that some of the information could be
relevant for more than one reporting period. The UniSA library has an excellent
serials database within EBSCO Host
may use ‘bullet points’ or a table format in answering this question, but
please do not abbreviate too much.
are not expected to explain the theory applicable for this assignment. For
example, the definition of inherent risk does not need to be explained.
Likewise, a discussion of why it is important to identify major events in the
planning of an audit is not required. Students should focus on applying the
theory to a practical environment.
and explanations of theoretical concepts eat up the word count and do not
accrue any marks. Please assume the marker understands the definitions of the
key topics being assessed by this assignment.
best way of approaching this question is to research BHP and identify articles
discussing events that have impacted on BHP. This will allow you to identify
inherent risks from the information in the articles.
a simplified example, you might find an article which says that 1000 staff had
their jobs terminated due to a restructure of the entity. This may be an
inherent risk because terminations normally involve the calculation of employee
entitlements which are complex in nature and the need to crate provisions for
employee redundancy. Hence, there is a greater chance that there will be
calculation errors due to things such as eligible termination payments, and
leave entitlements. You must provide specific examples of potential misstatements
that could occur in the financial reports.
note that this question will take you a bit of time to complete. It is
therefore advisable that you do not leave this to the last minute to begin. As
always, you are welcome to post questions on the discussion forum before
submitting. If you leave it to the last minute, it is unlikely you will receive
the assistance that you require to complete the assignment. It is reasonably
expected that students will have good research skills so we will not be providing
research hints for you.
The announcement (or subsequent payment) of profits/losses or dividends and
information about profit forecasts by BHP (irrespective of magnitude) does not
constitute an inherent risk of significance and will not accrue any marks. We
require students to research the company and identify specific BHP inherent
risks (other than those that may be linked to the announcement of financial
results) which will assist in the planning of the audit. We expect students to
research the entity by going beyond the annual report for BHP and the homepage
in the first assignment, a common mistake made by students (especially if they
are running out of time) is to simply use the annual reports and the entity’s
website to identify key inherent risks. It is easy for us to see that you have
not made the effort to undertake independent research to support your work and
your marks for the assignment will reflect this.
are expected to identify and discuss six (6) inherent risks that impact on the
planning of the audit of BHP.
auditor is required to form an opinion as to the overall inherent risk
applicable to the company chosen. You are required to assess inherent risk and
apply the audit risk model to identify the evidence mix when planning the audit
of the entity in the areas where you have identified the risk. Have a look at
the material covering the audit risk model and the steps involved in
determining the evidence mix and apply this to the area of BHP where you think
the risk exists. Remember, the inherent and control risk is assessed to
determine the acceptable audit risk which then allows the auditor to determine
the planned detection risk.
While independent research is required you may still wish to reference
information from the BHP annual report. Specifically, you will need to
reference the information back to the relevant pages in those annual reports.
Failure to do so could result in problems with plagiarism and charges of academic
not discount the importance of non-financial information in assessing inherent
risk. You may find information identified in question 1 may be relevant to this
question. As a very simple example, you may have identified in question 1 that
your company has just missed out on a contract to provide travel for a large
client (this has been made up and is used for illustrative purposes only) and
the potential is for lost income worth $3 million a year to BHP for the next 10
may be relevant to assessment of inherent risk because it indicates future
income streams will be much weaker and there is an incentive for management to
manipulate the financial reports to compensate for the loss of income in the
next 10 years. Management may engage in misleading conduct to placate investors
as a result of the loss of the major contract. This example is very general and
is used only as a broad indicator of strategy in answering the question.
we are looking at your ability to link information obtained to the assessment
of inherent risk. Refer to the textbook for further information regarding
evidence mix – you will need to discuss all aspects of the evidence mix
relevant to each main area of risk. Think about the different types of evidence
available – tests of transactions (control/substantive), tests of details of
balances etc). Again, the textbook is an excellent resource to assist in
answering this question.
are expected to assess control risk when assessing the evidence mix and the
approach to the audit. Although you do not have access to internal documents to
assess the internal control structure, try to find articles which may indicate
that there were problems with the accounting system of the company you have
chosen. For example, you might find an article that shows that your company had
problems with customers stealing inventory during the year. This indicates the
controls are not working properly and hence control risk will increase. Once
you have identified the inherent risk and control risk, you are then in a
position to offer an overall summary of the evidence mix required for your
company. Remember, Chapter 12 of the textbook is very useful to help you answer
this question (especially the seminar questions!!).
General comments on answering the questions in the
There are distinct
questions being asked in the assignments. We therefore require students to
answer each question SEPARATELY. Do
not combine any of the questions together in your assignment submission. Please answer each question separately.
Further, you do not need to have an executive summary, an introduction or
conclusion. Although presentation is important, we are more concerned with
ensuring that students have addressed the requirements of each question. This
means you do not need to present the assignment as a report or in an essay
Once again, we remind you
of the importance of referencing. Any information gained from a source must be
referenced in the body of the assignment and the source needs to be included in
your reference list..
note on the use of the website wikipedia as a source of information
has become a common tool for students to use in researching assignments. It is
important to note that the Wikipedia website contains information which has not
been verified by an independent third party. Contributions to the website can
be made by anyone without the need to verify this information. To this end,
information contained on the Wikipedia website may not necessarily be accurate.
Therefore, we discourage the use of Wikipedia as a reliable reference resource.
It can be used as a starting point for researching an entity. However, it is
recommended that if you use Wikipedia to find information related to the
assignment, that you use a secondary website to verify the information obtained
1. Arens A. A., Best, P. J., Shailer, G. E. P., Fiedler, B. A., Elder, R.
and Beasley, M., 2011. Auditing,
Assurance Services & Ethics in Australia – An Integrated Approach, Clarity
Update 8th edition, Pearson Australia, Frenchs Forest, N.S.W.
Fiedler B A, ‘Student Guide to accompany Auditing,
Assurance Services & Ethics in Australia – An Integrated Approach, 8th
edition, 2010. Pearson
Australia, Frenchs Forest, N.S.W.
Australia, Frenchs Forest, N.S.W.
Assurance & Ethics Handbook 2012,
Frenchs Forest, N.S.W.
5. Corporations Act.
Butterworths or Australian Government Printer. Available online at:.austlii.edu.au/au/legis/cth/consol_act/ca2001172/">http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/