HI6026 Auditing Assignment Sample
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Executive summary
This study provides the implication of ASX corporate governance principles of BHP Billiton Limited. The corporate governance statement of the company provides different implications of the ASX principles. In addition to this, the different steps of the risk assessment procedure are also explained in this study which is necessary during performing the audit.
In this procedure, the income statement ratios as well as balance sheet ratios are also calculated for the financial year 2016 and 2017 to identify the risk in material misstatement. This study also focuses on the different audit risks as well as procedure to reduce the potential risk.
Introduction
The principles of corporate governance are much effective for an organization because it set out different extents for the organization. In addition, the ASX CGC principles provide a perfect structure to the company as well as define the potential risks that may face the company. In this study, ASX corporate governance principles of BHP Billiton Limited and the risk assessment process of the company are defined.
Implications of ASX Corporate Governance Principles on BHP Billiton Limited Company
BHP Billiton Limited builds up the ‘corporate governance statement’ for the company that defines the level of corporate governance practices. Below are the corporate governance principles of the company
Lay solid foundations for management and oversight
In this principle, the organization provides the role and responsibilities of all the senior managers as well as board of directs for providing approval for the strategic directions. As this part, the BOD is responsible to develop effective policies, authorities, operation, practices, and satisfactory management.
As per the Corporate Governance Statement (CGS) of BHP Billiton Limited, it is identified that the senior managers plays an essential role to present strategic direction in order to determine the goals. The non-executive directors are also appointed by board in BHP Billiton Limited after defining their skills, background, professional skills, and experience. These directors are appointed from the different shareholders in BHP after defining qualification and illegibility like experience, knowledge, skills and quality of direction.
The board is also responsible for appointing a CS for the organization who is directly accountable. CS of the company should also have best experience and knowledge about the company laws and regulations. In order to develop a working environment, the company also focuses on the diversity and inclusion for supporting the strategic priorities to promote corporate culture.
The top management is responsible for the performance of the organizational people by periodically evaluations to save the company from different financial and non-financial risks. The investment committee of BHP develops effective strategies to achieve investment objectives.
Structure the board to add value
In this principle, it is identifies that the board has appropriate size, skills and commitment or not. The CGS of BHP defines that the board has effective structure, and process for the composition of the organizational activities. In this, the board includes the remuneration committee, nominations committee and risk & audit management committee.
The board of the BHP is chosen by the main stockholders for completing the organizational tasks and activities related with decision-making, authority, etc. The main purpose of developing board in BHP is to create the shareholders value for long-term through innovation, acquisition, marketing and development of the organizational resources.
The board of BHP includes chairman, senior independent directors, non-executive directors, etc. Each member of the board will be a part of decision-making process to make effective decisions by utilizing own skills, knowledge and experience. The board has also established the nomination and governance committee, sustainability committee in order to review the matters and to exercise the authority of board.
The board reserves the power of planning, monitoring performance, as well as approval for strategy, budget, dividend policy, acquisition and monitoring the system of risk management. In addition, the rewards and evaluation for the corporate achievement are also provided by the board.
Act ethically and responsibly
As per this principle, BHP provides their code of business conduct in order to draw core values of integrity, teamwork, honesty, respect, and high performance. The main aim of the business code is to present zero tolerance for retaliation. The code of conduct are developed for the health and safety of the organizational people by prohibiting the use of Alcohol, drug and tobacco at workplace, confidentiality of the employees personal information, respecting human rights, working with government by restricting corruption, engaging with communities and environment. In addition to this, the company also focuses on the third party relationships.
Safeguard integrity in corporate reporting
The board of BHP has established the risk and audit committee to set out the matters in term of referances. the committee is reposible to provide the an effective perfromance to the board. The main roles and responsibilities of members of the committee are to oversee:
- Integrity of financial statement as well as annual report.
- Appointment, remuneration and perfromance of the external auditor as well as integrity of the external audit process
- Provide effective system of risk management and internal control.
- Develop plans, performance, objectivity and leadership for the functions of the internal audit with integrity of the internal audit process
- Management of capital
- Develop training program.
Make timely and balanced disclosure
The board of BHP has committed to the stockholders that the company will continually disclose major information to the market by different communication channels. In order to promote investor confidence, the discloser committee will oversee the compliance as per the requirement. It has responsibility to identify the information that requires disclosure to the market as well as communications with stock exchanges to provide reviews.
Respect the rights of security holders
In order to respect of the security holders, the organization has provided all the relevant information at website that contains all ASX announcements, reports, results presentations. In addition, annual general meetings are also provided by the company to provide the facility of sharing the views of shareholders. This approach provides a healthy environment to ensure directors are aware about the raising issues and develop good understanding of current shareholder views.
Recognize and manage risk
The main aim of the risk management governance structure of BHP is to identify, evaluate and manage the risk of both internal and external control system. In order to cover both operational and strategic risks, board of BHP reviews and considers the risk profile each year. In concern to this, the board has established the Business Risk and Audit committees.
Remunerate fairly and responsibly
The board has communicated to its employees and workers to fairly remunerate as per the remuneration policies and practices. The main aim of the remuneration policies and practices is to provide rewards and other fringe benefits to the best performers. In this, the company provides the competitive rewards to the highly skilled executives for attracting and retaining them.
Risk Assessment
The risk assessment process of BHP includes several steps in order to access the risk in the material misstatement:
Recognizing the nature of company and company’s market overview
BHP is a trading entry of BHP Billiton plc that is a duel listed public company in multinational mining, metals and petroleum. BHP was founded in the financial year 1885 in the isolated mining town of Broken Hill Proprietary. Headquarter of the company is established in Melbourne, Australia.
The main product range of BHP includes the iron ore, petroleum, coal, copper, natural gas, potash, nickel & uranium that include much product range. The overview of the market of BHP shows that the firm generated a $2.2 Billion during the financial year 2017. There was approximately $19377 Billion operating income of the company during the financial year 2017.
The main clients of BHP are the different country’s government which needs the petroleum and coal products for the energy and power. The governments of 25 countries continually need the petroleum products and other natural resources for the energy and power. The main target of the company is to provide petroleum products to the different countries with maintaining quality and timely delivery.
Business Strategy
The business strategy of the BHP is to own and operate the market for long life, at lower cost, with expandability, diversified by commodity, and large geography market. On order to grow the value of the company, six point plan have been developed like cost efficiency, latent capacity, major projects, exploration, technology and onshore US assets. The focus areas of BHP are safety, culture, and productivity to manage the risk and enhance the performance.
Computation of income statement and balance sheet ratio
Balance Sheet Ratios
| Balance Sheet Ratios | 2017 (US $m) | 2016 (US $m) | Variances | |
| Current ratio | (Current Assets/Current Liabilities) | 1.85 | 1.44 | 28.5% |
| Current Assets | 21056 | 17714 | ||
| Current Liabilities | 11366 | 12340 | ||
| Quick ratio | (quick Assets/Current Liabilities) | 1.490 | 1.090 | 36.7% |
| Quick assets | 16989 | 13474 | ||
| Current Liabilities | 11366 | 12340 | ||
| Debt-to-Worth | Total Liabilities/ Net Worth | 0.87 | 0.98 | -11.2% |
| Total liability | 54280 | 58882 | ||
| Net worth | 62726 | 60071 | ||
On the basis of the above table, it is identified that the variance between the financial year 2016 and 2017 are significant. Under the balance sheet ratio, both current ratio and quick ratio has positive variances but the debt to worth ration has negative variance. In this, it is identified that current ratio increased 28.5% from 1.44:1 to 1.85:1 in 2017. As well, Moreover, it is found that the quick ratio is also increased 36.7% from 1.49:1 to 1.09:1 during the year. But in debt to worth ratio, it is defined that it decreased 11.2% in 2017.
Income statement ratios
| Income Statement Ratios | 2017 (US $m) | 2016 (US $m) | Variance | |
| Gross Profit Margin | Gross profit / Net sales | 30.70% | -20.17% | -252.2% |
| Net sales | 38285 | 30912 | ||
| Gross profit | 11753 | -6235 | ||
| Net Profit Margin | Net profit / Net sales | 16.3% | 20.1% | -19.1% |
| Net Profit | 6222 | 6207 | ||
| Net sales | 38285 | 30912 | ||
The income statement ratios of BHP are calculated above in order to analysis the material misstatement in financial statement. The gross profit margin and net profit margin ratios are calculated for the financial year 2016 and 2017. The gross profit margin has a much high variance because in the financial year 2016 the company was facing the loss situation. In this table, it is found that BHP has -20.17% gross profit margin in 2016 but 30.70% gross profit margin in 2017 that is much high so there is variance of -252.2%.
But in concern to net profit margin, it is evaluated that net profit margin decreased by 19.1% in year 2017. It is because in the financial 2016, it was 20.1% and in 2017 is found 16.3%. So, this situation defines that it was not high change in the net profit margin. Therefore, it can be stated that the material misstatement of the company can present in context to the operational expenses.
Overall Efficiency Ratio
| Overall Efficiency Ratios | 2017 (US $m) | 2016 (US $m) | Variance | |
| Sales to assets ratio | Sales / Total assets | 32.72% | 25.99% | 25.9% |
| Sales | 38285 | 30912 | ||
| Total assets | 117006 | 118953 | ||
| Return on assets | Net Profit Before Tax/ Total assets | 8.8% | -6.1% | -51.8% |
| Net Profit Before Tax | 10322 | -7259 | ||
| Total Assets | 117006 | 118953 | ||
| Return on investment | Net profit before tax/ Net Worth | 16.46% | -12.08% | -236.3% |
| Net Profit Before Tax | 10322 | -7259 | ||
| Net Worth | 62726 | 60071 | ||
The overall efficiency ratios are helpful to determine the material misstatement in the financial statement. The sales to efficiency ratio of year 2016 and 2017 are not much effective for the material misstatement because it increased with 25.9%. But return on assets is decreased with 51.8% as comparison of previous because returns on assets ratios are -6.1% and 8.8% respectively in the financial year 2016 and 2017.
In context of return on investment ratios are –12.08% and 16.46% in the financial year 2016 and 2017. Therefore, it is determined that it decreased 236.3% variance in the return on investment. So, as per the efficiency ratios, it is identified that the performance of the company reduced.
Specific Efficiency Ratios
| Specific Efficiency Ratios | 2017 (US $m) | 2016 (US $m) | Variance | |
| Inventory turnover | Costs of goods sold/Inventory | 25.15 | 46.45 | -45.9% |
| Inventory | 1095 | 764 | ||
| Cost of sales | 27540 | 35487 | ||
| Inventory turn days | 360/Inventory Turnover | 14.31 | 7.75 | 84.6% |
| Account receivable turnover | Net sales / accounts receivable | 39.06 | 31.82 | 22.8% |
| Average account receivable | 2995.5 | 3738 | ||
| Sales revenue | 117006 | 118953 | ||
| Average collection period | 360/A/R turnover | 9.22 | 11.31 | -18.5% |
| Account payable turnover | Cost of Goods Sold/Accounts Payable | 5.03 | 5.55 | -9.4% |
| Cost of Goods Sold | 27540 | 35487 | ||
| Accounts Payable | 5470 | 6389 | ||
| Average payable period | 360/ Accounts Payable Turnover | 71.57 | 64.86 | 10.3% |
From the above table, it is identified that there are some increment or decrement in the specific efficiency ratio of BHP. In this, the inventory turnover ratio, average collection period, and account payable turnover are decreased in the financial year 2017 as comparison of financial year 2016. On the other hand, inventory turnover days, average receivable turnover and average payable period ratios are increased in the financial year.
Development of common-size financial statements
The common size financial statements of BHP are developed in the annual reports that are based on the AASB and the corporation act, 2001. In order to save the company from audit risks, the company follows the accounting standards of the Australia. During the preparation of financial report, the accounting department focuses on accounting policies to reduce the potential risk of the accounting and also mitigates the material misstatements.
Conclusion
From the above analysis, it is concluded that BHP provides effective framework to the corporate governance. Moreover, it is also analyzed that the risk assessment process is helpful for the organization to overcome key issues and potential risks.
References
ASX. 2018. Corporate Governance Council [Online.]. Available at: https://www.asx.com.au/regulation/corporate-governance-council.htm [Assessed on: 4th May, 2018]
Beekes, W., Brown, P. and Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in Australia: A re‐examination. Accounting & Finance, 55(4), pp.931-963.
BHP Billiton Limited. 2018. BHP Annual Report 2016 [Online.]. Available at: https://www.bhp.com/-/media/bhp/documents/investors/annual-reports/2016/bhpbillitonannualreport2016.pdf?la=en [Assessed on: 4th May, 2018]
BHP Billiton Limited. 2018. BHP Annual Report 2017 [Online.]. Available at: https://www.bhp.com/investor-centre/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf [Assessed on: 4th May, 2018]
BHP Billiton Limited. 2018. Corporate Governance Statement [Online.].Available at: https://www.bhp.com/our-approach/our-company/governance [Assessed on: 4th May, 2018]
BHP Billiton Limited. 2018. Corporate Governance Statement [Online.].Available at: https://www.bhp.com/-/media/documents/ourapproach/governance/180320_boardgovernancedocument.pdf?la=en [Assessed on: 4th May, 2018]
Kathy Rao, K., Tilt, C.A. and Lester, L.H., 2012. Corporate governance and environmental reporting: an Australian study. Corporate Governance: The international journal of business in society, 12(2), pp.143-163.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. USA: Oxford University Press.
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