Preconditions of Auditing of KGC Ltd Mine

Question: Write an essay onPreconditions of auditing of KGC Ltd mine. Answer: Preconditions of auditing of KGC Ltd mine operating in Papua New Guinea : 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 companys financial so as to enable him to form a correct opinion about the companys 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. 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 entitys 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. 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 organizations sake. The opening balance , ledger of all existing PPE should be verified . He should investigate whether the depreciation of the a ssets 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 companys objectives, investment strategy , the expenses incurred ,risk associated with any opera tion ,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 companys performance . On the basis of information provided by the organization the investors cloud not treat the prospectus a s 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.