Identify what you consider are the inherent risk factors which would impact on the audit of BHP

Question 1 Identify what you consider are the inherent risk factors which would impact on the audit of BHP Billiton Limited. You are encouraged to use financial information relating to BHP Billiton Limited and the industry in which it operates for the period in question. Once again, simply discussing the announcement of profits, budgets or dividends or revised financial forecasts, of themselves, is not considered a major event or an inherent risk and this will not accrue any marks if identified and discussed as inherent risks. Non-financial information can be a goldmine 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 for this assignment 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 Billiton Limited). 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 Billiton Limited and be both reasonable and plausible. There has been ample discussion of BHP Billiton Limited (and the events impacting on them) in the financial press in the last 18 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 periods ending on or after 30th June 2016. 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/ . 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. You may use ‘bullet points’ or a table format in answering this question, but correct and adequate sentence structure must be adhered to, in addition to referencing protocol. As a general example, you might find an article which says that 10% of 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 and forecasts or dividends and information about profit forecasts by BHP Billiton Limited (irrespective of magnitude) does not constitute an inherent risk of significance and will not accrue any marks. We require you to research the company and identify specific BHP Billiton Limited inherent risks which will assist in the planning of the audit. We expect you to research the entity by going beyond the annual report and the homepage. 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. Question 2 An auditor is required to form an opinion as to the overall inherent risk applicable to each segment of the client company. You are first required by the question to make a judgment about the overall inherent risk in the BHP Billiton Limited audit in the segment affected by each inherent risk. Second you must 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 areas of BHP Billiton Limited which you identified in question 1. Be as specific as you can. 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 will still need to reference any information you have used from the BHP Billiton Limited annual reports. 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 BHP Billiton Limited has just been sued for breach of contract in relation to the failure to supply coal to Indonesia (this has been made up and is used for illustrative purposes only) and the case is proceeding through the Courts but will not be settled for some time. “The potential for material misstatement is reflected in the following issues related to the contingent liability as indicated in the financial press: This may constitute material misstatement if the contingency is not disclosed, or is nor disclosed properly. This may be relevant to assessment of inherent risk because it indicates a contingent liability exists for The financial press has warned that management may seek the following strategies to reduce the impact investors should the company lose the case. 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. You might need to think about the transaction cycle and which areas you would need to focus your control testing on, or if you consider that control testing would not be used. Think about the different types of evidence available – tests of transactions 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. For example, you might find an article that shows that the company had problems with staff stealing inventory during the year. This indicates the controls are not working properly and hence control risk will increase. Remember, Chapter 12 of the textbook is very useful to help you answer this question. Please also refer to the Weekly Study questions!