Determining the Audit Focus
Once auditors have a good understanding of mining sector activities in their jurisdiction and have identified all important government responsibilities in this sector, they have to determine where the key risks are and narrow down options to eventually arrive at a manageable audit focus.
Depending on the results of the risk analysis conducted and on the general preferences of audit offices about the breadth of audits, audits on the extraction of minerals will cover several areas of responsibility in a single report or will focus exclusively on one area of responsibility. For example:
A broad and a narrow focus are equally valid and the choice of approach is up to each audit office.
To determine the audit focus, auditors have to conduct further research in the areas that they have identified as relevant and important. While these areas may include environmental management, enforcement activities, or other aspects of mining activities, this part of the Practice Guide is strictly concerned with revenues and with financial assurances for site remediation. (Auditors can find information on other topics on the WGEI website.) Table 3 presents a non-exhaustive list of high-level questions that auditors can research as part of their efforts to determine whether and to what extent their audit should focus on revenues from the extraction of minerals. Table 4 presents a similar list of questions about financial assurances.
Table 3 – High-Level Questions About Revenues from the Extraction of Minerals
- Are the revenues from the extraction of minerals significant? (Each source of revenue should be assessed individually and their importance should also be assessed in the aggregate. While large revenues can be significant on their own, some smaller sources of revenues may also be significant because of their function. For example, leases, licences, and permits may be important because they enable departments to know who should be paying royalties and fees.)
- Is there a significant difference between predicted and actual revenues? If so, what is the explanation for this difference?
- Are there any new revenue sources? (For example, is there a new resource with its own royalty system, such as a recently developed diamond mining industry?)
- Has new relevant legislation or regulation been introduced or have significant changes been made to existing legislation and regulation recently?
- When was the last review of the revenue framework conducted? When is the next one planned?
- Where significant changes in revenues are observed, are they in line with current market conditions and production levels?
- Has the revenue framework (and supporting regulations) been criticized for being overly complex or unclear? Is there significant public interest in the topic?
- Have there been any public complaints or reporting of any inappropriate practices in the sector (transfer mispricing, for example)?
- Have annual financial audits identified significant or chronic issues with regard to the collection of revenues from the extraction of minerals?
- Is there a regulated royalty audit regime in place? If so, is there 100-percent audit coverage or risk-based coverage? Are audits completed on a timely basis? In addition, have internal audits of revenue collection processes been conducted?
- Is there significant reliance on self-reporting of production level?
- Does the government have sufficient expertise to verify information reported by the private sector?
- Have previous performance audits of mining revenues been conducted by the audit office? Has progress been made by the government to address prior recommendations?
- Is there segregation of duties between the collection of revenues and the assessment of the completeness of revenues received?
- Has the government clearly established the objective it is pursuing through its revenue framework for the mining sector?
- Is there legislation or regulation in place to ensure the public has access to reliable information on the payments the government receives from mining companies?
Table 4 – High-Level Questions About Financial Assurances for Site Remediation
- Is there a regulated system of financial assurances for site remediation in place? Is the system recent or well-established? Has a remediation fund been established?
- What is the current cost estimate (potential liability) for rehabilitating all mining sites in the jurisdiction?
- What is the state or risk of unfunded liability in the jurisdiction? Is the risk increasing over time?
- If there is a remediation fund, what is the current balance of this fund?
- Have there been any recent or looming changes in environmental standards or legislation that are expected to affect required securities?
- Does the duration of the securities match the expected duration of the expected liability?
- Is there documented guidance on how to estimate remediation costs?
- Are remediation cost estimates periodically reviewed by the government or an independent expert?
- If regulations allow for self-insurance, what is the relative frequency of self-insurance by mining companies in the jurisdiction?
- Are there mechanisms for regular monitoring of sites and monitoring of associated securities? Are these mechanisms implemented? What is the frequency of site visits?
- Are the licensing and inspection functions segregated?
- Is there a process to ensure that financial assurances are released only when compliance with site remediation requirements is achieved and documented?
- Are site inspections providing sufficiently complete assessments? (For example, can inspections identify underground contamination?)
- Are there sufficient penalties in place to encourage compliance with financial assurance requirements?