Running head: AUDITING THEORY AND PRACTICE

Auditing Theory and Practice

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 AUDITING THEORY AND PRACTICE

Executive Summary
The report will discuss about the company, Rio Tinto, a company from mining
background in Australia. The report will effectively analyze the areas of the higher material
misstatement as well as the significant risks associated with the generated financial
statements by the company, in accordance with ASA 315. The audit report will also be
observed with respect to ASA 701 which is related with the auditor judgements that is given
in the financial statements for the financial activities that occurred in the current financial
year. The relevant data for the purpose have been taken from general Purpose financial
statements and reports. The report will analyze the audit report of the company, Rio Tinto.

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 AUDITING THEORY AND PRACTICE

Table of Contents
Introduction................................................................................................................................3

Discussion..................................................................................................................................3

Auditor Risks.........................................................................................................................3

Significant Auditor Judgements.............................................................................................4

Effect on the Audit.................................................................................................................5

Conclusion and Recommendations............................................................................................6

References..................................................................................................................................7

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 AUDITING THEORY AND PRACTICE

Introduction
Rio Tinto is one of the largest mining and corporation company in Australia. The
company is known for the production of metals like iron ore, gold, diamond as well as
uranium. The company was established in the year 1853. The company has its joint
headquarters situated in both Australia and United Kingdoms. The headquarters in United
Kingdom is placed at London and the one at Australia is placed at Melbourne. The company
is listed under the top 200 ASX listed companies. Rio Tinto has been known as a dual listed
company as it is listed both in London Stock Exchange as well as Australian Stock Exchange.
The company trades with the name RIO in both London Stock Exchange as well as
Australian Stock Exchange. The company, Rio Tinto has been recently ranked by the Forbes
Global 2000 as the 114th largest company in public domain in the world (Tinto’s, 2020). The
company mainly focuses on extraction and mining, but after many successful mergers and
acquisitions, the company is now one of the leaders in the world in the mining and extraction
industry with dealings in metals like copper, uranium, diamonds and bauxite. The auditor of
the company is PriceWaterCoopers. The audit sections to be dealt with in the report are ASA
315, ASA 701 as well as ASA 570. The independent auditors report will mention all the key
audit risks attached with the company’s financial statements for the purpose of the analysis of
the true and authentic financial position of the company as well as the context of the material
misstatements present in the financial statements of the company. The ASA 315 deals with
the understanding of the entity of the company as well as the environment and then assessing
the risks of material misstatements in the financial statements of the company. It is the duty
of the auditor to analyze the key audit risks and then present them in the auditors report to the
company, using the various sections under Auditing and Assurance Standards Board (ASA).
The auditor is also expected to carry out various risk assessment procedures and apply them
3 practically in order to get a better idea about the risk management of the company
(Shrivastava and Vidhi 2020).

Discussion
Auditor Risks
The ASA 315 deals with the assessment of the risk management of the company
related to the material misstatements in the company or the significant risks in the company
which is in accordance with the ASA 315 in the company (AUASB, 2006). The material
misstatements in the financial statements of the company needs to be observed and found out
by the auditor of the company and at the same time, these are matters of audit risks in the
company and hence, the auditor should effectively analyze them. According to ASA 315, the
auditor is supposed to find out and assess the risks of material misstatements in the company
for a better analysis of the risks in the company (IAASB, 2009). The risks can either be
normal risks or specific risks attached to the financial statements of the company. In case of
Rio Tinto, the auditor of the company, PricewaterhouseCoopers LLP created an audit report
to the company stating the various key audit risks found in the company. The first and
foremost audit risk in regards with the ASA 315 is the assessment of the indicators of the
impairment issues of the company of the intangible assets of finite lives. These assets include
plants and equipment. The auditor found this key audit risk while assessing the material
misstatements in the company. It was found that approximately impairment losses had
occurred at Oyo Tolgoi, which amounted to US $2240 million and at Yarwun, which
amounted to US $1138 million. The impairment losses were found from the General-Purpose
Financial Reports of the company, which has been prepared for the purpose of distribution of
relevant information of the company the wide range of the users of the company (Audit,
2019). The users of the company includes the shareholders and the stockholders of the
 AUDITING THEORY AND PRACTICE

company. The shareholders use the information from the General-Purpose Financial Reports
in order to get a better knowledge of the company in which they are investing in. The recent
ASA701 also deals with the better and transparent communication about the specific and
important information about the company to the shareholders of the company (Xu Jiang,
Fargher and Carson, 2011). The key matters should be effectively analyzed and presented in
the annual report of the company as well as the General-Purpose Financial Reports and
Statements prepared for the sake of the users and a better analysis of the financial condition
of the company.
In case of Rio Tinto, the auditor effectively used various valuation models in order to
get a better estimate of the recoverable amount of the impairment losses. The commercial
contracts were put to test and the authenticity of the contracts as well as the agreements also
served the purpose of being the proof for the analysis of the key audit risks. The decisions
taken by the management were also identified by the auditors and they also verified the
accuracy of the mathematical formulae which were used by the management for the valuation
model in order to get deep into the analysis of the key audit risks. As per ASA 315, there has
to be a better analysis of the material misstatements for the purpose of the analysis of the
audit risks of the company (Oussous et al., 2020). In the process of audit for the company,
Rio Tinto, the auditor of the company, Paul Barkus and the partner Debbie Smith finally
found that there was no material misstatements or issues from the side of the company and
that the company is not at risk for the impairment losses. The impairment losses for both Oyo
Tolgoi as well as Yarwun is accurate and there is no case of any deficiency or information
deficit from the side of the company.
Significant Auditor Judgements
The significant auditor judgements is made by the auditor on the areas of financial
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units in the financial statements generated by the company that has been involved in the
significant areas of the management of the company. The auditor has to pass a judgement on
the significant key audit risks in the company which have been found out and assessed during
the process of auditing by the company. The auditor of the company, Rio Tinto is
PricewaterhouseCoopers and the senior auditor of the company was Paul Barkus and the
partner auditor was Debbie Smith. The judgement of the auditor is very important for the
analysis of the true and authentic image of the company. The users and the shareholders of
the company will critically analyze the judgements of the auditor as they think that the
auditor is going to pass true and authentic judgements on the key audit risks of the company
(Lamboglia and Mancini, 2020). A proper and serious audit team is elected in order to
observe and find out the various key risks in the financial statements of the company. For
instance, the key audit risk of the company involving the impairment losses of both Oyo
Tolgoi as well as Yarwun was a major relief for the company as the judgement of the auditor
claimed the fact that there was no discrepancy or material misstatement found on the part of
the company and that the company, Rio Tinto was not at fault by the auditor team. If the
reverse situation took place where the auditor claimed that there was material misstatements
found in the process of the valuation models as well as the accuracy of the management
decision of the company regarding the mathematical formulae used of the valuation of the
amount to be recovered from the impairment losses, then the shareholders would have lost
interest from the company and this would have severely affected the worth of the company
(OGBAISI and Ohiokha).
Apart from the impairment losses found on both Oyo Tolgoi as well as Yarwun, there
were other two major key audit risks found by the audit team. One was the provisions made
by the company, Rio Tinto for the close down and the restoration and environmental
 AUDITING THEORY AND PRACTICE

obligations of US $11,090 worth by the end of the financial year 31 st December,2019. The
amount of US $11,090 was calculated after taking into consideration the various aspects like
the future costs and the timing of the payment of the future costs as well (Kend and Nguyen,
2020). The second key audit matter consisted of the provisions made by the company in
regards to the uncertain positions of the company which specifically related with the concept
of transfer pricing of some of the transactions made by the company with the commercial
center of the Group in Singapore. This matter was a concern of numerous jurisdictions and
the specific matters were related to indirect tax provisions and the transaction related tax
matters of the company. This was also a matter of huge concern, but the audit team
thoroughly investigated the matter and reached a conclusion that there was no material
misstatements found in the part of the company, Rio Tinto. There was no discrepancy found
by the audit team even after investigating and going through all the concerned matters and
transaction history as well to properly investigate the matters of key audit risks and then
decide if there is any case of material misstatements (Puspitarani and Mapuasari, 2020). But,
on the contrary, there was no material misstatement found and this was clearly mentioned by
the auditors in the Independent audit report in the annual report of the company. This is a
type of a communication between the audit team and the shareholders, stating the true and
authentic judgement and the view of opinions by the audit team on the key audit risks of the
company. This gives a fair idea about the true financial image about the company to the
shareholders (Logie, J. and Maroun, W., 2020).
Effect on the Audit
The Auditing Standard ASA 701 states that the key audit matters should be present in
the independent auditors report as well. This means that the shareholders and the users of the
company should have a transparent knowledge about the key audit risks in the company in
5 which they are dealing. This will also be useful to the potential investors and shareholders as
well as it will give a clear and wise picture about the company to them. The key audit risks
are found by the audit team who are formed and elected specifically for the purpose of
finding out the key audit risks and then verify the supporting documents as well (Eilifsen,
Hamilton and Messier Jr, 2020). The verification of the documents and the relevant
supporting materials is done in order to get a clear idea about the presence of the material
misstatements in the company. Paragraph 9 of the Auditing Standard ASA 701 incorporates
the concept of the effect on the procedure of audit or audit process from the significant events
related to financial history or the transactions that have already occurred during the time of
the audit procedure as well. This is a crucial topic as there are certain restrictions on the
independency of the auditor and the audit process as well and this gives a clear idea about the
contradictions on the thought process of the audit team and the company as well (Shan,
Troshani and Loftus, 2020).
In case of Rio Tinto, the company has three major key audit risks that were found
during the process of audit. But the analysis of the supporting documents releases an image
that the audit team got full support and there was no negative impact on the audit process.
The first key audit risk mentions about the impairment losses for both Oyo Tolgoi as well as
Yarwun. There was an impairment loss of about US $2,240 in Oyo Tolgoi and US $1,138
million in Yarwun. This is a huge amount and that is why it is mentioned in the key audit
risks as well. The audit team thoroughly investigated the recoverable amount for both Oyo
Tolgoi as well as Yarwun using the accuracy of the different valuation models used by the
company. The accuracy of the mathematical formulae which were used by the companies for
the valuation of the impairment loss is also checked for the purpose of authenticity and the
presence of material misstatements. There was no material misstatement or deficiency found
on the part of the company by the audit team (Hu et al., 2020). The second audit risk says
 AUDITING THEORY AND PRACTICE

about the provisions made by the company on the part of the close down and the restoration
and the obligations on the matters of environment. The audit team effectively reviewed the
process taken by the management on the part of the environmental obligations. And after
considering all the necessary documents as well, it was found that there was no material
misstatement found in this key audit risk as well. The third key audit risk is related to the
uncertain tax provisions, related to transfer pricing as well for certain transactions made by
the company for the Group in Singapore. After reading and analyzing the accuracy of the tax
statements and the relevant documents of the transaction history, it was found that there was
no material discrepancy by the side of the company at all. All these documents reveals that
there was no negative effect on the part of the company in the process of the audit or the key
audit risks as well.

Conclusion and Recommendations

The report effectively analyzed the various key audit risks which were found out by
the audit team of PricewaterhouseCoopers LLP for the company, Rio Tinto. The company is
one of the leaders in the mining and extraction industries in Australia as well as globally. The
company has a huge database and after many mergers and acquisitions, the company deals
with the effective mining and extraction of many metals. The company was said to have three
major key audit matters which were analyzed by the audit team. the first audit matter was
related to the impairment losses in both Oyo Tolgoi as well as Yarwun. The second key audit
matter was related to the provisions for the close down as well as the restoration and the
environmental obligations of worth US $11,090 by the end of the financial year December
2019. This was analyzed for the purpose of considering the effectiveness and the accuracy of
the decision of the management. The third audit risk was due to indirect tax provisions made
by the company. There was no material misstatements found on the part of the company.
6 After the successful analysis of the ley risks, the recommendations for the company would be
that a clear and effective communication to the shareholders through monthly meetings and
authentic transaction carry outs would prevent the happening of the key audit matters in the
hands of the audit team as well.
 AUDITING THEORY AND PRACTICE

References

AUASB, 2006. ASA 315 Understanding the Entity and Its Environment and Assessing the
Risks of Material Misstatement.
Audit, A.A., 2019. Rio Tinto.
Eilifsen, A., Hamilton, E.L. and Messier Jr, W.F., 2020. The importance of quantifying
uncertainty: Examining the effects of quantitative sensitivity analysis and audit materiality
disclosures on investors’ judgments and decisions. Accounting, Organizations and Society,
p.101169.
Hu, K.H., Chen, F.H., Hsu, M.F. and Tzeng, G.H., 2020. Identifying key factors for adopting
artificial intelligence-enabled auditing techniques by joint utilization of fuzzy-rough set
theory and MRDM technique. Technological and Economic Development of Economy, pp.1-
34.
IAASB, 2009. ASA 315 identifying and assessing the risks of material misstatement through
understanding the entity and its environment. In SAICA Members’ Handbook.
Pietermaritzburg: LexisNexis.
7 Kend, M. and Nguyen, L.A., 2020. Big Data Analytics and Other Emerging Technologies:
The Impact on the Australian Audit and Assurance Profession. Australian Accounting
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Lamboglia, R. and Mancini, D., 2020. The relationship between auditors’ human capital
attributes and the assessment of the control environment. Journal of Management and
Governance, pp.1-29.
Logie, J. and Maroun, W., 2020. Evaluating Audit Quality Using the Results of Inspection
Processes Performed by an Independent Regulator. Australian Accounting Review.
OGBAISI, S.A. and Ohiokha, F.I., ISSUES IN BEHAVIOURAL AUDITING: A SURVEY
OF LITERATURE.
Oussous, A., Benjelloun, F.Z., Lahcen, A.A. and Belfkih, S., 2020. ASA: A framework for
Arabic sentiment analysis. Journal of Information Science, 46(4), pp.544-559.
Puspitarani, P. and Mapuasari, S.A., 2020. DOES AUDITOR INDEPENDENCE,
SKEPTICISM, AND PROFESSIONALISM INFLUENCE AUDIT QUALITY?. Jurnal
Muara Ilmu Ekonomi dan Bisnis, 4(2), pp.251-260.
Shan, Y.G., Troshani, I. and Loftus, J., 2020. Managerial ownership, audit committees and
non-audit services. Australian Journal of Management, p.0312896220945763.
Shrivastava, P. and Vidhi, R., 2020. Pathway to Sustainability in the Mining Industry: A Case
Study of Alcoa and Rio Tinto. Resources, 9(6), p.70.
Tinto’s, R., 2020. After the mine.
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Xu, Y., Jiang, A.L., Fargher, N. and Carson, E., 2011. Audit reports in Australia during the
global financial crisis. Australian Accounting Review, 21(1), pp.22-31.