Topic: audit, assurance and compliance

Paper details:

KARRICK Gold & Copper Ltd. (KGC Ltd), an Australian mining firm listed on the
Australian Stock Exchange (ASX), has been operating a large Open Cast (Pit) gold and
copper mine in the Star Mountain Range in Papua New Guinea (PNG) for 30 years. The
Star Mountain Range in PNG is very isolated (no roads) and has a wide range of exotic
plants and animals found nowhere else in the world.
Other Information—KGC Ltd. has:
1) Revenues of $30 billion Australian dollars (AUD) a year and, in the absence of new ore
finds, has only seven years of ore reserves.
2) The Net Book Value (NBV) of the PP&E is $16.5 billion AUD and another $5.0 billion
AUD is needed over the next seven years.
3) There is no active prospecting for additional reserves of ore—because the firm’s current
license from the PNG government to mine in that region will expire in eight years.
4) While there have been several rich “shows” of silver and lead ore,1
nothing so far is of
commercial quantity and quality. However, the mine manager expects that over the next
eight years large deposits of commercially-viable silver-and-lead ore will be found within the
mine property or adjacent.
5) The KGC Ltd. employs 3,400 full-time employees in its PNG mine, offices, and processing
plant—3,000 are PNG citizens and reside in the Star Mountain Range. The labourparticipation
rate in that region of PNG is 32 percent and the unemployment rate (among
those 32 percent) is 45 percent.
NB: If KGC Ltd. shuts down its mining operations in the Star Mountain Range in PNG, the
unemployment rate among the 32 percent participating in the labour market will rise to 95
percent and there are few if any alternative sources of employment.
6) The KGC Ltd. PNG operations pay $4 billion in royalties to the traditional owners of the
land where they mine and process ore and $6 billion in taxes to the PNG government. Also,
they built and operate the only water-processing plants, grade schools, hospitals, and health
centres in the Star Mountain Range in PNG.
1 A “show” of a mineral is a small finding of noncommercial amounts. A show of a mineral is a strong indicator
that there may be commercial amounts of the ore but is not definitive.
HI6026 AUDITING AND ASSURANCE SERVICES
TRIMESTER 1, 2016
GROUP ASSIGNMENT
Assessment Value: 20%
Instructions:
7) In the last few decades, the Christian-animist residents of the Indonesian half of the Island of
New Guinea (the Indonesians call their half of the island “Irian Jaya” or “Papua”) have been
agitating for independence from Indonesia (it is estimated that 100,000 of them have died in
the conflict and some of the tribes have resumed headhunting with the Indonesian soldiers
and settlers being targeted. The PNG tribes near the border with Papua are closely related to
the tribes across the border and there is fear the conflict and the police actions by the
Indonesian army will spill into the PNG portion of the Star Mountain Range.
8) A recent collapse of a “tailings” pond dumped 5 million litres of ore-waste sludge into a river
from which two local villages draw their drinking water, fish, hunt, harvest lotus root and
water their taro root, yam and cassava crops.
2 While most of the sludge flushed through to
the ocean in a few days, many environmental groups in Australia are screaming that KGC
Ltd. is environmentally irresponsible. The complaints got especially loud and strident after
the General Manager of the PNG mine stated at a public meeting: “First) The sludge quickly
flushed out to sea; Second) “At sea the sludge was vastly diluted; Third) The solution to
pollution is dilution; and Fourth) The peoples of the Star Mountain Range in PNG depend on
the KGC Ltd. operations for most of their jobs, clean potable water, health care, and
education.”
9) The cost of remediating the sludge spill (i.e. a combination of clean-up, fines, offsetting work
elsewhere, and compensating cash payments) is expected to range between $6 billion and
$60, billion, depending on the outcome of a court case in PNG that has been initiated by an
ecological group from Australia. Please note: KGC Ltd. is claiming that the annual benefits
of the KGC Ltd. operations in the Star Mountain Range in PNG offset the harm of the
mining and processing (including the rare sludge spill) by manyfold and that should the mine
be shutdown, the loss to that region and PNG in general would be devastating.
While this case study is adapted from real events and circumstances, names have been
changed to protect the innocent and to avoid lawsuits. Please answer the following
questions using the above information and supplementing it (as needed) with content from
the course, internet, and other literature. Marks will be awarded for clarity of thought and
succinctness of presentation.
Required (HI6026): Marks
a) Discuss the steps that you need to consider before accepting to do an audit of the KGC
Ltd. mine in PNG? 30
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)
30
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.
40
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?
15
e) Review of the future prospects of the mine 20
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)
25
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)