Audit in Mining Industry PDF

I. Introduction 4. Financial institutions and investors - These entities provide the necessary capital for mining...

I. Introduction 4. Financial institutions and investors - These entities provide the necessary capital for mining projects. Financial institutions facilitate loans and investments, while investors may buy shares in Definition and Nature of Mining Industry mining companies or invest directly in mining projects. Mining Types of mining and Extraction Method It is the process of extracting minerals, coal, ore and other geological materials which can’t be fabricated using artificial means below or on Earth’s surface. Mining Entities are companies involved in the extraction of valuable non-renewable resources like fossil fuels and minerals from the Earth which are strictly regulated by the government/state where they operate. There are 3 classifications of mining entities based on the size and financial capacity, these are: Major Companies, Intermediate Companies, and Junior Companies. Involves obtaining natural resources or non-regenerative resources from the Earth. Also known as wasting assets, once resources get depleted they will not replace anymore This industry is capital intensive and labor intensive Audit of Mining Industry Is independent and systematic of the company's financial statements, internal control, processes and other relevant documents to provide assurance on the fair presentation of the company’s financial performance and position. Entails evaluating the organization compliance with applicable accounting standards, regulations and 1. Surface Mining industry specific requirements. This type of mining operation involves removal of plant life, soil and potentially bedrock to be able to access resource deposits. It is normally used for fairly shallow, non-precious deposits. Significance of Mining Industry Audit 2. Underground Mining 1. Investor Confidence - The industry involves significant capital investments and long-term projects. It is relatively costly and frequently used to get to deeper deposits. It involves digging down into the earth and Independent audits provide investors with assurance that financial statements are reliable, enabling creating tunnels and shafts that reach the deposits of resources. With underground mining, the surface remains them to make informed decisions. intact and workers and machines remove the minerals through the tunnels or shafts. 2. Regulatory Compliance - Mining companies operate in a highly regulated environment, and failure to comply with regulations can result in fines, penalties, or even revocation of licenses 3. Placer Mining 3. Risk Management - The industry faces various risks, such as fluctuations in commodity prices, This type of mining operations uses water to excavate, transport, concentrate, and recover heavy minerals from environmental liabilities, and potential fraud alluvial or placer deposits. It is commonly used in mining gold and platinum. 4. Environmental, Social, and Governance (ESG) Consideration - With increasing emphasis on sustainability, companies need to demonstrate responsible practices. 4. In-Situ Mining It involves leaving the ore where it is in the ground, and recovering the minerals from it by dissolving them and II. Overview of the Mining Industry pumping the pregnant solution to the surface where the minerals can be recovered. This type of operation is common in mining uranium. Key Players in the Industry Mine Life Cycle 1. Mining and extraction companies - These are the primary players in the mining industry, responsible for the exploration, extraction, and processing of minerals and metals. Acquisition - Before starting mining operations, companies need to get various licenses and permits. This 2. Contractors and service providers - These companies offer specialized services to support mining involves conducting environmental and social impact assessments to understand the potential effects on local operations. They include construction firms, equipment manufacturers, and maintenance providers. ecosystems and communities. Companies must engage with local communities through public consultations to 3. Government agencies and regulatory - Government bodies oversee and regulate the mining industry gain their support. They also need to comply with regulations by submitting detailed plans and obtaining necessary to ensure compliance with environmental, safety, and economic standards. They issue permits, monitor permits operations, and enforce regulations. Exploration - This initial stage involves searching for mineral deposits. Geologists use various methods, such as Habitat Destruction: Mining activities often disrupt local ecosystems, destroying wildlife habitats and geological mapping, geophysical surveys, and drilling, to identify and evaluate potential mining sites. This stage potentially leading to biodiversity loss. can take several years and involves significant investment to determine the feasibility of mining the identified Social Conflicts: Tensions with local communities can arise from land use disputes, the displacement resources. of populations, or insufficient compensation for affected areas, leading to delays, protests, or operational shutdowns. Development - This includes building infrastructure such as roads, processing plants, and worker accommodations, which can take several years. Detailed planning ensures efficient and safe operations. III. Relevant Accounting Standards (Unique Accounts) Companies also prepare budgets, secure funding, and manage costs. Hiring and training the workforce is crucial, focusing on safety and environmental management. Pre-production activities, like setting up facilities and testing PFRS 6 Exploration for and Evaluation of Mineral Resources equipment, prepare the site for full-scale production. Provides guidance for entities involved in the exploration and evaluation of mineral resources. It allows companies to either capitalize or expense related costs, with policies applied consistently. Production - This is the operational phase where the actual extraction of minerals takes place. Mining methods vary depending on the type of mineral and the geology of the site. Production can last for several decades, PAS 36: Impairment of Assets depending on the size and richness of the deposit. Sets guidelines for recognizing and measuring the impairment of assets. It ensures that an asset's carrying amount does not exceed its recoverable amount, which is the higher of its fair value less costs to sell or Restoration and closure - Once the mineral resources are depleted, the mine enters the closure phase. This its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is involves rehabilitating the site to minimize environmental impact and ensure it is safe for future use. recognized. Key Risk Areas IV. Audit Process Operational Risk: This refers to uncertainties that arise from the daily activities of a mining company. It covers: Pre Engagement Technical Challenges: Unexpected breakdowns in equipment, inefficiencies in mining processes, or 1. Performing procedures regarding the continuance of the client relationship and the specific audit challenges in accessing ore bodies. engagement. Safety Concerns: Accidents, injuries, or fatalities among workers, and risks associated with Competence assessment hazardous conditions such as underground mining. Knowledge and understanding of the business and its industry Logistical Challenges: Difficulties in transportation, supply chain disruptions, or delays in delivery of Time and resources needed materials and machinery to mining sites. 2. Evaluating compliance with relevant ethical requirements, including independence. These risks can cause production delays, increase costs, and potentially reduce profitability. Relevant ethical requirements in accordance with Code of Professional Ethics. Financial Risk: This risk area involves the potential negative impacts on the company’s financial statements due Independence of the audit firm as a whole (auditor and all audit team members) should to: be considered by examining potentially significant threats that might impair the auditor’s Fluctuations in Commodity Prices: Mining companies depend on the sale of commodities (e.g., gold, professional judgment or independence. copper, coal), so price changes directly affect revenue. Integrity of the client Changes in Exchange Rates: If a mining company operates in multiple countries or exports products, 3. Establishing an understanding of the terms of the engagement fluctuations in currency exchange rates can lead to losses. Once the pre-engagement assessment is complete, preparation and issuance of Interest Rate Changes: Increases in interest rates can make borrowing more expensive, raising the engagement letter follows. company’s financial costs, especially if it relies on debt to finance operations. Both parties should agree with the following terms inclusive: Regulatory Risk: This involves the potential impact of changing laws and regulations on mining businesses, - Engagement objectives, scope and limitations; including: - Management’s responsibilities; Environmental Regulations: New or stricter laws on pollution, emissions, and environmental - Auditor’s responsibilities; protection can increase compliance costs or limit mining activities. - Responsibility for other adjustments; and Tax Laws: Changes in tax policy or new tax rates on mining operations or profits can affect the - Other matters, such as fees company’s bottom line. Safety Standards: Stricter safety requirements may necessitate new investments in equipment, Audit Planning training, or other safety measures, adding to operational costs. 1. Acquire knowledge of business by gathering and analyzing relevant information on the mining sector. Environmental and Social Risk: This relates to the potential negative impacts of mining on the environment and Business Environment- Understanding the business environment involves a review of the company's surrounding communities, such as: economic, industry, and competitive conditions. Environmental Pollution: Mining can result in water contamination, air pollution, and soil degradation, Organizational Structure- A review of the company's organizational structure is important to Identify leading to reputational damage, fines, or lawsuits. key decision-makers and understand their roles and responsibilities.  Operational processes- Involves gaining knowledge of the company's exploration, extraction, Environmental regulations processing, and sales activities. Labor laws Financial reporting practices -A review of the company's financial reporting practices helps auditors Tax regulations understand how the company's operations are reflected in its financial statements. Health and safety standards Laws and Regulations- Understanding the laws and regulations applicable to a mining company is Rights of indigenous people crucial in assessing the company's compliance and identifying potential legal and regulatory risks. Considering the Internal Control of the Mining Industry 2. Understand the diversity and extent of government responsibilities in overseeing the sector. These responsibilities can be separated into some categories: 1. Inventory valuation and management Evaluating mining development options Assess the accuracy and reliability of the company's estimates of mineral reserves. Ensuring the responsibility development of natural resources Review controls over recording of their transactions, production output, physical security, Monitoring natural resource extraction and periodic inventory count 2. Segregation of duties Key Objectives and Areas focus 3. Compliance with laws, policies, and regulations Assess the client’s compliance with laws and regulations and ensure that the internal Audit Focus controls are align with local, national, and internal regulations including environmental and The first step in the audit planning process is to determine what exactly should be audited in the mining sector. safety standards The auditors will need to undertake two initial research and analysis tasks. Verify the validity and compliance with all necessary permits and licenses 1. Acquire knowledge about the business. 4. Manpower management and Operational Controls 2. Identify and assess risk factors. Evaluate the efficiency and effectiveness of mining operations Ensure compliance with relevant health and safety regulations At this stage, the auditors can also view performance audits on the mining sector that have been previously Assess the adequacy processes for monitoring compliance with health and safety published by their office or other jurisdictions, as well as the work that financial auditors have conducted as regulations and addressing any related incidents. part of their audits of the public accountants. This may help audit teams to complete their list of potential issues 5. Controls over sales to examine and to identify risk factors that they might not yet have considered. Review sales contracts, sales and dispatch documentation, and verify the timing of the revenue recognition Audit Objectives It should be realistic and achievable and give sufficient information to audited organizations about the focus of Test of Controls the audit. a. Inquiry - Inquire with knowledgeable personnel regarding the mining company’s control environment, business operations, and the implementation of its guidelines and policies. An audit can have one or several objectives depending on its breadth. Office practice will also influence the - Determine critical areas in the mining industry that are prone to risks such as inventory number of objectives and whether or not sub-objectives are used. (Some audit offices never use sub- management (e.g., ore or minerals), asset management, environmental compliance, and objectives.) Sub-objectives can be included in audit plans (for example. one for each line of enquiry), but revenue recognition. auditors who decide to do so will still be expected to conclude on their main audit objective(s). - Assess Risk Management Procedures. Inquire about how the organization manages risks, especially in areas like environmental impact, worker safety, and fluctuations in Examples: commodity prices. Audit Focus: Financial Management and Reporting - Inquire about the systems used for recording and reporting financial and operational data, Audit Objectives: Verify that financial statements accurately represent the company’s financial ensuring proper segregation of duties and system access controls. position, performance, and cash flows. - Ask about how environmental controls are monitored, such as controls over waste Revenue recognition and sales management, reclamation, or emission reporting. Inventory valuation - Ask how the organization ensures compliance with tax laws, royalty payments, Capital Expenditure and depreciation of mining assets environmental regulations, and other legal requirements specific to the mining industry Asset impairment and reserve estimation (Philippine Mining Act of 1995 (RA 7942)) Audit Focus: Laws and regulation Audit Objectives: Assessing the company’s compliance in identifying potential legal and regulatory b. Observation risk. During observation, auditors directly watch processes and activities to verify that internal controls are Financial reporting standards being properly implemented and followed. Key actions include:  - Track inventory movement: Observe the storage, extraction, and processing of minerals V. Completing the Audit to ensure accurate inventory records and proper handling procedures. Upon the completion of the Execution phase/fieldwork, an audit summary should be prepared to summarize the - Observe compliance with safety standards: Watch for compliance with occupational work done and conclusion reached. Subsequently, a series of procedures are generally carried out to complete safety standards, such as evacuation drills, equipment testing, and safety protocol the audit. These procedures are: enforcement in hazardous areas. 1. Identifying Subsequent Events c. Inspection Requiring Adjustment – those that provide further evidence of conditions that existed at the financial statement During inspection, auditors examine documents, records, and physical evidence to verify that internal date such as: controls are functioning effectively. Settlement of litigation in excess of the recorded liability - Examine financial transactions: Inspect invoices, purchase orders, and receipts related to large equipment purchases, production costs, and other key expenditures. Requiring Disclosures – Those that are indicative of conditions that arose after the financial statement date such - Examine licenses and permits: Inspect mining licenses, permits, and renewals to ensure as: they are up to date and comply with regulatory obligations. Accounting for exploration costs and mine development - Review system access logs: Inspect documentation related to user access controls for Amortization of capitalized costs financial and operational systems, ensuring that only authorized personnel have access. Issue of impairment Provision for costs to be incurred after mine closures d. Re-performance During re-performance, auditors execute or perform the controls and procedures of the company to 2. Determining Litigations and Claims verify their effectiveness and accuracy. PSA 501 requires the auditor to carry out procedures in order to be aware of litigations and claims involving the - Recalculate inventory quantities: Perform physical counts of inventory, such as ore entity which may have a material effect on the financial statements. It usually includes: stockpiles or finished products, and compare these counts with the company’s records to Inquiry of management (particularly with concerns to environmental issues, safety issues, market value ensure accuracy. of the minerals, and if the entity have lawsuits filed) Minutes of meeting and correspondence with lawyers Performing Substantive Tests Reviewing legal expense account 1. Review of relevant documents 3. Acquiring Written Management Representation Auditors need to consider everything from evidence of the rules that government organizations and mining PSA 580 requires an auditor to obtain sufficient appropriate audit evidence that the entity’s management: companies have to meet to evidence that controls have been put in place and are functioning as intended. Has acknowledged that it has fulfilled its responsibility for the preparations and presentation of fair financial statements. Example Has approved the financial statements. List of mining sites in the jurisdiction, list of leaseholders Laws, regulations, and policies that govern the mining sector, including the revenue framework 4. Performing Wrap-Up Procedures Descriptions of the revenue framework, royalty regimes, prospecting license or mining claims Wrap-up procedures are those procedures done at the end of the audit that generally cannot be performed before the other audit work is complete which include 2. Interviews Final analytical procedures. Interviews with key managers and staff in the organization(s) responsible for collecting mining revenues can be Evaluation of the entity’s ability to continue as a going concern. valuable testimonial evidence in an audit of mining revenues. Evaluation audit findings. ` 3. IT systems VI. Post Audit Responsibilities Audit teams may need the help of an IT expert to complete their audit procedures particularly when there is a Post audit responsibilities include the consideration of the following: highly automated royalty process in place. In such a case, an IT expert can review IT general controls and Subsequent discovery of facts validate application controls for the calculation of royalties existed at the date of the auditor's report if known at the date of report, it caused the auditor to modify the report. 4. Site visits Subsequent discovery of omitted procedure Site visits can help auditors to map out processes in detail. They give auditors a chance to meet many assess the importance of omitted procedure to his present ability to support his previously expressed individuals who have direct knowledge of key processes and to observe first-hand the workings of important opinion regarding those financial statements taken as a whole. systems.  NAME OF THE MINING COMPANY AUDIT PROGRAM FOR EXPLORATION AND EVALUATION OF MINERAL RESOURCES Audit Objectives: 1. To assess whether the accounting policy for the recognition of exploration and evaluation of mineral resources expenditures of the mining company is in relevance with PFRS 6. 2. To review the nature of the costs capitalized if it meets the criteria for capitalization under PFRS 6 and examine if they are measured reliably. 3. To assess whether the mining company has appropriately considered the relevant indicators of impairment and whether impairment losses are correctly measured and recognized accordingly. 4. To ensure that disclosures are properly presented in accordance with the PFRS 6. Audit Assertions: Rights and Obligations (RO), Accuracy and Valuation (AV), Existence or Occurrence (EO), Completeness and Cutoff (CC), Presentation and Disclosure (PD) Audit Procedures: Activities WP Ref Date Done by 1. Examine the permits, licenses, and other documents that proves the mining company’s legal right to explore a specific area. 2. Evaluate the company's exploration and evaluation policies for compliance with PFRS 6 and verify consistent application by reviewing relevant transactions and documentation. 3. Obtain a list of all expenditures during the exploration and evaluation phase and evaluate if they are classified accordingly and are aligned to the accounting policy applied by the mining company. 4. Obtain a list of all capitalized costs attributable to exploration and evaluation activities and assess if they meet the criteria for capitalization under PFRS 6. 5. Verify the accuracy of the capitalized costs by examining the invoices, contracts, and other available supporting documents. 6. Assess for relevant impairments indicators: a. The right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed. b. Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned. c. The entity has decided to discontinue exploration of mineral resources in the specific area. 7. Check all the instruments are measured and classified correctly based on the business model and cash flow characteristics. Prepared by: ________________________ Reviewed by: ___________________