Steps To Consider Before Accepting To Audit KGC Ltd. Mine In PNG

Compliance with Auditing Standards of Australia

a). Discuss the steps that you need to consider before accepting to do an audit of the KGC Ltd. mine in PNG?

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b). If the inherent risk of the KGC Ltd. mine in PNG is estimated as 80% and the control risk and detection risk are estimated at, respectively, 10% and 50%, should your audit firm accept the role of doing an audit of the KGC Ltd. mine in PNG? (Explain)

c). List and discuss what should be included in an audit program for the KGC Ltd. mine in PNG. Your program should include general coverage plus items 1 to 8, above.

d). If KGC Ltd. revalues its major PPE assets from historic cost to fair market value, what are the major concerns for the auditor and what tests should the auditor perform to resolve those concerns?

e). Review of the future prospects of the mine

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f). In a triple-bottom line addendum (i.e. addition) to their GPFS, KGC Ltd. described their operations as being socially responsible and environmentally friendly. Are you willing to sign-off on that statement as being true and fair? (Explain)

g). KGC Ltd. is hoping to raise $5 billion AUD, KGC Ltd. via a share issue. In the share prospectus,3 KGC Ltd. that its PNG operations are its principal asset and described those operations as low risk and that it expected them to be indefinite (permanent) in duration. Are you willing to sign-off on that prospectus as being true and fair? (Explain).
 

Before   conducting  the  audit  of  Karrick  Gold  &  Copper  Ltd  mine  operating  in  the  Papua  new  Guinea  ,  the  first  and  foremost  task  is  to  look  into  the  matter  that  whether  the  operating  company   are  in  compliance  with  the  Auditing  standard  of  Australia. There  are  few  conditions  which  are  to  be  met  before  conducting  the  audit  by  the  auditors.  The financial  statement  are  prepared  using  the  framework  of  the  financial  reporting  of  the  company  and  the  auditor  is  required  to  determine  the  acceptability  and  accuracy  of  the  financial  reports. He  is  required  to  take  into  account  the  nature  of  the  entity  and  the  evaluation  of  the  financial  statements  as  per  the  rules  and  regulations  prescribed  it. The  auditor  should  be  accessible  to  all  the  indispensable  information  which  is  needed  in  carrying  out  the  audit. The  reporting  of  the  financial  data  are  free  from  the  error  or  any  fraud. The  auditor  should  also  investigate  the  company in  terms  of  every  factors  and  evaluate   it regarding  its  potentiality  to  perform  its  work. The  auditor  is  required  to  look  into  the  issues  relating  to  .the  confidentiality  and  whether  there  is  any  interest  conflict.  Evaluation  of  all   these  matters  should  be performed  and  the  documentation  of  the  Same  should  be  done. The  ethical  matters  should  also  be  looked  into. The  above  enquiries  would  enable  the  auditor  in  concluding  that  firms  integrity  is  not  being  questioned  which  might  create  risk  which  is  not  acceptable.  The  auditors  task  before  accepting  the  audit  is  to  determine  whether  the  firms  does  not  risk  itself  when  it  comes  to  ethics.  When  the  several  threat  are  discovered ,  the  auditors  should  not  decline  the  task  of  auditing  and  should  be  able  to  safeguard  the  measures  which   reduces  the  risk  level   and  that  can  be  accepted (Ahammed 2015).

Evaluation of Financial Statements

The  auditors  are  also  required  to   make  the  client  acquainted  that  they  are    to   make  the   statement  in  accordance  with  the  scenario  presented  to  them. If  the  auditor  is  asked  to  disclaim  the  opinion  of  financial  statements  evaluated,  in  that  case  the  agreement  to  engage  in  the  auditing  should  be  turned  down  and  also  if  the  framework  of  the  financial  statement  is  not  acceptable  and  is  not  in  accordance  with  the  guidelines.

KGC  ltd  has  been  held  responsible  for  not  being  environment  friendly  and  it  has  exposed  to  the   ethical  threats  and  so  before  conducting  the  audit  ,the  auditor  should  safeguard  the  measures  to  reduce  the  risks  or  the  threat  to  an  acceptable  level.  Therefore,  it  is  very  crucial  for  the  auditors  to  do  the  evaluation  before  engaging  in  the  new  engagement. 

First  of  all,  we  get  to  define  the  risks  associated  with  auditing.

Inherent  risk  exists  when  the  organization  lacks  internal  control  and  there  is  a  material  misstatement .KGC  Ltd  has  inherent  risk  of  80 %  which  is  quite  high  indicating  that it  lacks  internal  control. Here, the  auditor  needs  to  directly   evaluate  the  account  balances  and  he  cannot  rely  on  the  actions  of  the  client. The  auditors  need  to  assess  the  risks  by  applying  the  procedures  to  evaluate  the  clients   and  the  environment  in  which  it  operates. The  control  risks  it  at  its  low  at  10 %   which  refers  to  how  the  control  has  been  designed  and  operated  and  the  auditor  must  investigate  and  look  for  evidence  supporting  it.  The  detection  risks  stands  at 50 %   and  it  implies  that  there  is  half  a  chance  that  the  auditor  would  not  be  able  to  detect  the  materiality  in  the  financial  statements  or  any  account  balances  and  he  would  be  relying  on  the  information  provided  by  the  client  for  detecting  the  additional  uncertainty (Ali 2016).

According  to  the  audit  risk  model :

Audit  risk = Detection  risk  * Inherent  risk  * Control  risk

                  =.5 * .8 * .1 = .04 = 4 %

Here , the  auditor  verifying  the  financial  statements  has  4 %  probability  that  he  would  be  giving  a  wrong  opinion  of  the  financial  statements  evaluated.  The  percentage  is  low  which  is  acceptable  and  reasonable (Griffiths 2012).

Before  the  audit  firm  conduct  the  auditing  of  KGC Ltd ,  he  should  take  into  account  all  the  risks  but  he  has  no  control  over  inherent  risks  which  needs  be  précised  as   it  has  direct  impact  on  the  auditing  procedures  followed  and  so  the  auditing  procedures  followed  should  be  substantive. The  auditing  firm  need  to  perform  some  checklist  before  conducting  the  audit :

Risk Assessment

Audit  firms  need  to  assess  and  judge  the  relevance  of  the  audit  risks  before  applying  the  auditing  procedure  as  conducting  the  audit  tasks  is  quite  expensive  and  time  taking  as  well  and  the  auditor  can  extend  the  auditing  the  auditing  procedure  if  demanded. Though  the  inherent  risk  is  quite  high  ,  the  desired  audit  risk  level  has  not  exceeded  and  it  should  be  accepted. The  audit  firm  should  accept  the  role  of  auditing  the  KGC  Ltd.

Audit  program  is  a  procedure  followed  by  the  auditor  to  confirm  the  validity  of  the  documents  incorporated  in  conducting  the  audit  and  also  to  ensure  that  the  plans  were  in  compliance  with  the  regulations. The  criteria’s  are  to  be  set and  accordingly  the  auditing  procedures  are  to  be  followed .The  audit  evidence  on  the  basis  of  which  the  auditors  form  the  opinion  of  the  financial  statement  are  to  be  determined.  The  auditor  should  prepare  the  audit  program considering  several  points  which  are  as  follows :

The  first  and  foremost  point  which  an  auditor  should  look  into  in  planning  for  audit  is  the  size  and  nature  of  the  business.  The  entity  to  be  audited  is  small  or  medium.  This  would  enable  to  perform  the  auditing  and  plan  and  executing  in  accordance  with  the  accounting  standard  which  gives  guidelines  specific  to  that  particular  entity  for  which  the  audit  is  being  performed. The  KGC  Ltd  could  be  sought  as  medium  entity  with  its  total  book  value  of  $ 21.5 billion  and  the  evaluation  of  the  same  should  be  done.

Details  of  various  audit  work  to  be  performed  forms  the  list  of  audit  program  content , such  as  the  balance  sheet  and  the  profit  and  loss  statement  of  the  entity  should  be verified.  The  tax  payment  to  the  PNG  government  and  the  royalties  to  the  mine  owner  should  be  of  the  same  value  in  the  account  of balances  as  provided  by  the  company.

The  time  which  would  be  employed  to  conduct  the  audit  task   should  be  also  framed. Here,  the  entity  is  being  accused  of  being  not  environmentally  friendly  and  it  poses  ethical  threat  to  it  and  it  involves  estimated  costs  of $ 60 billion  to  remediate  it  and  the  company  claims  its  annual  benefit  to  be  much  higher  to  offset  the  harm.  The  audit  firm  needs  to  invest  considerable  amount  of  time  depending  upon  the  outcome  of  the  case  initiated  by  the  ecological  group (Flammer 2013.).

The  audit  report  to  be  prepared  after  having  a  detailed  inspection  of  all the  relevant  documents  and  auditor  can  also  review  the  previous  year’s  documentation  to  understand  the  way  of  performing  the  tasks  

Ethical Considerations

So,  with  reference  to  the  KGC  Ltd  we  can  see   that  several  points  are  to  be  check listed  and  then  included  in  the  audit  program. 

The  revaluation  of  the  assets  of  the  firm  from the  historic  costs  to  the  fair  market  value  is  done  by  the  expert  team and  so  if  the  revaluation  is  done  based  on  the  reasonable  fact  then  auditor  should  accept  the  revaluation  . The  property , plants  and  equipment  are  to  be  revalued  at  fair  market  price. The  PPE  are  carried  from  over  year  to  year  as  they  are  not  held  for  sale. These  assets  are  accounted  for  only  once  and  they  are  closely  controlled. In  this  case ,  the  auditor  should  understand  the  clients  and  the  environment  in  which  it  operates  and  any  risks  associate  with  the  property  or plant. The  internal  control  over  the  property  should  be  a  concern  to  look  after.  The  expenditure  and  the  depreciation  should  be  understand  whether  there  is  any  manual  mistakes .  The  auditors  should  follow  appropriate  procedure  to  assess  the  risks. He  should  perform  the  physical  verification  of  the  assets  and  to  identify  the  costs  there  should  be  proper  system. The  auditor  understand  that  the  assets  are  revalued  when  they  can  be  measured  reliably.  The  auditor  should  consider  the  basis  on  which  assets  has  been  revalued  and  the  evidence  supporting  the  valuation  should  be  adequate  and  reasonable. The  auditor  needs  to  analyze  the  economic   benefit  of  the  assets  and  when  it  does  not  hold  any  benefit  , then  only  the  assets  are  revalued. There  should  not be  any  material  difference  between  the  carrying  value  and  fair  value  of  assets (Gashi and Shala 2015).  The  satisfaction  of  the  auditors   considering  the  above  facts  should  be  adequate.

The  future  prospects  of  the  mining  firm  does  not  seems  to  be  bright  and  this  would  be  supported  by  many  factors  provided  in  the  information.

The  firm’s  license  to  carry  out  the  mining  activities  from  the  PNG  government  is  about  to  expire  in eight   years and  it  cannot explore  the  additional  ore  of  reserves  hence  no  chance  of  propelling. The  quality  and  quantity  of  the  ore  extracted  is  not  so  much  commercially  viable . Moreover ,  KGC  Ltd  has  been  accused  by several  ecological  group  of  being  environmentally  irresponsible as  there  was  secretly  dumping  of 5  million  liter  of  ore  waste   which  could  devastate  the  survival  of  human  as  well  as  animal. So  ,  the  mining  firm  is  exposed  to  ethical  threats. The  political  conflict  might  pose  a  threat  to  the  existence  of  the  firm  in  the  Papua  new  guinea  area  as  the  tribal’s  borders  are  closely related  to  the  papua  area  and  there  is  the  possibility of  the  Indonesian  army  spilling  the  star  mountain  range  area  where the  mine  operates.

Audit Program for KGC Ltd. Mine in PNG

The  above  factors  explains  the  negative  prospects  of   the  firms. On  the  other  hand  there  are  other  factors which  shows  some  positive  prospects. The  people  residing  in  the  star  mountain  range  depend  on  KGC Ltd  for  their  livelihood  and  there  are  no  other  source  of  employment  for  them.  Would  it  be  closed  the  level  of  unemployment  would  rise  to  95 %  as  compared  to  32 %  currently.  KGC Ltd  is  the  sole  producer  of  water   processing  plants  and  operator  of  hospitals , health  centers  and  school.  This  case  verdict  should  be  in  favor  of  the  firm  because  shutting  it  down  would  lead  to  devastation  of  human  life.  So  the  prospects  of  the  mining  firm  KGC  Ltd  is  a  mixture  of  positive  and  negative  prospects. 

The  statement  of  KGC  Ltd  describing  themselves  as  environmentally  friendly  and  socially  responsible  could  not  be  sign  off  as  being true  and  fair.  Some  ecological  group  has  put  the  allegation  on  the  firm  of  being  irresponsible  and  reckless   when  it  comes  to  environment. The  secret   dumping  of  5 million  liter  of  ore  waste  into  the  river  on  which  the  population  of  village  depends  to  draw  drinking  water  and  do  the  fish  hunting  was  the  reason  of  its  being  polluted  and  unfit  for  drinking  and  any  other  purposes. The  mining  and  extracting  process  of  ore  and  the  dumping  of  the  waste  was  not  in  favor  of  moral  and  ethical  health  of  the  firm.  The  statement  made  by  the  firm  could  not  be  justified  in  light  of  the  above  facts.

Issuing  of  shares to  raise  $ 5  billion  Australian  dollar ( AUD)  by  KGC  Ltd  is  how  far  fair  can  be  depicted  from  the  discussion  made  below :

The  prospectus  containing   the  proposed  business  venture  states  that  firms  principal  assets  is  its  copper  mine  operating  in  Papua  New  Guinea  is  quite  fair  because  major  activities  are  in  process at  that  particular  place .The  operations  are  expected  to  be  permanent  and  at   low  risk  which  is  a  doubtful  fact  as  the  ongoing  court  case  imposed  by some  ecological  group  makes  the  duration  of  the  business  operations  uncertain  and  also   the  license  from  the  PNG  government  to  continue  its  operation  expires  in  eight  years  and  moreover  extraction  of  lead  ore  is  not  viable  commercially  in  terms  of  quality  as  well  as  quantity.  So  all  these facts  and   factures   does  not  make   the  future  so  fruitful  for  the  company. Investors  seeking  to  invest  for  long  term  and  those  who  are  risk  averse  would  not  be  interested  to  invest  in  this  company  whereas  the  investors  who  are  likely  to  take  risk  and  are  interested   in  short  term  investment  might  be  willing  to  investing  in  this  mining  firm. The  prospectus  contains  the  detailed  information  on  the  basis  of  which  investors  can  evaluate  the  company’s  financial  health. The  investors  does  not  seem  to  be  making  a  positive  view  in  investing  in  the  shares  of  the  firm (Gifford 2012).  

Reference :

Ahammed, K.F., 2015. GOVERNANCE IN SUSTAINABLE PUBLIC PROCUREMENT (Doctoral dissertation, INSTITUTE OF GOVERNANCE AND DEVELOPMENT, BRAC UNIVERSITY).

Ali, A.M., 2016. 1MDB: The Financial Accounting’s Question of Going Concern. Journal of Public Administration and Governance, 5(4), pp.142-162.

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.

Gifford, J., 2012. Effective shareholder engagement: The factors that contribute to shareholder salience. In The next generation of responsible investing (pp. 83-106). Springer Netherlands.

Griffiths, M.P., 2012. Risk-based auditing. Gower Publishing, Ltd.

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