Audit Strategy of Newcrest Mining Limited and the Commonwealth Bank of Australia - Case Study Example

Financial Reporting and Auditing Strategy Name: Instructor: Institution: Date: Introduction For the purpose of this assignment, the two companies selected are Newcrest Mining Limited and the Commonwealth Bank of Australia. Both companies are located in Australia. Background Information Newcrest Mining Limited. New Mining Limited is a company based in Australia which involves in exploration, mining, development and sale of gold-copper concentrate and gold in general. The company is headquartered in Melbourne, but in recent years, it has expanded its operations and business to other nations like Indonesia, Fiji, Papua New Guinea, and Ivory Coast (Basu, Hicks, Krivokapic-Skoko, and Sherley 2015). The business was initially established in 1966 as a subsidiary company under Newmont Mining Corporation, but it was until 1990 that it acquired 100% of the Australmin Holdings Limited thus taking its current name. Management of the firm is made of a board of management with a wide range of expertise that has a proven operational, technical, commercial and financial skills and experience in the field of mining exploration, strategy development, business acquisition, corporate finance and venture capital. Commonwealth Bank of Australia (CBA) Commonwealth Bank of Australia is a multinational bank headquartered in Sydney, Australia. Apart from Australia, the bank is operational in Fiji, New Zealand, USA, the UK and Asia. The bank was established in 1911 but commenced business in 1912. The management board of the bank comprises of a chief executive officer who is supported by a number of directors. The business was developed to offer saving as well as the general banking business. Over the years the business has developed to offer a range of financial services to its local and oversee consumer base. Financial Performance Newcrest Mining Limited Newcrest Mining recorded a massive improvement in its financial performance in 2015 financial year rebounding from a crucial write-down in 2014 financial year. This was primarily attributed to the improvement the company made in cutting cost significantly amid an efficiency drive motive of $400 million. The company posted a net profit of $546 million dollars as at June 30th following a massive loss of $2.2 billion it had incurred in 2014 financial year. The company shares return worked in favor of the investors with the recorded EPS being $12 as at June 30 from $ 4.5 that was recorded in 2014. The exceptional performance was largely attributed to the massive decrease in operational costs by 12% over the 2015 financial year. Among the major rival firms in the mining industry in Australia apart from Newcrest includes BHP Billiton Limited, Freeport-Mcmoran Inc. and Newmont Australia Pty Limited. Across the board, the major companies made significant profits in the 2015 fiscal year which represented an increase from the previous year (2014 FY) recorded profit. Though not among the leading companies in this industry, the earning per share of Newcrest Mining Company was worth investing considering the impressive performance the company recorded in 2015. Commonwealth Bank of Australia (CBA) Apart from CBA other major banks in the banking industry of Australia includes ANZ, NAB, and WBC. Despite the restrained level of economic activities coupled with strict regulations and policies, these key players in the banking industry recorded stable financial results in the for 2015 fiscal year. The four major industry players recorded a combined profit of 30 billion US dollars which represented a 5.5% growth from the combined profit levels recorded in FY 2014. The analysis of individual bank performance indicated that CBA recorded a profit of $9.1 billion which was a 5.2% increase from the previous year (FY 2014) profit level. ANZ realized a profit level of 7.2 billion US dollars which marked a 1.4 % growth; NAB profit level was exceptional. The bank recorded 5.8 billion US dollar worth of profit which represented 15.5% growth level. Also, apart from the recorded profit, the business had made a significant provision of 1.5 billion US dollars in the 2014 fiscal year related to conducting concerns on the sale proceed of the business legacy United Kingdom insurance cover product (Beatty, and Liao 2014). Earnings per Share (EPS) also depicted some interesting trend across the industry. CBA, NAB, and WBC all recorded an increase in EPS with respect to the previous year’s performance; for ANZ, EPS was constant across the two years. This assessment was made based on a cash basis. Based on a statutory basis, these major firms recorded an increase in their EPS with respect to previous year (2014) performance. The price of shares for all the key market players decreased in the 2015 fiscal year as a result of the uncertainty that was pronounced across the globe as well as the decreasing prices of commodities will lead to an extensive fall in investor confidence across the board that had devastating impacts on stock exchange market later in the year. The share price of CBA increased by 5.3% reaching a maximum of $ 85 as at June but later fall to $ 77 in November the same year. The other banks; WBC, NAB, and ANZ recorded a decrease in their respective share prices during the 2015 financial year. The major banks across the industry are in strong financial position across various aspects some of these success attributed to the technological developments and innovation these banks have invested in over the years as well as the strong management board the firms have invested and cherish on. The future predicts to be undoubtedly difficult with a lot of challenges for the major banks in the banking industry. Most financially successful banks will have to integrate a more strategic long-term stands on their franchises and focus more on transforming their operating framework to best serve their the desires and needs of their customer base against short-term financially driven decision making (Carson, Zhang, and Fargher 2014). Comparison Of The Two Company’s Financial Performance Both CBA and Newcrest Mining Limited recorded an increase in their net profit from the previous year’s performance. Unlike CBA, Newcrest Company recorded massive loss in the previous. Newcrest Mining pursued a cost reduction motive in the 2015 financial year which saw it improving its profit levels significantly from negative to positive. Shares performance for both firms looks promising for investors since both firms recorded an improvement of their EPS from their previous year recorded amount. Both firms are multinational firms but the profit levels and EPS of CBA are larger than that of Newcrest Mining Limited. Therefore to an investor seeking higher returns of investments, CBA offers the best prospects. This assumption is just based on the financial performance over the two years considered but a deep analysis has to be made to reach an optimal decision by considering the facts that the two companies are in two different environments and faced with working environment and risks. Key Business and Inherent Risks Commonwealth Bank of Australia (CBA) Management of financial risks and non-financial risks especially form the basic function of CBA. Over the years the CBA has incorporated in its operation a risk management framework for foster risk management as well as to ensure a risk-adjusted returns on a reliable and consistent basis. The risk framework functions by empowering each functional unit within the bank to plan and manage the outcome of a risky undertaking by supporting the decisions for such activities with an internally developed risk adjusted performance measurement criteria that permits for the cost of risk and on which incentives are based and outcomes are evaluated. The risk framework of the CBA group requires that each functional business unit should; Develop and maintain a suitable risk control as per the unit nature and working environment, proactively manage and control its risk profile within acceptable levels of risk appetite, and apply a risk-adjusted consideration and outcomes as part of the daily decision-making procedures and processes. Some of the most prevalent inherent risks faced by the company over the years credit risks, funding and liquidity risks, markets risks, operational risks, compliance risks, reputational risks and insurance risks. Newcrest Mining Limited The performance, operation and financial results of Newcrest Mining Limited are subject to a number of uncertainties and risks. Some of these risks and uncertainties are beyond the control of the Newcrest business. Among the most pronounced risks the company has been facing over the years includes but not limited to volatile market price of gold, silver and copper, foreign exchange rate risks, increased costs and production inputs, operating risks and hazards of industrial accidents, unexpected ground conditions, underperformance or total failure of equipment and infrastructure, inadequacy of basic supplies and natural disasters among others, compliance risks especially to foreign nations where they are operational, intense competition, uninsured risks, political, social, economic and security risks and environmental and closure risks. Moving forward, the company will be required to put a measure that will ensure those risks that can control significantly for instance operation costs are well managed so that fluctuations in their financial performance that are attributed to this risks are minimally felt. This in return will ensure projections made on various aspects of the financial statements are realistic and certain. Even with great attempts the company have made towards identifying factors that would cause actual events, actions or result to differ significantly, other factors that have the potential to cause actual performance, events, achievements or results not to be expected, intended or estimated as well as many more events are beyond the reasonable capacity and thus control of Newcrest Mining Limited group. Audit Strategies and Audit Tests for the Two Companies Audit strategies provide the general approach an auditor will take to conduct the audit. It gives the scope that is understanding the business entity under consideration, its risk levels, the legal environment it operates in and the financial reporting standards applicable among others. Also, audit strategies enable an auditor to determine the resources to deploy in specific audit areas, the amount required, when the resources should be deployed and the general management, supervision, and coordination of the deployed material. Audit tests are procedures and processes performed by an auditor to analyze the accurate levels of various financial statements affirmations. The most common applicable audit tests are tests of internal controls and substantive tests (Porter, Simon, and Hatherly 2014). Both are useful and thus applied to both the internal and external auditors so as reach and conclude an established audit objective. Internal control test focuses on basic internal control practices that are developed and designed to detect and prevent possibilities of material misstatement that may end up compromising the accuracy of financial statements. Substantive audit tests, on the other hand, are used to validate the balances shown in the financial statements (Glover, Prawitt, and Drake 2014). Both CBA and Newcrest Mining Limited audit approach used by their specific auditors are aligned to the financial reporting framework as provided by the Australian accounting standards and corporation act of 2011 as well as the various globally recognized standards such as IFRS. Considering the size of the two companies, their transactions are likely to be too large such concluding an audit will require the significant collection of audit evidence. As stated earlier the two companies have expanded their operation to other countries across the globe. Thus during auditing, the two audit tests methods identified are widely applied to facilitate in the assertion of various transactions concluded as well as establishing the quality and effectiveness of internal control systems implemented. The materiality of these two tests are very critical on various materiality concerns of a range of entities in the financial statements. Audit Reports and Opinions of the Two Companies After concluding the audit of the financial statement, a firm’s audit company writes a report over which an opinion is provided regarding the financial statements of the company. Audit reports provide a written opinion of the company’s auditor concerning the firm’s financial statements. Audit reports are written using a customary format as mandated and outlined by the Generally Accepting Auditing Standards (GAAS) (Porter, Simon, and Hatherly, 2014). The external auditor for Common Wealth Bank of Australia for the financial year of 2015 was PriceWaterCoopers (PWC) while for Newcrest Mining Limited for the same year was Ernst & Young (EY). PWC and EY opinions regarding the audited remuneration reports of CBA and Newcrest Mining Limited indicated that they had complied with section 300a of the Corporation Act 2001. The implication these opinions have is that the respective auditors’ for the two companies have assessed the financial reports of the two companies and they have agreed that the reports have been prepared and reported in accordance with the stipulated standards and thus they have no reservations to the company’s compliance thus providing an unqualified opinion. Limitations of the audit reports to users To an auditor, the limitation of usage and thus the level of liability placed to him by users of the audit report established should be on the consequences of their own actions. The wide notion user of auditor’s report on the ability to pay instead of the level of fault is something policy makers needs to revisit and make possible amendments where possible. The limitations users on the reliance of the audited report is limited within the confines of the auditor's judgment which is established and developed based on the set standard, auditors experience and independent levels awarded. While auditor owes user of their audit report duty to care it is critical that some exemptions should be outlined to minimize the extent within which an auditor might be liable to third parties as well as the intended users of the report (Laitinen 2014). Examining the two reports, the two auditors of the companies did not place any exemptions in their audit report something tends to expand the user’s reliance and thus possible litigations suppose something contrary happens while relying on the financial statements. The Responsibilities of the Auditors in the Two Companies External independent auditors have a solemn responsibility of giving an independent opinion on whether the financial statements of a company are fairly presented regarding all material aspects and in accordance with the stipulated financial frameworks and standards. The opinion formed considers the Generally Accepted Auditing Standards (GAAP) as well as the relevant ethical standards and requirements (Carson, Zhang, and Fargher 2014). For opinions to be made, auditors are required to collected that are deemed suitable that will be used as evidence to observe test, compare and confirm until an assurance that can be considered reasonable is developed. It’s after such process that an auditor of a company can come up with an independent opinion on whether the financial statements are free from material misstatement that may originate from error or fraud (Coram 2014). For both companies, the responsibility of the Auditor is to audit the various financial reports of the company and provide an opinion on whether the two businesses have complied with the stipulated accounting standards recognized within Australia nation and those that are globally recognized. It is the responsibility of the two audit firms to seek enough evidence that will help them draw an appropriate conclusion concerning the financial reports of the two companies. References Basu, P.K., Hicks, J., Krivokapic-Skoko, B. and Sherley, C., 2015. Mining operations and corporate social responsibility: A case study of a large gold mine in regional Australia. The Extractive Industries and Society, 2(3), pp.531-539. Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383. Calvo, G., Mudd, G., Valero, A., and Valero, A., 2016. 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