Effects Of Reporting Critical Audit Matters On Judgments

Auditors’ Independence Requirement

Potential investors and the other users of the financial statements consider the report of the auditors as a major tool for judging the truthfulness as well as fairness of various financial reports as the auditors provide their analytical judgments on the fact that whether there is any material misstatements in the financial statements of the audit clients or not (Parker, 2013). The quality of the audit reports largely depends on the consideration of the material issues in the financial statements of the companies by the auditors. For this reason, the quality of the audit reports has become a major issue to the audit regulations setters. It can be seen that there have been major initiative taken in the recent years for the enhancement of the quality of the audit reports (Ferguson, Pinnuck & Skinner, 2016). These initiatives have increased the responsibility of both the companies and the auditors as it has become necessary for the companies and the auditors to report about the major key audit matters in the auditor’s report so that the  investors and other users can know about them. An extra responsibility for the auditors is to take into consideration all the relevant material issue at the time to assess the financial statements. The report aims at the analysis of the role and responsibility of the auditors from the 2017 annual report of Oz Minerals.

Taking into consideration all the requirements of auditor’s responsibility is a prime success factor in the audit profession. The 2017 annual report of Oz Minerals states that KPMG, the audit partner of Oz Minerals for the year 2017, has followed the standards of Section 307C of the Corporations Act 2001 in order to maintain auditor’s independence (ozminerals.com, 2018). The auditors of the company have not mentioned about any contravention of auditor’s independence requirements as they have maintained the professional code of conducts of the profession (ozminerals.com, 2018).  

The 2017 annual report of Oz Minerals shows the received non-audit services by Oz Minerals from KPMG; and they are Tax Compliance and Other Tax Advisory Services and Other Non-audit Services. The payment for the taxation related non-audit services to KPMG is $180,000 and $160,124 in the year 2017 and 2016 respectively; the payment for other non-audit services to KPMG is $44,328 and $5,125 for the years 2017 and 2016 respectively (ozminerals.com, 2018). The analysis of the Audit Committee in the organizations did not found any material impact on the integrity and objectivity of the external auditors for providing non-audit services. It needs to be mentioned that KPMG has complied with Corporations Act 2001 for not compromising the auditor’s independence while providing the non-audit services (ozminerals.com, 2018).

Non-Audit Services

The following table shows the remuneration of the auditors in Oz Minerals for the year 2017 and 2016; and the change in percentage in the remuneration:

Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2017 ($)	2016 ($)	% Change
Audit Services
KPMG Australia	425,000	439,722	-3.35%
KPMG Firms Overseas	23,549	34,990	-32.70%
Total Fees of KPMG’s Audit Services	448,549	474,712	-5.51%
Other Assurance Services	50,000	71,900	-30.46%
Total Fees for Audit and Assurance	498,549	546,612	-8.79%
Tax Compliance and Tax Advisory Services	180,000	160,124	12.41%
Other Services	44,328	5,125	764.94%
Total  Fees for Non-Audit Services	224,328	165,249	35.75%
Total Fees	722,877	711,861	1.55%

As per the above table, the payment to KPMG related to the audit and assurance related services has decreased in the year 2017 from 2016 by 8.79%. The main reason that contributed towards the decrease in this payment is the decrease in the payment for all the services under audit and assurance services by 3.35%, 32.70%, 5.51% and 30.46%. This can be considered as a positive aspect for Oz Minerals as the company has been able in reducing the expenses for remuneration (ozminerals.com, 2018).

The above table also indicates towards the fact that Oz Minerals had to increase the payment to KPMG for receiving the non-audit services by 35.75%. The main reason for the increase in this overall payment is the increase in the payment for the non-audit services by 12.41% and 764.94%. It indicates that the company has increased the proportion of non-audit services from KPMG (Hodne et al., 2013).

It can also be seen from the above table that Oz Minerals had to make an increased payment in the overall audit fees by 1.55%. Increase in the payment for the items for non-audit services can be held responsible for this increase in the audit payment to KPMG (ozminerals.com, 2018).

The key audit matters assessed by the auditors of KPMG in Oz Minerals are discussed below:

One major key audit factor in Oz Minerals can be seen in the carrying value of the PPE of Prominent Hill and the main reason for considering it as a key audit matter is that the auditors had to put major effort in the assessment of the fact that there is not any impairment of the PPE of Prominent Hill (ozminerals.com, 2018).  This situation involves some crucial factors. In this aspect, the auditors have considered another aspect as crucial that is the presence of any impairment indicator that can lead to the analysis of the recoverable value of the PPE of Prominent Hill.  The historical sensitivity of the used model by Oz Minerals for the external and internal uses can be considered as another major reason for this. For this reason, KPMG has taken into consideration some relevant factors like capital and operating expenditures, foreign exchange rate and others (ozminerals.com, 2018).

The auditors have assessed this issue with the application of some substantive analytical procedures. In order to assess the impairment primary indicator, the auditors have tested the internal control of Oz Minerals in the areas of budget and operational plan for the PPE of Prominent Hill (He et al., 2017). In addition, the auditors have made the assessment of some major factors related to the PPE of Prominent Hill like historical cost, operating cost, level of production for metal and others. Another major step by the auditor was the comparison between foreign exchange rates and forecasted price of the commodity. Hence, these procedures can be classified as substantive tests of details and tests of control (Leung, Richardson & Jaggi, 2014).  

Auditor’s Remuneration

After the above, another key audit matter in the financial operation of Oz Minerals is the low grade gold valuation and the main reason for considering this as a key audit matter is that there is a presence of major judgment while evaluating the valuation process. At the time of the valuation of this low grade gold ore, Oz Minerals uses a certain estimate related to the future revenue  and the company is expected to get the revenue in future from the low grade gold ore. In order to assess this risk, the auditors have taken into consideration the factors like level of production, future processing cost and others (ozminerals.com, 2018).

KPMG has addressed this issue with the application of the substantive audit procedures. Test of control can be considered as one of them in which the auditors have tested Oz Minerals’ valuation process for the low grade gold ore (Brasel et al., 2016). After that, the auditors have done the assessment of the selected methodology in order to determine the value of low grade gold ore. After this process, the auditors were involved in the examination of the used assumptions for the valuation of low grade gold ore such as commodity price, operating cost and others. Thus, these processes can be considered as the substantive test of control (Hillison & Peecher, 2017).

The management of Oz Minerals has established an Audit Committee with the aim to assist the board of directors of the company to discharge their roles and responsibilities in the process of financial reporting. One non-executive director of Oz Minerals, Peter Wasow, will be the chairman of this committee (Badolato, Donelson & Ege, 2014).

Apart from this audit committee, Oz Minerals has an Audit Committee Charter with certain responsibilities. The aim of governance and risk policy is to ensure the presence of ethics in the business processes (Contessotto & Moroney 2014). The aim of Market Dividend Policy is to ensure fair trading of the company’s securities. The aim of Finance and Accounting Policies is to ensure effective financial compliance. The aim of Securities Trading Policies is to set necessary policies for the staffs, employees and director of Oz Minerals (ozminerals.com, 2018).   

The provide opinion of KPMG on the analysis of the financial statements of Oz Minerals indicates towards the fact that the management of the company has prepared and presented the financial statements in accordance to the Corporations Act 2001 and this aspect leads to the true and fair view of the financial performance of the company (ozminerals.com, 2018). The opinion of KMG also indicates towards the fact that the company has followed the Australian Accounting Standards and Corporations Regulations 2001 at the time of the process of financial reporting (ozminerals.com, 2018).  

Key Audit Matters

It is the responsibility of the management and the directors of Oz Minerals to prepare and present the financial statements of their business in accordance to the Australian Accounting Standards and Corporations Act 2001 so that they can reflect the true and fair view of the financial statements. Another two major responsibilities are the assessment of the internal control and going concern assumptions of the company (ozminerals.com, 2018).

It is the responsibilities of the auditors of Oz Minerals to gain enough evidence and assurance on the fact that there is not any material misstatement in the financial statements of the company as a result of fraud and errors. After that, the issue of proper audit evidence is another major aim of the auditors (Brown, Preiato & Tarca, 2014).

As per the annual report of Oz Minerals, the company has made a payment for the fully franked dividend of 14% on 26 March 2018 and the date to record was 12 March 2018. It can be seen that the total amount was $41.8 million and the company has not recorded this amount in the financial statements for the year ended 31 December 2017. Apart from this, there is not any other material subsequent event in the year 2017 for Oz Minerals (ozminerals.com, 2018).

From the above discussion about different dimensions of the audit report of Oz Minerals, it can be observed that KPMG has complied with all the relevant standards of the audit profession like Corporations Act 2001, Australian Auditing Standards and others. It can also be seen from the discussion that the auditors have reported about the key audit matters and the substantive audit tests that they have applied. Thus, based on the above discussion, it can be observed that the auditors of KPMG have assessed the material financial information of the company in the most effective manner (DeZoort & Harrison, 2018).

It can also be observed from the above discussion that KPMG has done the proper evaluation of the financial statements and reports of Oz Minerals in the presence of the compliance with all the required rules and regulations of the audit profession (Czerney, Schmidt & Thompson, 2014). It can also be observed from the above discussion that the auditors have considered two aspects in the financial statements of Oz Minerals as key audit matters; they are the valuation of the carrying value of PPE of Prominent Hill and the valuation of low grade gold ore. After that, they have performed different substantive audit procedures for addressing these issues. Thus, in the presence of all these factors, it can be said that the auditors have not missed any material information (Czerney, Schmidt & Thompson, 2014).

Some major questions can be asked to the auditors; such as what are the used procedures for the detection of the key audit matters? Is there any loophole in the internal control of the company? What are the future plans for the audit operations of Oz Minerals? (Brasel et al., 2016)

Conclusion

It can be seen from the above discussion about the audit report of Oz Minerals that the auditors of KPMG has complied with all the regulations, rules and guiding principles of audit profession at the time to conduct the audit operations of the companies; these regulations and standards are Corporations Act 2001, professional code of conduct and others. It can also be observed from the above discussion that there is an overall increase in the payment for the auditors due to the increase in the payment for the non-audit services. It is visible from the above table discussion that the auditors of KPMG has considered two key audit matters based on the analysis of the financial statements of the company; at the same time, the auditors have also applied substantive audit procedures for addressing them. The above discussion indicates that Oz Minerals has both Audit Committee and Audit Committee Charter. The above discussion also shows that the auditors have not missed any material information from the financial statements of Oz Minerals.

References

Brasel, K., Doxey, M. M., Grenier, J. H., & Reffett, A. (2016). Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), 1345-1362.

Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52.

Czerney, K., Schmidt, J. J., & Thompson, A. M. (2014). Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?. The Accounting Review, 89(6), 2115-2149.

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OZ Minerals. (2018). 2017 Annual and Sustainability Report. Retrieved 19 September 2018, from https://www.ozminerals.com/uploads/media/OZMinerals_2017_Annual_and_Sustainability_Report.pdf

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