Financial Accounting

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

Executive Summary

The report has provided an insight into the annual report of BHP Billiton for the assessing, analysing and evaluating the role, responsibilities and duties of the auditor. The report has developed the requirement for maintaining independence and nature of non-audit services. The report has also provided the reason for considering some matter to be key areas for auditor judgement. Material information is the information which affects the decision of users of accounts and financial statements. The auditor of Company has covered the material information inappropriate manner.


With the increase in corporate accounting scandals in the last decades, strict efforts are continuously being made by the accounting and auditing body for improving the quality of audit reporting. Accounting scandals such as the collapse of WorldCom, Enron and Lehman brother were the great shock to the whole world. It has resulted in the enhancement of reporting standards and requirements of auditing.

This report seeks to analyse and evaluate the role of the auditor in assuring the financial statement of entities and control the environment. The report will review and cover all the sections about the auditor role of ASX listed Company and will discuss 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 of mining, petroleum, and metals. Presently, Company is working with more than 60000 employees and earned revenue of US $38.285 billion in the year 2017 (BHP, 2017). The auditor of the Company is KPMG.

Auditor Independence         

Auditor independence refers to the process of the audit which includes integrity and objectivity. Auditor independence requires an auditor to carry its responsibilities freely and in an objective manner.

As per section 307C of Corporation Act, 2001, an auditor is required to give a declaration in writing that 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. There is also no conflict of interest arise which is required to be disclosed by the auditor. The auditor did not commit any offence under subsection (2) of Section-324CA (BHP, 2017).

The auditor of BHP Billiton has declared its independence in the financial statements as required under the act. In other words, the auditor is complying with the provisions of the Corporation Act, 2001 and APES 110. The auditor is successful in keeping the distance with any of director or officer in personal interest and also presenting the true and fair auditor report and financial statements. Independence requirement is also followed in complying with the non-audit services both by director and auditor.

Non-audit Services

Non-audit services are services which have no connection with the audit process of an auditor and 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 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 any non-audit services out of the policy.  Non-audit services are performed by Company with the prior approval of RAC. The services are incompatible with the general standards for maintenance of auditor’s independence.

Analysis of the Auditor’s remuneration

Figure 1: Remuneration of auditor   Source : (Annual report, 2017)

As per the annual report of BHP Billiton, 2017 the remuneration of the auditor includes the fees payable to the group’s auditor for the purpose assurance services, fees payable to the group’s auditors for other services (Norman et al., 2010). All amounts are paid to the KPMG and the affiliated firm of KPMG. The fees of the auditor 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.

Auditor fees do not include the audit of pension funds. Audit-related assurance services consist of half-year review reports and work of audit in the association of section-404 of the US Sarbanes-Oxley Act. Other assurance services include assurance for sustainability reporting of BHP Billiton.

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

As per the above table, the fees of the auditor has been increased to $3381 million in the year 2017 from $3126 million in the year 2016. The fees have slightly decreased from the year 2015 (Spira and Page, 2010). In case of other services by the auditor, the fees reduced from the last two years due to a decrease in the requirement of other services by the company.

Key audit matters

The auditing standard 701 is for communication of key audit matters under the independence 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 statement and is critically important for auditing of financial statements. The matters provide an understanding of 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 auditor’s report of BHP Billiton are here presented below:-

Key audit matter Rationale Procedure adopted
Asset valuation Because of the size of balances and requirement of level of judgment in the evaluation of reasonableness in inputs and for the evaluation of 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 commodity with comparison value as per the market.Comparison of future capital expenditure with operating and reserve life data in association with the latest approved budgets and plans. Assessment of impact from the changes in the value of assets on the carrying value of assets.
Taxation Due to multiple reach and size of Company and application of a number of the tax legislation of different countries. The legislation is complex and specialized which requires judgment for the evaluation of 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.  
Samarco The number of complex judgment for accounting involved with the failure of Samarco dam. There were significant claims and uncertainty in the estimation required level of judgment for ascertaining the legal claim and obligations of Billiton Brazil’s obligations. 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 in relation to the contingent liabilities via inspection, and observation of internal documents, senior management, and legal personnel.
Closure and rehabilitation provision Due to size and level of judgment need for estimation of management’s quantum and timing involved for future cost and assessing the rate applied on 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 practice of the industry. 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 of three members having two non-executive directors and one chairperson who is not the chair of the board. The members are Frank Cooper (Chairman), David Crawford (Non-executive director) and Futhi Mtoba(Non-executive director). All the members are financial and accounting expertise and have a great understanding of the industry in order to discharge the mandate of the committee effectively.

            The responsibilities of the committee include the following:-

  • Overseeing the reporting process of corporate in order to safeguard the integrity of financial reporting.
  • Monitoring and examine the related party transactions (Dechow, et. al., 2011).
  • Reviewing and monitoring the independence of external auditor and performance.
  • Giving consent on the fees of external auditor and policy containing the non-audit services. Further, monitoring those services.
  • Administrating and overseeing the effectiveness, objectivity, and independence of function of internal audit and also 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 risk management system in the light of risk appetite set by the board and appraise the effectiveness of the framework for risk management.

Auditor Opinion

            Auditor of BHP Billiton has provided an unqualified opinion with respect to the financial statements and other compliances. Consolidated financial statements are also giving a true and fair picture of the group and properly prepared in consideration of international financial reporting standards.

The reports have also complied with UK accounting standards; FRS 101 reduced disclosure framework and article 4 of the IAS Regulation (Chan and Vasarhelyi, 2018). But the auditor has drawn the attention of the going concern basis of accounting having no material uncertainties which may cast doubt on the group.

The financial instruments and going concern accounting is materially inconsistent as per the auditors and they have nothing to report in these respects.  The remuneration report of the Company is complying with the section 300A of the Corporation Act, 2001.

Auditor in his report has mentioned that they have nothing to report on the matters where adequate accounts are not kept, appropriate returns are not received from branches, and certain disclosures of remuneration of the director are not made and if any information or explanation is not received for the audit process.

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

Directors are responsible for the preparation of financial statements which can provide a true and fair picture of financial position. Director0s are also requiring ensuring that the financial statements are as per the relevance framework of financial reporting. Further, directors are also responsible for the implementation of 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 regular concern. For this proper disclosure on matters related to going concern and use of accounting of going concern unless they have any intention of ceasing the operations or liquidate the BHP Billiton and have no alternative realistic but to do so.

Auditors are responsible for obtaining the reasonable assurance on 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 report containing the 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, flooding which resulted in charges for Company such as legal, advisory charges and loss of million amounted to $134 million (BHP, 2017). Dam failure impacted the communities of Gesteria, Bento Rodrigues, and Paracatu and other downstream communities. Samarco has been jointly owned by BHP Billiton has an equity investment of 50%.

The company identified contingent liabilities and provisions as a consequence of the failure of Dam. The company enters into a framework agreement and a preliminary agreement with the federal government and federal prosecutors in Brazil. 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 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 understand the financial position of the Company.

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 in relation to 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 then 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 which has been disagreed by management and the reason for not correcting such error.


            The report went insight of the annual report and revealed about many aspects of 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 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.available at accessed on 15.09.2018

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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