Preconditions of auditing of KGC Ltd mine operating in Papua New Guinea:

Guidelines for financial reporting in adherence to the Australian auditing standard

Write an essay on Preconditions  of  auditing  of  KGC  Ltd mine.

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Before  conducting  the  audit , several  points  have  to  be  accounted  for . The  account  balances  and  all the  financial  statements  of  the  company  should  adhere  to  the  rules  and  regulations  of  the  Australian  auditing  standard.  The  acceptability  of  the  financial  report  of  the  company  by  the  auditors  requires  it  to  be  in  the  framework  of  the  guidelines  set  as  per  the  auditing  standard.  The  auditor  is  required  to  carry  out  the  inspection  of  the  company  in terms  of  any  factors  and  he  should  have  access  to  all  the  detailed  information  about  the  company’s  financial  so  as  to  enable  him  to  form  a  correct  opinion  about  the  company’s  financial  reporting. Confidentiality  into  the  financial  data  should  be  enquired  into  and  investigation  should  be  made  regarding  the  fraud  and  material  misstatement  or  any  human  error  reported  in  the  data(Flammer 2013).  Enquiry  should  also  be  made  by  the  auditor  so  that  the  entity  is  not  exposed  to  any  social  or  ethical  threats  which  may  lead  to  questioning  its  integrity. Performing  these  tasks  of  enquiring  and  investigating   would  enable  the  auditor  to  take  the  appropriate  measures  and  safeguard  which  would  help  in  mitigating  the  risks  associated  with  the  entity  and  the  task  of  auditing  could  be  performed  with  ease. KGC  Ltd  has  been  accused  of  being  environmentally  irresponsible  and  so  it  poses  ethical  threat  and  the  auditor  should  take  appropriate  measures  to  mitigate  the  risks to  such  a  level  which  can  be  accepted.

If  the  financial  statements  are  not  adhering  to  the  guidelines  of  the  auditing  standard ,  then  there  arises  the  need  for  auditor  to  turn  down  the  engagement  of  auditing  tasks.

The  fact  that  the  auditor  should  accept  the  role  of  auditing  or  not  depend  upon  the  risks  associated  with  the  entity.  There  are  many  types  of  risks  involved  and  their  assessment  and  carrying  out  auditing  process  is  a bit  complex  process. Auditor  needs  to  follow  some  procedures  to   determine  the  risks  which  could  lead  to  material  misstatement  of  the  financial  statements  and  they  should  seek  for  the  evaluation  and  control  method  to  detect  the  error  in  the  annual  financial  statements.  . The  inherent  risk,  control  risk  and  the  detection  risks  are  mentioned  to  be  associated  in  conducting  audit  of  the  entity  and  they  together   they  form  audit  risk(Gashi and Shala 2015).

The  inherent  risks  stands  at  80 %  which  is  inherent  to  the  peculiarity  of  the  firm. Regarding  its  activities ,  the  environment  in  which  it operates  and  the  nature  of  accounts,  financial  and  organizational  structure . The  auditor  needs  to  assess  the  inherent  risks  by  enquiring  about  the  entity  about  its  management  and  the  accounting  procedures  it  follows  while  maintain  the  account  of  balances  and  investigating  about  the  characteristics  of  the  company  that  is  unique  to  its  function  such  as  management  of  risks  relating  to  its  attitude ,  future  prospects  of  the  organizations.  Control  risk  is  the  risk  of  not  detecting  the  error  with  the   help  of  internal  control  system  .  There  would  be  a  probability  of  transformation  of  potential  risk  into  possible  risk,  if  the  internal  control  system  suffers  from  any  weakness. Control  risk  is  associated  with  the  designs  and  the  nature  of  operation  of  the  entity. The control   risks  stands   at  10 %  which  is  not  too high.  Detection  risks  is  the  incapability  of  the  auditors  to  identify  the  errors  contained  in  the  account  of  balances  and  the  financial  statements ,  though  it  is  not  possible  to  eliminate  the  risk  completely  or  to  ensure  that  the  financial  statements  are  free  from  error, the  auditors  are  required  to  reduce  it  by  following  the  proper  auditing  procedures  and   techniques.  The  detection  risk  stands  at  50%  which  indicate  that  there  is  50-50  chance  of  auditors  not  able  to  detect  the  errors  existing  in  the  financial  statements. The  risks  involved  in  auditing  should  be  limited  to  a  acceptable  level.

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Enquiry into confidentiality and fraudulent financial statements

Audit  risk  stands  at  4 %  which  is  acceptable  and  it  follows  from  the  product   of  inherent risk,  control  risk  and  detection  risk  and  the  analysis  of  audit  risk  depend  upon  these  three risks. Here ,  the  assessed  level  of  risks  are  to  be  used  by  the  auditor  to  reduce  the  audit  risk  to  such  a  low  level  which  is  acceptable  by  determining  the  techniques  and  procedures  and  the  nature  and  timing .  so  the  audit  firm  will accept  the  auditing  of  The  KGC  Ltd  and  the  assessed  level  of  risks  could  be  modified  by  the  auditor  in  the  course  of  conducting  the  audit  on  the  basis  of  information  which  he  comes  across  and  he  can  apply  the  techniques  accordingly.

The  action  plan  of  auditors  regarding  the  accomplishment  of  the  work  and  the  procedures  followed  by  them  forms  audit  program.

While  carrying  out  the  audit  program ,  auditors  needs  to  consider  and  include several  things  which  are 

The  name  , address  and  objective  of  the  entity  should  be  included  and  it  include  the  date  and  duration  of  the  audit  program  to  be  conducted,  that  is  the  time  until  which  the  audit  will be  performed.  KGC  Ltd  is  situated  in  star  mountain  range  in  PNG  for  30  years.  The  nature  and  size  of  business  is  another  factor  to  be  considered.  The   net  worth  of  business  and  the  size  whether  the  operating  entity is  small  medium  or  large  enterprise  should  be  considered. KGC  Ltd  employ  3400  employees  and  has  a  net  book  value  of  16.5 $  billion.

The  procedure  and  accounting  systems  followed  are  to  be  accounted  for  in  carrying  out  audit  program. The  effectiveness of  internal  control  system  should  be  evaluated .

Points  which  are  generally  accepted  also  form  the  content  of  audit  program 

The  future  prospects  of  the  entity  and  its  growth  and  development  are  to  be  accounted  for.  The  entity’s  license  to  carry  out  mining  activities from  PNG  government  would   expired  within  eight  years  which  puts  a  doubt  in  its  continuation. The  quality  and  quantity  of  the deposits  of  lead  ore  found  are  not  commercially  viable  and  so  the  planning  process  could  not  be  set  and  the  evidence  becomes  doubtful.  The  verification  of  accounts  of  balances  should  be  done  and  the  royalties  and  tax  payment  by  the  entity  should  be  enquired  into. The  program  include  the  investigation  of  the  relevant  documents(Harrison et al .2015).

The  audit  task  are  to  be  completed  by  dividing  the  work  among  the  staffs  considering  their  talent  skills  and  intelligence  in  completing  the  audit  tasks.

Assessment of inherent risk, control risk, detection risk

While  revaluing  the  Property  Plant  and  equipments  from  historical  value  or  book  value  to  the  fair  market  value  should  comes  with  a  genuine  reason  and  should  be  fair.  The  auditors  are  required  to  do  the  verification  of  the  assets  and  to  ensure  that  the  method  of  revaluating  the  assets  is  reasonable  enough. There  are  points   which  he  need  to   considered :

He  is  liable  to  scrutinize  all  the  assets  accounts  to  find  out  the  true  cause  of  revaluation. Depreciation ,  profits  and  loss  accounts  have  been  properly  adjusted  or  not  have  to  be  enquired  into. The  physical  verification  of  the  asset  should  also  be  done  which  is  mainly  a  task  of  management  and  the  auditor  needs  to  satisfy  himself  about  the  competence  of  the  person  carrying  out  the  verification. The  appraisal  or  the  revaluation  of  the  asset  are  done  by  the  qualified  person ,  experts  and engineers.  The  revaluation  of  the  assets  should  be  accepted  by  the  auditor,  if  upon  examining  he  came  with  a  conclusion  that  the  appraisal  is  reasonable  enough  and  it  is  based  on  some  adequate  facts. The  auditor  needs  to  analyze  the  fact  that  assets  are  revalued  only  because  it  does  not  hold  any  economic  benefit  and  it  has  not  been  materially  altered  for  the  organization’s  sake. The  opening  balance , ledger  of  all existing  PPE  should  be  verified . He  should  investigate  whether  the  depreciation  of  the  assets  have  been recorded  in  the  proper  account   before  writing  off.   Auditors  should  be  well  versed  with  the  information  he  is  gathering  about  the  asset  and  on  the basis  of  which  he  would  be  forming  the  opinion  about  the  acceptability  of  the  revaluation  whether  it  has  been  done  fairly  or  not(Nicolaescu  2013).

 KGC  Ltd  is  in  operation  for  30  years  and  is  located  in  isolated  place  in  Papua  new  Guinea  and  employs  about  3400  employees.  The  Net  worth  of  its  property ,  plants  and  equipments  is  $ 16.5  billion. Though  the  company  is  the  only  manufacturer  and  operator  of  the  water  processing  plants,  health  centers  ,  hospital  and  schools  ,  the  ongoing  court  case  which  has  been  initiated  by  some  ecological  group  make  its  existence  doubtful .The  company  has  been  accused of  being  environmentally  irresponsible  as  an  allegations  of  dumping  of  the  ore  and  lead  waste  into  the  river  of  local  villages  has  been  put.  The  future  prospects  of  the  company  does  not  seems  to  be  very  positive  as  the  license  from  the  PNG  government to  carry  out  its  mining  activities  would  also  expire   in  eight  years. The  information  provided  by  the  company  about  the  quality  and  quantity  of  ore  lead  extracted  being  not  commercially  viable  is  also  one  of  the  factors .  Though  the  managers  estimate  of  extraction  of  deposits  is   quite  large  over  the  next  eight  years  when  the  license  is  about  to  expired.  These  are  few  facts  about  the  entity  which  would  lead  to  doubtful  future.  On  the  other  hand,  shut  down  of  the  mine  firm  would  be  devastating  as  the  employment  rate  in  the  labor  market  would  rise  to  95%  in  the  absence  of  any  alternative  source  of  employment. Also  the  estimated  annual  income  of  the  company  is  expected  to  offset  the  harm  and  damage  caused  because  of  dumping. So,  the  closure  of  the  mine  would  make  the  situation  worse  than  expected.

Being  environmentally  friendly  requires  the  organization  to  carry  out  its  activities  adhering  the  guidelines  set  by  the  environment  accounting  standards.  The  dumping  of  5  million  liter  of  ore  waste  into   the  local  village  river  which  is  used  by b the  villagers  for  harvesting  and  drinking  purpose  by  KGC  Ltd  does  not  expect  it  to  make  a  statement  of   being  socially  responsible. The  claim  of  being  environmental  friendly  would  be  ruled  out  as  the  act  of  disposing  the  wastes  into  river  posed  it  to  ethical  threats  and  the  stakeholders  review  the  company  on  the  basis  of  the  entities  social  and  moral  traits  which  they  would  be  using  as  yardstick   in  measuring  the  corporate whether  it  is  socially  responsible  or  not. The  statement  made  by  the  company  would  not  be  signed  off  as  true  and  fair  from  the  point  of  view  of  outsiders  and  stakeholders. The  prospectus  of  the  company  contain  information  about  the  company’s  objectives,  investment  strategy ,  the  expenses  incurred  ,risk  associated  with  any  operation ,tax  payable ,  brokerage  fees , pricing  of the  product  and  many  more. Issuing  of  shares  by  KGC  Ltd  to  raise  additional  money  of  $ 5billion  on  the  assurance  and  claim  that  the  operation  would  be  carried  out  indefinitely  and  is  at  low  risks  could  not  be  treated  as  being  fair  by  the  investors. The  future  performance  of  the  company  and  its growth  and  development  is   at  halt  because  of  the  ongoing  court  case  and  due  to  the  expiry  of  license  form  the  government  to  carry  out  its  mining  activities. Investors  willing  to  invest  would  be  interested  in  the  future  prospects  of  the  company  which  is  not  so  bright. The  net  worth  of  the  assets  of  the  company  is  also  not  worthy  of  investing.  So  the  investor  would  not  sign  off  the  prospectus  as  fair  and  true.  Those   willing  to  take  risks  of  investing  would  need  the  reports  of  auditing  in  order  to  form  some  opinion  about  the  company’s  performance . On  the  basis  of  information  provided  by  the  organization  the  investors  cloud  not  treat  the  prospectus  as  being  true.  The  willing  investors  need  to  go  through  the  every  audited  financial  statements  and  reports  to  investigate  and  verify  them  and  then  forming  an  opinion  of  treating  the  prospectus  as   fair  and  investing  accordingly.  The  claim  of  the  entity,  of  its  operation  being  infinite  would  not  be  treated  as  fair  because  the  license  of  carrying  out  the  mining  activities  from  the  government  would  expire  in  eight  years. 

Reference : 

Flammer, C., 2013. Corporate social responsibility and shareholder reaction: The environmental awareness of investors. Academy of Management Journal, 56(3), pp.758-781.

Gashi, M. and Shala, N., 2015. Preconditions that Affect in Increasing Control Effect and Increased Chance for Tax Fraud Detection. European Journal of Sustainable Development, 5(1), pp.83-90.

Harrison, R.A., Gemmell, I. and Reed, K., 2015. The Effect of Using Different Competence Frameworks to Audit the Content of a Masters Program in Public Health. Frontiers in public health, 3.

Harrison, R.A., Gemmell, I. and Reed, K., 2015. The Effect of Using Different Competence Frameworks to Audit the Content of a Masters Program in Public Health. Frontiers in public health, 3.

Nicolaescu, E., 2013. Understanding Risk Factors for Weaknesses in Internal Controls over Financial Reporting. Psychosociological Issues in Human Resource Management, 1(3), pp.38-44.

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