AUDITING

Question # 00083836 Posted By: solutionshere Updated on: 07/22/2015 01:00 AM Due on: 08/21/2015
Subject Accounting Topic Accounting Tutorials:
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auditing theory and practice

ASSIGNMENT 2

Word Limit – 2,500 words**

(Penalties will be applied if the assignment exceeds 2,750 words)**

**(Word countexcludes reference list and appendices)

BHP Billiton– Assignment (Audit planning case study)

BACKGROUND INFORMATION

BHP 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 their website:

http://www.bhpbilliton.com/bb/aboutUs.jsp ).

Additional Information

Details 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 June 2012.

The 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 Students:

The 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 risks.

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).

The 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.

IMPORTANT: 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)

REQUIREMENTS/QUESTIONS

Required

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 June 2012.

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.

(HINT: 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

Assignment guidance notes

Guidance notes for Assignment

Word limits

Assignments 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.

Objectives of the assignments

Having completed the assignments, students should be able to:

· Identify inherent (or otherwise) risk factors facing the auditor and understand the impact on audit procedures and the collection of audit evidence;

· Apply accounting knowledge (lifelong learning skills) in identifying the risk of errors in financial reports;

· Use the skills they have learned in previous units to think critically about the quality of information.

· Exercise judgment and learn about the investigative nature of audit tasks.

· Apply theory to a simulated real world case.

Students 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.

Many 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.

ASSIGNMENT 2 GUIDANCE NOTES

Question 1

Identify 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 research.

Be 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 financial reports.

Further, 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.

How 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.

An 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 properly).

There 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 http://www.library.unisa.edu.au/services/oua/ .

You may use ‘bullet points’ or a table format in answering this question, but please do not abbreviate too much.

Students 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.

Definitions 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.

The 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.

As 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.

Please 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.

IMPORTANT: 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 for BHP.

As 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.

Students are expected to identify and discuss six (6) inherent risks that impact on the planning of the audit of BHP.

Question 2

The 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.

IMPORTANT: 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 misconduct.

Do 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 years.

This 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.

Ultimately, 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.

You 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!!).

Assignment General Hints

General comments on answering the questions in the assignment

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 format.

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..

Important note on the use of the website wikipedia as a source of information

The website, Wikipedia (http://www.wikipedia.com) 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 through Wikipedia.


REFERENCE LIST

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.

2. 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.

3. Accounting Handbook 2012,Pearson Australia, Frenchs Forest, N.S.W.

4. Auditing Assurance & Ethics Handbook 2012, Pearson Australia, Frenchs Forest, N.S.W.

5. Corporations Act. Butterworths or Australian Government Printer. Available online at:http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/

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Tutorials for this Question
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