The Audit Risk of Bhp

1. Introduction

Before the identification of audit risk, it is necessary to understand the environment and circumstance of the company sustain and dynamically, including internal factors (the company's business activities, internal governance structure and internal control, et.al) and external factors (industry conditions, legal and regulatory environment, et.al)

BHP Billiton is among the world’s top producers of major commodities including iron ore, metallurgical coal, copper and uranium, also has substantial interests in oil, gas and energy coal. It extracts and process minerals, oil and gas from production operations located primarily in Australia and the Americas, and products are sold worldwide, with sales and marketing led through Singapore and Houston, United States. Its global headquarters are in Melbourne, Australia, and operate under a Dual Listed Company structure with two parent companies (BHP Billiton Ltd and BHP Billiton Plc) operated as a single economic entity. In terms of internal governance and transparency, BHP has plans as the Natural Resource Governance to reduce the potential corruption for and bribery across the entire resource value chain.

BHP has a seasonal and cyclical nature of production and management in the integrated mining and resource industries. From 2014 to 2016, the global commodity market into the trough, the low price makes the risk of expanding BHP business. At the same time BHP Billiton's business activities are subject to strict regulation, the mining industry in the field of environmental protection and personal safety requirements. In the event of the tragedy following the failure of the Fund o tailings dam at Samarco ---- on 5 November 2015 BHP, Sustainability and Integrity for more attention.

As the statements illustrated, During the 2016 financial year, underlying EBITDA of BHP Billiton was down 44% to $12.3 billion and underlying attributable profit down 81% to $1.2 billion. the revenue of BHP Billiton dropped to 30.912 billion in 2016 compared to 44.636 billion in 2015. And it has a statutory loss of $6.4 billion in 2016. However, EBITDA has remained healthy at 41% and there is a strong cash generation of assets, which has resulted in a free cash flow of $3.4 billion.

Figure 1        Consolidated Income Statement for the year ended 30 June 2016

Source: BHP Billiton annual report

Figure 2        Consolidated Balance Sheet as at 30 June 2016

Source: BHP Billiton annual report

1. Theory background

1. audit risk theory

Audit risk refers to the possibility that the financial statements are materially false and the CPA cannot provide the appropriate audit opinion. With an audit model can be expressed as:

Audit risk = Inherent risk × Control risk × Detection risk

In the audit planning stage, the auditor must first determine an acceptable level of audit risk, in order to assess the risk of material misstatement of the audited entity and determine the Detection risk. In considering the level of audit risk, the main consideration is the degree that the external users of the financial statements depend on, the possibility of financial difficulties of customers after the audit report issued, as well as the integrity of customer management.

Inherent risk is confined to the risk of material misstatements. It is mainly affected by the integrity of management, company background, business nature, industry characteristics and changes, business risk and financial condition and other factors. Control risk is a function of the effectiveness of the internal control structure as good controls reduce risk. In practice, the inherent risk and control risk is difficult to completely distinguish, two are collectively referred to as the risk of material misstatement. The risk of material misstatement is mainly reflected in two levels, one is the level of financial statements, and the other is the various types of transactions, the balance of the account and the report assertion levels. For the risk of material misstatement, auditors can only identify and evaluate, but cannot control.

Detection risk is that the existence of a certain error, the error reported alone or in conjunction with other errors are significant, but the auditor did not find the possibility of such errors. detection risk depends on the reasonableness of the audit procedures and the effectiveness of the implementation. If audit risk is fixed, the acceptable levels of detection risk are inversely related to the assessments of inherent and control risks.

1. Business risk

The business risk of the company often affects the company's entire financial statements, and therefore requires the auditor to identify threats faced by the organization, increase the chances of identified risks of material misstatements in the financial reports. The situation in which the audited entity is at risk of material misstatement is often the case: for example, starting business in economically unstable countries and regions, problems with asset liquidity, loss of significant customers, limited financing capacity, etc., which can make auditors raise a significant suspicion of the continuing operating capacity of the unit being examined. The same lack of integrity or extreme pressure on management can also lead to fraud risk, which has an impact on the overall financial statements.

BHP belongs to the mining industry, which has periodic characteristics. The company suffered a downturn in 2016 when the commodity prices are in the doldrums, having a significant impact on the BHP's revenue and inventory measurement. As the global energy price decline higher than expected, the company reduced the value of energy assets of US Onshore, write-down about $ 7.2 billion before tax. So the industry downturn may lead to a risk of material misstatement for BHP company.

Moreover, BHP has recently dismantled its non-core business assets, divested some of its crude oil assets, set up a new company south32, and sold 75% of Indonesia's metallurgical coal mine to its partner company Adaro. In the process of major restructuring and the sale of business segments, the measurement and accounting of financial data are more complex and prone to material misstatement, thus affecting the balance of financial statements.