Audit OF Mining Industry PDF

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City of Balanga, BataanAUDITING AND ASSURANCE; MINING INDUSTRYOverview:The mining industry sector is a major backbone of the Philippine economy. The long history of the industry has been much affected by the vicissitudes of the international market, as well as other domestic factors. With the adopti...

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ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan AUDITING AND ASSURANCE; MINING INDUSTRY

Overview: The mining industry sector is a major backbone of the Philippine economy. The long history of the industry has been much affected by the vicissitudes of the international market, as well as other domestic factors. With the adoption of the 1986 Constitution, the concept of awarding mineral rights has been drastically changed from leasehold to a system of contracts for various modes of production. Such changes have, as expected, temporarily unsettled the industry. The preponderance of small-scale mining, the growing public awareness on the environment, increasing labor and energy costs are concerns which should be addressed. Amidst all these, and in the framework of very stiff competition in the region for investments, new thrusts and directions, without compromising general stability, are urgently required for the overall development not only of the industry but for the whole country. The Philippines is the fifth most mineral-rich country in the world for gold, nickel, copper, and chromite. It is home to the largest copper-gold deposit in the world. The Mines and Geosciences Bureau (MGB) has estimated that the country has an estimated $840 billion worth of untapped mineral wealth, as of 2012. About 30 million hectares of land areas in the Philippines is deemed as possible areas for metallic minerals. According to the Mines and Geosciences Bureau (MGB), about nine million hectares of land areas is identified as having high mineral potential. The Philippines metal deposit is estimated at 21.5 billion metric tons and non-metallic minerals are at 19.3 billion metric tons, as of 2012.

Nature and Background of Specialized Industry A country’s socio-economic development largely depends on the extent and composition of its natural resources. Examples of natural resources include forestry, minerals, and commercial sources of energy (like coal, oil, natural gas, and hydro power). Mining and mineral processing are activities for extraction and processing minerals for commercial use. The mining sector is likely to contribute to the development of the economy of any country through taxes from large-scale mining companies and contribute to social–economic infrastructural development within the area where the mine is located. The mining sector can:     

create employment opportunities both directly in the mines and indirectly on services to the mines, provide education and health services, increase foreign exchange reserves, (reducing a country’s foreign exchange deficit), improve infrastructure like roads and water supply, and create other economic activities to support the mines instead of importing all supplies from abroad.

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan

A working definition of mining according to the United Nations Environmental Program (UNEP) could simply be “the extraction of minerals from the earth”. The word “minerals” in this case would cover a wide variety of naturally occurring substances extracted for human use. Although this definition is adequate for our purposes, mining can also be seen as a process that begins with the exploration and discovery of mineral deposits and continues through ore extraction and processing to the closure and remediation of worked-out sites. Minerals are a non-renewable resource, so mining represents a temporary use of the land. The mining life cycle during this temporary use of the land can be divided into the following stages: exploration, development, extraction, processing, and mine closure. In this section, we explain the various phases of mining, the associated impact in each phase, and the suggested mitigation or amelioration measures. The figure below sets out the five physical stages of the life cycle of a mine.

The exploration phase of mining Exploration activities encompass all actions in the field that precede feasibility studies. Exploration activities include initial reconnaissance flights and geophysical surveys, stream sediment studies and other geochemical surveys, construction of access roads, clearing of test drilling sites, installation of drill pads and drilling rigs, benching, trenching/pitting, erection of temporary accommodation, and power generation for exploratory drilling. Exploration activities also include determining the location, size, shape, position, and value of a body of ore using prospecting methods.

The development phase of mining The development of a mine consists of several principal activities: conducting a feasibility study, including a financial analysis to decide whether to abandon or develop the

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan property; designing the mine; acquiring mining rights; filing an Environmental Impact Assessment (EIA); and preparing the site for production. The development phase may include such activities as   

overburden stripping and placing, road/trail, building and/or helicopter transport, drilling and trenching, erecting treatment plants, preparing disposal areas, and constructing services, infrastructure such as power line or generating plants, railways, water, supplies and sewerage, laboratories and amenities.

The main taxes levied on the mining sector are corporate income tax, excise tax on minerals and royalties on mineral reservations, while the major oil and gas levies are the government’s share in oil and gas revenues, corporate income tax and withholding tax on profit remittance to principal. The Bureau of Internal Revenue (BIR) is the main body responsible for collecting taxes paid to central government, while the Mines and Geosciences Bureau of the Department of Environment and Natural Resources and the Department of Energy collect sector levies for mining and coal, oil, and gas respectively. Local government units (LGUs) are responsible for collecting subnational payments. Oil and gas service contracts (PSCs) are awarded through competitive public bidding, while mining permits are awarded through direct negotiation. Several moratoriums on the issuance of mining licenses implemented in previous years from 2012 to 2017 have affected the number of mining projects in the country. As of February 2021, there were 309 Mineral Production Sharing Agreements, 5 Financial or Technical Assistance Agreements and 13 existing Exploration Permits for the mining sector. Beneficial Ownership (BO) disclosure and Politically Exposed Persons (PEP) reporting in the Philippines has been a significant aspect of transparency in the Philippines. The multistakeholder group identifies tax evasion, money laundering, and compliance with the Constitutional provisions on the nationality of mining companies as the national issues that their work on beneficial ownership aims to address. It faces constraints, however, in terms of data privacy restrictions. The Philippines EITI previously published a Beneficial Ownership (BO) roadmap on 15 December 2016. Several milestones of the Roadmap have been accomplished by the beginning of 2021, including the integration of BO in the mainstreaming efforts of PH-EITI, the increased coordination with the SEC and the pilot disclosure of BO information. According to the 2018 EITI Report published in December 2020, 41 out of 65 covered companies/projects fully or partially disclosed beneficial ownership information. A total of 128 name entries were declared as beneficial owners.

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan Securities Exchange Commission (SEC) Memorandum Circular (MC) No. 15 (issued in July 2019) enhanced the BO Declaration form. The revised General Information Sheet (GIS) under MC No. 15 mandates corporations to fill out a beneficial information declaration form that asks for nine categories of beneficial owners and their information, including complete name, residential address, nationality, tax identification number, and percentage of ownership or voting rights. While there is currently no public register of beneficial owners, work has begun to ensure that BO information, contracts and extractives information is integrated into one publiclyavailable portal.

GOVERNMENT RESPONSIBILITIES IN A MINING SECTOR To be able to make sound scoping decisions for a performance audit of the mining sector, auditors need to clearly understand the diversity and extent of government responsibilities in overseeing the sector. These responsibilities can be separated into five categories: 1. Evaluating mining development options: This involves processes that help governments to make policy decisions on whether to develop a particular sector or not (for example, deciding whether to allow the development of uranium mines in a jurisdiction), including environmental impact assessments, socio-economic impact assessments, strategic environmental assessments, and cumulative impact assessments. This process may also include, where relevant, the consideration of Aboriginal land claims and their impact on proposed developments.

2. Ensuring the responsible development of natural resources: This involves putting in place laws and regulations that will set clear requirements that must be met by mining companies to limit the impacts of mining activities on the environment and local communities. For example, regulations may prohibit certain extraction practices, set site remediation standards, or establish limits on the release of contaminants in the air, soil, and water.

3. Monitoring natural resource extraction: This involves oversight activities carried out by government departments and agencies to ensure that mining companies are in compliance with all applicable laws and regulations. This involves, among other tasks, conducting compliance inspections, issuing fines and remediation orders when necessary, and certifying that decommissioned mines have been properly remediated.

4. Collecting revenues from natural resource extraction: This involves setting rates and collecting all fees, leases, bonuses, penalties, and royalties related to the extraction of

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan minerals, and conducting audits to ensure that all due payments have been received in full.

5. Collecting financial assurances for site remediation and monitoring financial liabilities: This involves collecting financial assurances from leaseholders, assessing the adequacy and completeness of remediation plans submitted by private companies, monitoring progress on remediation work, attesting that remediated sites have met all applicable standards and requirements, and regularly updating estimates of future remediation costs.

CHARACTERISTICS THAT GENERALLY DISTINGUISH MINING INDUSTRY FROM OTHER INDUSTRY 

Nature of operation or activities They start with mining process, where they extract minerals from specific geological locations, then refined an develop it and sell it to market.

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Regulated by DENR The department of environment and natural resources (DENR) is the primary agency that regulates and administers the mining industry in the Philippines. Its mandate among others is to assure availability and sustainability of the country’s natural resources through judicious use and systematic restoration of replacement whenever possible.

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Governed by Republic Act No. The principal laws that regulate the mining industry are Republic Act No. 7942, otherwise known as the Philippine Mining Act 1995(The mining Act), and its implementing rules and regulations, DENR administrative Order No. 2010-21(Mining Act IRR)

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Internal auditor The internal auditor needs to ensure that:

 The various Periodical Reports conducted and submitted by the company on air test and the air pollution against the permissible limits in the control areas - to various authorities.  Inspect pollution control equipment and its working and Deviation Reports thereon submitted to respective PCB and complaints or show causes notices received, if any and action taken thereon by the Company.  Water testing periodical Reports submitted by the company to the respective PCB authorities need to be observed by auditor to check the action taken report required if any, by the company.

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan  Noise pollution levels and accepted norms shall be check by auditor with the reports submitted and the Social checks/campaign conducted by the company in the vicinity.  Following the checks and balances as per the specific Company norms applicable and obtained for mine closure.

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Implementing EITI The Philippine Extractive Industries transparency Initiative, or PH-EITI, is a governmentled, multi-stakeholder initiative implementing EITI, the global standard that promotes the open, accountable management, and good governance of oil, gas, and mineral resources.

AUDIT OBJECTIVES OF A MINING INDSUTRY      

Mining activities are developed in accordance with government policy and objectives. In compliance with mining act and applicable regulations Compliance with PFRS 6 Internal Review and audit of payments Fraud prevention and transparency. To determine whether the control of gold production measurement performed by the responsible organization ensures the reliability and integrity of gold production data used to assess royalty payments.  To determine whether the government has designed and implemented control systems that provide assurance that it is collecting all mining royalties payable from producers.

SKILLS OR EXPERTISE The mining industry is a complex, often heavily regulated sector. Auditors who intend to audit revenues from the extraction of minerals may need access to specialized knowledge and expertise to conduct their audit. Depending on the audit focus, a team may need the help of a tax or data-mining expert, an IT specialist, a lawyer, or an engineer.

However, finding an expert for an audit engagement may be difficult, especially if the field of expertise is very technical and if the sector is undergoing a period of rapid growth. The necessity for experts to be independent from mining companies is challenging because most active experts have links with the industry. For this reason, auditors may consider hiring a retired expert as a consultant. (In such a case, an independence check should include inquiring whether the expert owns shares in mining companies.) It may also be possible to rely on a specialist employed by the government in cases where independence requirements are met.

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan Another option is for an audit office to have one or more individuals with in-depth knowledge of mining business processes on staff (or to train an individual to become a specialist in this field). The problem with this option is that these specialists will often be able to find better-paying jobs in the mining industry. As a result, it may be difficult for an audit office to retain sufficient expertise on the mining sector in-house. 

Site visits

Performance auditors often develop their knowledge of business of a new area by conducting site visits to see relevant business activities first-hand and to meet knowledgeable staff and managers on the ground. With mineral extraction, there may be cases where this would be very costly or would involve complex logistics because mines are often in remote areas, far from cities and transportation hubs. There may also be security concerns or seasons in which weather conditions would make travel even more difficult. 

Access to information

There may be some situations where auditors will have difficulty obtaining the required information to reach a conclusion on an audit criterion. External auditors will not usually need to access the records and data of private mining companies to conduct their audit, but should this need arise (for example, if auditors are seeking to assess the transfer pricing risk), they should not assume that private companies will collaborate with their audit, especially if the audit office does not have a clear legal mandate to access such information. Another potential challenge related to access to information is when auditors decide to assess whether the decision to adopt a particular revenue framework or royalty regime was evidencebased. In such a case, it is possible that the required information will not be provided because it is considered to be subject to Cabinet confidence (meaning information for the members of the governing council of ministers only). Finally, auditors may have trouble accessing information from other jurisdictions for benchmarking purposes. Indeed, it is possible that the extent of information they can obtain in their own jurisdiction because of their office’s legal mandate will prove unattainable for other jurisdictions where their mandate does not apply. Because a fair benchmarking process requires comparing similar information from all selected jurisdictions, disparity in information quality and quantity may mean that no useful results can be drawn from the exercise.

AUDIT CONSIDERATIONS Key Financial Concepts in the Mining Industry (see PFRS 6 Exploration and Evaluation of Mineral Resources for more information)  

Revenue: Ore (tons) x Grade (g/t) x Recovery x Payability x Metal Price Royalties: Properties often have royalties on them

ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC. City of Balanga, Bataan      

Operating costs: Per ton basis mining) Capital costs: Includes initial capital (construction of mine) and sustaining capital (ongoing equipment, etc.) Reclamation costs: Takes place at the end of a mine’s life; accrued for accounting purposes but not accrued in a cash flow model. Depreciation: A percentage of production bases over the entire life of the mine Taxes: Can often be complicated with mining companies operating in several countries; mining specific taxes and royalty agreements need to be considered Changes in working capital: Changes in accounts receivable, inventory, and accounts payable should be factored into a cash flow model.

Special Consideration in Audit Arise Because of:     

Mining companies carry out the various stages of development necessary before production over a long period at a high cost Mining operations typically require a high level of capital investment to develop, extract, process minerals Mining companies in the Philippines are heavily regulated by the Department of Energy and resources (DENR) The minerals reserves are the most valuable asset of a mining company. However, they do not appear as an asset on the balance sheet except to the extent they were purchased Mining companies normally incur high costs at mine sites after the minerals have been extracted and the mine is closed.

AUDIT PLANNING Planning involves deciding which programs and controls to audit. To make these decisions, auditors will need to complete three tasks:  Acquire further knowledge of business, by gathering and analyzing relevant information on the different types of revenues or financial assurances that the government is collecting and managing, and on the systems and practices it uses to do so.  Identify and assess risk factors that could prevent the government from collecting all the revenues it is entitled to or all the financial assurances it needs to ensure that decommissioned mines will be properly remediated.  Consider the work done by financial auditors in assessing the design and implementation of the controls in place for revenues, environmental liabilities, and financial assurances.  Equipped with the required information, audit teams will be able to determine which revenue or financial assurance programs and controls to audit. Once these decisions are made, auditors will be a...