Accounting Auditing and Assurance

Questions: a). Discuss the steps that you need to consider before accepting to do an audit of the KGC Ltd. mine in PNG? 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 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). Answers: a): 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 pe rform 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). 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. b): 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 prcised 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 : 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. c): 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 criterias 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 years documentation to understand the way of performing the tasks 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. d): 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 ar e 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. e): 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 firms 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 tribals 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. 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. f): 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. g): 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 companys 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 Accountings 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. InThe next generation of responsible investing(pp. 83-106). Springer Netherlands. Griffiths, M.P., 2012.Risk-based auditing. Gower Publishing, Ltd.