Ramirez, James Vann B.

Auditing & Assurance: Specialized Industries

BSA701A

RISK-BASED AUDIT PROCESS

Inventories

An auditor may use the expertise of an expert, such as an actuary, to determine the number of
inventories. The number of inventories determined by the actuary may be multiplied with the rates of
the ores in the market to determine its market value. The auditor can also check the costing of
inventories by extracting all costs in the company's database that are categorized as mining to see if the
list only includes costs linked to the mining location and not the company's main office. The auditor
must also examine if inventories are valued at reduced costs and net realizable value. This determines
whether the cost of goods sold is valued correctly which avoids misstatements in the operating income.

Property, Plant, and Equipment (PPE)

The balance of the PPE can be checked by the auditor by testing and examining the company's fixed
asset roll-forward. The auditor may also conduct a test of fixed asset movement, which entails
determining additions, reclassifications, and disposals. The auditor must also verify that the PPEs have
been properly valued and that depreciation has been properly reported. To determine whether PPE is
properly depreciated, an auditor must determine the authorized method of depreciation, whether unit-
of-production or projected useful life.

Renewal and Reconditioning Costs

The costs of performing a major renewal or reconditioning are capitalized if it gives access to future
economic benefits. Such costs will include the labor and materials costs of performing the renewal or
reconditioning. Renewal and reconditioning costs should not be accrued over the period between the
renewal and reconditioning. Thus, the auditor must check whether these costs are properly recorded by
the company and were not accrued over the company's operations.

Rehabilitation bonds.

The auditors must determine whether the company's rehabilitation bonds are complete. They must also
examine the bond's components and decide whether there are distinct bonds for tree planting and land
rehabilitation. Furthermore, the auditors must verify that the bonds exist. It is possible to accomplish
this by sending confirmation letters to bondholders, such as banks. They must also examine the bond's
interest rate to ensure that it is appropriate. It can be done by recalculating it or comparing it to the
interest rates on bonds issued by other mining corporations.

Revenues

Mining companies may face difficulties in recognizing revenue. Revenue from Contracts with Customers
(PFRS 15) stipulates that revenue be recognized when significant risks and rewards are transferred to
the buyer. However, it can be difficult to tell whether the risks and profits in mining have been shifted.
Extracted mineral ores, for example, may need to be transported across great distances and in specified
quantities to suit smelter or refinery specifications. Companies in the mining industry may also swap
products to satisfy logistical, scheduling, or other needs. As a result, an auditor can examine a mining
company's revenue contracts. Thus, the auditor may check the revenue contracts of a mining company.
It can be done by “vouching” the agreement of the company and its clients. The auditor may also check
the recorded receivables of the company by sending confirmations to its clients.