Auditing business risk

Question 1 Business Risk 10 Marks You are the auditor of BS Limited (hereafter BS), a mining company operating in the iron ore industry. BS operates out of the Port Hedland region in Western Australia, and currently ships over 200 million tonnes of iron ore per annum to China and India as its main customers. BS has a workforce of over 5,000 employees. BS's strategy to effectively deliver products from the mine to the market is achieved through their innovative exploration methods, iron ore processing and their plant design. S engages with key stakeholders by working together with them to positively manage and create opportunities for Indigenous people, contribute to the success of local communities and protect the environment. Contributing to the BS success story has been their longstanding engagement with China. Your audit team are planning this year's audit for year ended 31 December 2019 and after discussions with management, reviewing minutes of Director's meetings and the preliminary analysis of unaudited 2019 financial report, you have also noted the following: . Over the last 12 months BS has invested $0.95billion into the battery market, by diversifying into copper and lithium mining processes. However, despite some success in this market, there has been criticism of the lithium carbonate extraction process and accusations of BS polluting the local water supplies in the Kimberley region (Western Australia), affecting and poisoning communities. There are also concerns among the Minerals Council of Australia that BS's lithium mining practices are questionable with last year's chemical leakage in the region resulting in another legal battle against an indigenous group. Currently there is a 'Subsequent Event' disclosure relating to a $100 million claim lodged against BS in Australia's Federal Court, for another legal matter that commenced in 2017, where indigenous group "Yindjibarndi" is claiming royalties for mining on their land. Mining royalties are paid each year by BS to the Government who then transfer them to indigenous communities. These royalties are based on a percentage of iron ore production, value estimations and subject to a number of complex variable factors, making it often difficult for accounting staff to determine the royalty payable. Meeting minutes indicate that apart from dealing with debtors in China (see table below), BS also engages with Chinese investors and Chinese banks with over US$1 billion of procurement. Revenue from China in namantainetamilliosanslantatatamillennisiastianithaalaa Meeting minutes indicate that apart from dealing with debtors in China (see table below), BS also engages with Chinese investors and Chinese banks with over US$1 billion of procurement. Revenue from China in 2019 amounted to US$9,753 million and (2018: US$4,753 million), arising from the sale of iron ore and the related shipment of lithium battery products. The impact of COVID-19 (coronavirus), which is understood to have originated in Wuhan, China is early December 2019, has meant that exports to China have experienced disruptions including rapid changes in demand, uncertainty regarding international freight and logistics, and reduced capacity of domestic logistics and supply chains in China. BS is in negotiation with financially stressed Chinese debtors to extend their credit terms. 2019 USSM 2018 USSM Note ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories 9(b) 10(a) 1000) 1,874 923 863 120 496 772 LIABILITIES Current liabilities Trade and other payables Deferred income 100) 10(d) 986 486 678 267 Total emissions generated in 2019 are approximately 18% higher than in 2018. This increase is mainly as a result of expanding operations, including the commencement of early works at the 'Wana'mine development, and additional diesel and fuel costs associated with increased haulage distances due to the long distance between the mines and the shipping ports. Diesel and fuel imports from South Korea and Japan have been subjected to huge price fluctuations over this year and in addition the Australian Dollar declined 17% relative to the US Dollar. Below are the other associated transportation costs. Japan have been subjected to huge price fluctuations over this year and in addition the Australian Dollar declined 17% relative to the US Dollar. Below are the other associated transportation costs. 2019 US$m 2018 US$m 1,829 1,739 190 188 176 172 Mining and processing costs Rail costs Port costs Shipping costs Government royalty Depreciation and amortisation 1,082 1,148 651 416 1,184 1,265 In respect to Property, Plant and Equipment, BS has increased iron ore production in 2019 due to its investment over time in mining and ore processing plant facilities that maximise product quality and improve efficiency to deliver sustainable lower operating costs. With the COVID-19 impacts, BS has sold its interests in railway and port assets just before year end for US$6.9 billion, to mitigate the huge capital expenditure into Lithium production. 12 Property, plant and equipment Plant and equipment US$m Land and buildings US$m Exploration Assets and under evaluation development Development US$m US$m US$m Total US$m Note 10,995 744 857 3.292 Net carrying value At 1 July 2018 Transfers of assets 16,189 301 (366) 678 20 (391) 53 (6) 12 89 954 1,055 Additions 678 20 (391) (366) 53 (6) 12 89 954 1,055 Transfers of assets Additions Disposals Depreciation Changes in restoration and rehabilitation estimate (8) (8) (980) (114) (189) (1,283) 13(a) 146 147 Other (7) (17) (23) 10,690 650 539 889 3,303 16,071 At 30 June 2019 Cost Accumulated depreciation 1,062 539 889 4,751 17,154 (6,464) 24,395 (8,324) (412) (1,448) Notes In accordance with AASB121 - The Effects of Changes in Foreign Exchange Rates, the functional currency of BS is US dollars. Accordingly, as auditor you consider it correct for the financial report to be expressed in US dollars. Assets under development shown above includes the investment in the battery market. You are satisfied that BS is a going concern. Required From the information presented identify and explain two (2) risks to the auditor, i.e. those risks which are likely to lead to a potential misstatement in the financial report. In addition, identify the key accountote disclosure and key assertion at risk together with a substantive test of detail which you would use to gather sufficient appropriate audit evidence to address the risk (0The key accountote disclosure affected. (ii) The key assertion at risk. (iii) A brief explanation as to why this risk represents a risk to the auditor. (iv) For the account and assertion identified in (i) and (ii) describe a specific practical Substantive Test of Detail Question 1 Business Risk 10 Marks You are the auditor of BS Limited (hereafter BS), a mining company operating in the iron ore industry. BS operates out of the Port Hedland region in Western Australia, and currently ships over 200 million tonnes of iron ore per annum to China and India as its main customers. BS has a workforce of over 5,000 employees. BS's strategy to effectively deliver products from the mine to the market is achieved through their innovative exploration methods, iron ore processing and their plant design. S engages with key stakeholders by working together with them to positively manage and create opportunities for Indigenous people, contribute to the success of local communities and protect the environment. Contributing to the BS success story has been their longstanding engagement with China. Your audit team are planning this year's audit for year ended 31 December 2019 and after discussions with management, reviewing minutes of Director's meetings and the preliminary analysis of unaudited 2019 financial report, you have also noted the following: . Over the last 12 months BS has invested $0.95billion into the battery market, by diversifying into copper and lithium mining processes. However, despite some success in this market, there has been criticism of the lithium carbonate extraction process and accusations of BS polluting the local water supplies in the Kimberley region (Western Australia), affecting and poisoning communities. There are also concerns among the Minerals Council of Australia that BS's lithium mining practices are questionable with last year's chemical leakage in the region resulting in another legal battle against an indigenous group. Currently there is a 'Subsequent Event' disclosure relating to a $100 million claim lodged against BS in Australia's Federal Court, for another legal matter that commenced in 2017, where indigenous group "Yindjibarndi" is claiming royalties for mining on their land. Mining royalties are paid each year by BS to the Government who then transfer them to indigenous communities. These royalties are based on a percentage of iron ore production, value estimations and subject to a number of complex variable factors, making it often difficult for accounting staff to determine the royalty payable. Meeting minutes indicate that apart from dealing with debtors in China (see table below), BS also engages with Chinese investors and Chinese banks with over US$1 billion of procurement. Revenue from China in namantainetamilliosanslantatatamillennisiastianithaalaa Meeting minutes indicate that apart from dealing with debtors in China (see table below), BS also engages with Chinese investors and Chinese banks with over US$1 billion of procurement. Revenue from China in 2019 amounted to US$9,753 million and (2018: US$4,753 million), arising from the sale of iron ore and the related shipment of lithium battery products. The impact of COVID-19 (coronavirus), which is understood to have originated in Wuhan, China is early December 2019, has meant that exports to China have experienced disruptions including rapid changes in demand, uncertainty regarding international freight and logistics, and reduced capacity of domestic logistics and supply chains in China. BS is in negotiation with financially stressed Chinese debtors to extend their credit terms. 2019 USSM 2018 USSM Note ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories 9(b) 10(a) 1000) 1,874 923 863 120 496 772 LIABILITIES Current liabilities Trade and other payables Deferred income 100) 10(d) 986 486 678 267 Total emissions generated in 2019 are approximately 18% higher than in 2018. This increase is mainly as a result of expanding operations, including the commencement of early works at the 'Wana'mine development, and additional diesel and fuel costs associated with increased haulage distances due to the long distance between the mines and the shipping ports. Diesel and fuel imports from South Korea and Japan have been subjected to huge price fluctuations over this year and in addition the Australian Dollar declined 17% relative to the US Dollar. Below are the other associated transportation costs. Japan have been subjected to huge price fluctuations over this year and in addition the Australian Dollar declined 17% relative to the US Dollar. Below are the other associated transportation costs. 2019 US$m 2018 US$m 1,829 1,739 190 188 176 172 Mining and processing costs Rail costs Port costs Shipping costs Government royalty Depreciation and amortisation 1,082 1,148 651 416 1,184 1,265 In respect to Property, Plant and Equipment, BS has increased iron ore production in 2019 due to its investment over time in mining and ore processing plant facilities that maximise product quality and improve efficiency to deliver sustainable lower operating costs. With the COVID-19 impacts, BS has sold its interests in railway and port assets just before year end for US$6.9 billion, to mitigate the huge capital expenditure into Lithium production. 12 Property, plant and equipment Plant and equipment US$m Land and buildings US$m Exploration Assets and under evaluation development Development US$m US$m US$m Total US$m Note 10,995 744 857 3.292 Net carrying value At 1 July 2018 Transfers of assets 16,189 301 (366) 678 20 (391) 53 (6) 12 89 954 1,055 Additions 678 20 (391) (366) 53 (6) 12 89 954 1,055 Transfers of assets Additions Disposals Depreciation Changes in restoration and rehabilitation estimate (8) (8) (980) (114) (189) (1,283) 13(a) 146 147 Other (7) (17) (23) 10,690 650 539 889 3,303 16,071 At 30 June 2019 Cost Accumulated depreciation 1,062 539 889 4,751 17,154 (6,464) 24,395 (8,324) (412) (1,448) Notes In accordance with AASB121 - The Effects of Changes in Foreign Exchange Rates, the functional currency of BS is US dollars. Accordingly, as auditor you consider it correct for the financial report to be expressed in US dollars. Assets under development shown above includes the investment in the battery market. You are satisfied that BS is a going concern. Required From the information presented identify and explain two (2) risks to the auditor, i.e. those risks which are likely to lead to a potential misstatement in the financial report. In addition, identify the key accountote disclosure and key assertion at risk together with a substantive test of detail which you would use to gather sufficient appropriate audit evidence to address the risk (0The key accountote disclosure affected. (ii) The key assertion at risk. (iii) A brief explanation as to why this risk represents a risk to the auditor. (iv) For the account and assertion identified in (i) and (ii) describe a specific practical Substantive Test of Detail