Acquiring Knowledge of Business and Assessing Risk
Audit procedures typically require auditors to acquire knowledge of the organization and subject matter being audited and to prepare a risk-based audit plan.
In practice, this means that, once the decision to audit the completeness of revenues from the extraction of minerals (and related questions) has been made, the audit team needs to start conducting research and interviewing officials to acquire or further develop a sound knowledge of business and an understanding of the risks facing the organizations being audited. The information collected will be used to determine what the main risk areas are and where audit efforts should be directed.
To develop their plan for auditing the completeness of mining revenues, auditors will need to answer three main questions:
- What are the sources of revenues?
- Which revenues should we audit?
- Which controls should we examine?
Revenues from mining activities come from the exploration and production phases of mining projects. Revenues from the exploration phase come from the fees charged for leases and licences, plus any penalties that can be applied when leaseholders do not meet their lease obligations. (Leaseholders may be required to conduct a minimum amount of work each year on each of their parcels; failure to meet these requirements may result in fines or in leases being cancelled.) Lease revenues can come from fixed rates for every unit of land or are determined by the results of lease auctions. Auditors need to determine which option is used in their jurisdiction and obtain information on the annual revenues generated by lease payments. Once they have this information, auditors can determine whether the materiality of lease payments is sufficient to justify including this subject in the audit.
Exploration phase revenues can also come from the auction of exploration rights. Such auctions can generate large revenues in certain jurisdictions when economic conditions are favourable. Given their importance and competitive nature, auctions of exploration rights carry a risk of fraud and corruption. However, given the relative rarity of auctions of exploration rights in the mining sector, variable rules from one jurisdiction to another, and the lack of information on best practices in this area, this Practice Guide does not provide specific guidance on how to audit such auctions.
Revenues from the production phase of mining projects come from royalties. As discussed previously, the revenues from royalties can be very substantial in many jurisdictions. As such, materiality will often be enough to justify inclusion of royalty payments in the audit.
Finally, some revenues may also come in the form of fines paid by private sector companies due to non-compliance with a federal or provincial regulation on the extraction of minerals. This source of revenue will often be small compared with lease payments and royalties and may not be material enough to include in the audit (unless there are indications that a government is losing significant revenues due to ineffective enforcement).
For each source of revenues selected for audit, a number of areas can be examined, including:
- the design of the revenue framework,
- the processing of payments,
- the internal review and auditing of payments, and
- the measures adopted to increase the transparency of payments and to prevent and detect fraud.
Each of these areas is described in more detail below and some of the controls that could be audited under each area are highlighted. Note that while these categories are useful for understanding the subject matter, the areas may not be so easily distinguished in real life and administrative structures may vary by jurisdiction.
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