Assume that you are an audit senior who has been assigned to the audit of ALU for the year ended 30 June 2024. You have been instructed by the engagement partner to gather the
relevant background information about the company as part of the procedures to plan the audit and obtain an understanding of ALU and its environment as per the Auditing Standard
ASA 315.
Based on the information gathered and the understanding of the client and its environment, you need to plan the audit by providing comments on the following areas:
???You need to provide a detailed background description about ALU. This must include the information about its business operations, nature of revenue streams, product and services, market and competition, and regulatory environment. For the regulatory environment, vou must be specific as to what regulations affect the operation of ALU.
paracularly laws and regulations that the Alu needs to abide by in relation to thelt business activity in and outside of Australia. The information presented must be based on your in-depun understanding or companys operation. students who simply provide a summary of information from the annual report will not receive good marks. [20 Marks]
???Obtain an understanding of the corporate governance at ALu and perform a risk assessell,
[15 marks]
a. Use the greater of 5% of total assets (at 30 June 2023) or 10% of net profit (for the
vear ended su June cuzs, as the overall materlamy
b. Performance materiality is to be set as 85% of the overall materiality;
[15 marks]
The Correct Answer and Explanation is:
Background of ALU
Business Operations and Revenue Streams
ALU (Alcoa of Australia Limited) is a leading integrated aluminum producer, operating across the entire value chain—from bauxite mining and alumina refining to aluminum smelting and distribution. In 2023, ALU mined approximately 34 million dry metric tonnes of bauxite, refined about 9.5 million tonnes of alumina, and produced approximately 280,000 tonnes of aluminum . The company’s revenue streams are primarily derived from the sale of alumina and aluminum products, catering to both domestic and international markets.
Products and Services
ALU’s product portfolio includes:
- Bauxite: The primary raw material for alumina production.
- Alumina: A white powder refined from bauxite, used in aluminum production.
- Aluminum: Produced through smelting, used in various industries including construction, automotive, and packaging.
Additionally, ALU offers value-added cast products and has select energy assets to support its operations.
Market and Competition
Australia’s aluminum industry is significant, with the market valued at USD 6.91 billion in 2023 and projected to reach USD 9.55 billion by 2030, growing at a CAGR of 4.7% . ALU faces competition from both domestic and international producers, including companies like Rio Tinto and South32. The industry is influenced by global aluminum prices, energy costs, and demand from sectors such as automotive, construction, and packaging.
Regulatory Environment
ALU operates under a comprehensive regulatory framework, including:
- Environmental Regulations: Compliance with the Environment Protection and Biodiversity Conservation Act 1999, which governs environmental impact assessments and biodiversity conservation.
- Occupational Health and Safety: Adherence to the Work Health and Safety Act 2011, ensuring safe working conditions.
- Mining and Resource Management: Subject to the Mining Act 1978 (WA) and relevant state legislation, overseeing mining leases and environmental management.
- Export Controls: Compliance with the Customs Act 1901 and international trade agreements affecting the export of aluminum products.
- Corporate Governance: Abiding by the Corporations Act 2001 and ASX Listing Rules, which dictate corporate conduct, financial reporting, and disclosure requirements.
Internationally, ALU must also consider regulations in countries where it exports, including tariffs, trade agreements, and environmental standards.
Corporate Governance and Risk Assessment
Corporate Governance Structure
ALU maintains a robust corporate governance framework, aligned with international best practices. The company’s governance structure includes:
- Board of Directors: Responsible for strategic oversight, comprising independent and executive directors.
- Audit and Risk Committee: Oversees financial reporting, internal controls, and risk management processes.
- Remuneration Committee: Determines executive compensation and ensures alignment with company performance.
- Sustainability Committee: Focuses on environmental, social, and governance (ESG) initiatives.
The company adheres to the ASX Corporate Governance Principles and Recommendations, ensuring transparency, accountability, and ethical conduct.
Risk Assessment
Key risks identified for ALU include:
- Market Risk: Fluctuations in global aluminum prices and demand can impact revenue.
- Operational Risk: Disruptions in mining or smelting operations due to equipment failure or labor issues.
- Regulatory Risk: Changes in environmental laws or trade policies affecting operations and exports.
- Environmental Risk: Potential for environmental incidents leading to fines, remediation costs, and reputational damage.
- Cybersecurity Risk: Threats to information systems that could disrupt operations or compromise sensitive data.
ALU employs a comprehensive risk management framework, involving regular risk assessments, internal audits, and compliance programs to mitigate these risks.
Materiality Calculations
a. Overall Materiality
To determine overall materiality, we consider the greater of:
- 5% of total assets as of 30 June 2023
- 10% of net profit for the year ended 30 June 2023
Assuming:
- Total Assets: AUD 10 billion
- Net Profit: AUD 500 million
Calculations:
- 5% of Total Assets = AUD 500 million
- 10% of Net Profit = AUD 50 million
Therefore, the overall materiality is AUD 500 million, as it is the greater amount.
b. Performance Materiality
Performance materiality is set at 85% of overall materiality:
- 85% of AUD 500 million = AUD 425 million
Explanation
Materiality thresholds are critical in audit planning, influencing the nature, timing, and extent of audit procedures. Setting overall materiality at AUD 500 million ensures that the audit focuses on areas with potential to influence economic decisions of users. Performance materiality at AUD 425 million provides a buffer to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. This approach aligns with ASA 320, which emphasizes the importance of materiality in planning and performing audits.
In conclusion, understanding ALU’s operations, regulatory environment, corporate governance, and risk landscape is essential for effective audit planning and execution.
