Audit of Mining Companies

Definition of auditing in the mining and extractive industry

Auditing in the mining and extractive industry is the independent and systematic examination of
a company's financial statements, internal controls, processes, and other relevant documents to
provide assurance on the fair presentation of the company's financial performance and position.
It entails evaluating the organization's compliance with applicable accounting standards,
regulations, and industry-specific requirements. However, our focus would be on the financial
reporting aspects of the mining companies.

Significance of auditing in the mining and extractive industry

Auditing is essential in the mining and extractive industry for several reasons:

Investor confidence: The industry involves significant capital investments and long-term projects.
Independent audits provide investors with assurance that financial statements are reliable,
enabling them to make informed decisions. Example: A publicly-traded mining company
undergoes an annual audit to provide shareholders with an independent assessment of its
financial performance. This helps investors decide whether to buy, hold, or sell the company's
shares.

Regulatory compliance: Mining companies operate in a highly regulated environment, and failure
to comply with regulations can result in fines, penalties, or even revocation of licenses. Audits
help ensure that companies adhere to regulatory requirements and maintain their licenses to
operate. Example: An audit of a mining company operating in the Philippines might involve
verifying compliance with the local environmental laws and other relevant regulations.

Risk management: The industry faces various risks, such as fluctuations in commodity prices,
environmental liabilities, and potential fraud. Audits help identify and assess these risks, enabling
companies to implement mitigation strategies. Example: In the case of a gold mining company,
auditors might assess the accuracy of the company's mineral reserve estimates, which are crucial
for predicting future revenues and ensuring sustainable operations.

Environmental, social, and governance (ESG) considerations: With increasing emphasis on

sustainability, companies need to demonstrate responsible practices. Audits can assess a
company's ESG performance, providing stakeholders with valuable information. Example: An
audit might assess a mining company's efforts to minimize water pollution, ensuring compliance
with environmental regulations and alignment with industry best practices.
03.2 Overview of the Mining/Extractive Industry

This part provides a broad overview of the mining and extractive industry. It is designed to
establish a strong understanding of the industry's operations, key participants, and the regulatory
and societal context within which it operates. This knowledge is crucial in auditing mining and
extractive companies, as it informs the identification of potential risks, the application of relevant
standards and regulations, and the consideration of broader societal impacts and expectations.

Key players in the industry

The mining and extractive industry involves various key players, including:

Mining and extraction companies: These are the primary operators involved in the exploration,
extraction, and production of minerals and other natural resources. Examples include Philex
Mining Corporation, Semirara Mining and Power Corporation (SMPC)
Contractors and service providers: They offer specialized services to mining companies, such as
drilling, geological surveys, transportation, and equipment leasing. Examples include Boart
Longyear and Caterpillar.

Government agencies and regulators: They are responsible for granting licenses, monitoring
compliance with regulations, and overseeing the industry's environmental and social impact.
Department of Environment and Natural Resources (DENR) Mines and Geosciences Bureau
(MGB), Environmental Management Bureau (EMB), Department of Labor and Employment
(DOLE), National Commission on Indigenous Peoples (NCIP), Energy Regulatory Commission (ERC)
Climate Change Commission (CCC)

Financial institutions and investors: They provide the necessary capital for mining projects, either
as equity or debt financing. Examples include banks, private equity firms, and institutional
investors.

Types of mining and extraction methods

There are several types of mining and extraction methods, including:

Surface mining: This method involves extracting minerals close to the earth's surface. Examples
include open-pit mining, strip mining, and mountaintop removal.

Underground mining: This method involves extracting minerals from deep underground deposits.
Examples include shaft mining, room-and-pillar mining, and block caving.

Placer mining: This method extracts minerals from alluvial deposits, typically found in riverbeds,
beaches, and former stream courses. Examples include panning, sluicing, and dredging.
In-situ recovery (ISR): This method involves extracting minerals without physically removing the
ore from the ground. It is commonly used for extracting uranium and copper.

Regulatory framework and compliance requirements

In the Philippines, the relevant government and regulatory agencies include the following:

Department of Environment and Natural Resources (DENR): The DENR is the principal agency
responsible for the conservation, management, development, and proper use of the country's
environment and natural resources. Its mandate includes ensuring the sustainable use of
resources and the preservation of biodiversity.

Mines and Geosciences Bureau (MGB): This is a line bureau under the DENR. The MGB is
responsible for providing geoscientific services to ensure the proper evaluation and disposition
of mineral resources. This includes geologic studies, issuing mining permits, and monitoring for
compliance with environmental and safety regulations.

Environmental Management Bureau (EMB): Another bureau under the DENR, the EMB is
responsible for the implementation of environmental policies and programs in the country. This
includes pollution control and environmental impact assessments, among others.

Department of Labor and Employment (DOLE): The DOLE is the government agency responsible
for creating and implementing policies, programs, and services for the labor sector. It promotes
gainful employment opportunities, advices and assists workers on their employment rights, and
promotes safe and healthy work environments.

National Commission on Indigenous Peoples (NCIP): The NCIP is the government agency that
formulates and implements policies, plans, and programs for the recognition, promotion, and
protection of the rights and well-being of Indigenous Peoples in the Philippines.

Energy Regulatory Commission (ERC): The ERC is an independent, quasi-judicial regulatory body
that is mandated to promote and protect long-term consumer interest in terms of quality,
reliability, and reasonable pricing of a sustainable supply of electricity.

Climate Change Commission (CCC): The CCC is an independent and autonomous body that has
the same status as that of a national government agency. It is the lead policy-making body of the
government tasked to coordinate, monitor, and evaluate the programs and action plans of the
government relating to climate change.
Environmental, social, and governance (ESG) considerations

The mining and extractive industry faces increased scrutiny regarding its ESG performance. Some
key considerations include:

Environmental impact: Companies need to minimize their impact on the environment by reducing
greenhouse gas emissions, conserving water, managing waste, and rehabilitating land after
mining operations.

Social impact: Companies must consider the well-being of local communities and respect human
rights. This includes addressing issues like displacement, fair labor practices, and cultural
preservation.

Governance and transparency: Companies should maintain strong corporate governance

practices and transparent reporting of their operations, financial performance, and ESG activities.

Responsible sourcing: Companies need to ensure their supply chains adhere to ethical and
environmental standards, avoiding conflict minerals and addressing issues like child labor and
illegal mining.

The mining and extractive industry consists of various key players, employs diverse mining and
extraction methods, and operates within complex regulatory frameworks. Companies need to
pay attention to ESG considerations, as responsible practices are increasingly important for
maintaining their social license to operate and attracting investments.

Risk Assessment
Identification of key risk areas

• Operational risks: Operational risks refer to uncertainties arising from a company's

day-to-day operations, including technical, safety, and logistical challenges.

Examples:

1. Equipment malfunction or breakdown leading to production delays or

increased costs.
2. Mine collapse or other safety incidents, resulting in injuries or fatalities.

• Financial risks: Financial risks involve potential adverse effects on a company's

financial performance, such as fluctuations in commodity prices, exchange rates,
and interest rates.
Examples:

1. A sudden drop in the market price of gold, negatively affecting the

revenue of a gold mining company.
2. Unfavorable currency fluctuations leading to increased operational costs
for a mining company with international operations.

• Regulatory risks: Regulatory risks stem from potential non-compliance with laws,
regulations, and industry standards, which may result in penalties, fines, or loss of
licenses.

Examples:

1. A mining company failing to meet environmental standards, leading to

fines and potential suspension of operations.
2. Non-compliance with financial reporting requirements, resulting in
reputational damage and potential legal consequences.

• Environmental and social risks: These risks relate to the potential adverse effects of
a company's operations on the environment, local communities, and other
stakeholders.

Examples:

1. A mining company's operations causing significant water pollution,

affecting local communities and ecosystems.
2. Conflict with local communities over land rights, negatively impacting the
company's reputation and license to operate.

Audit Planning

Understanding the mining/extractive company's business and operations

An auditor's understanding of the business and operations of a mining or extractive company is

fundamental to conducting an effective and efficient audit. This understanding involves
knowledge of the company's business environment, organizational structure, operational
processes, financial reporting practices, and applicable laws and regulations. It forms the basis
for identifying audit risks, determining audit procedures, and evaluating audit findings.

Business Environment: Understanding the business environment involves a review of the

company's economic, industry, and competitive conditions. This includes knowledge of the
market forces, industry trends, key competitors, supply and demand factors, and other relevant
business risks affecting the company. For instance, knowledge about commodity prices
fluctuations, such as gold or copper, can affect a mining company's revenue recognition and
valuation of its reserves.

Organizational Structure: A review of the company's organizational structure is important to

identify key decision-makers and understand their roles and responsibilities. This includes the
management team, board of directors, audit committee, and key operational personnel.
Understanding this structure aids in identifying areas where the risk of misstatement may be
higher due to oversight or control weaknesses.

Operational Processes: Understanding operational processes involves gaining knowledge of the

company's exploration, extraction, processing, and sales activities. This includes the methods and
technologies used for mining or extraction, the stages of resource development, the process of
turning raw materials into market-ready products, and the company's sales and distribution
channels. For example, understanding the technical process of ore grade estimation and ore
reserve calculation is critical in auditing the reasonableness of reserve figures reported by a
mining company.

Financial Reporting Practices: A review of the company's financial reporting practices helps
auditors understand how the company's operations are reflected in its financial statements. This
involves understanding the company's accounting policies, estimation techniques, and disclosure
practices, particularly those that are industry-specific such as depletion and depreciation
methods, asset retirement obligations, and the recognition and measurement of exploration and
evaluation expenditure.

Laws and Regulations: Understanding the laws and regulations applicable to a mining or
extractive company is crucial in assessing the company's compliance and identifying potential
legal and regulatory risks. This includes knowledge of financial reporting standards,
environmental regulations, labor laws, tax regulations, health and safety standards, and rights of
indigenous peoples, among others.

Identifying relevant financial reporting standards and regulations

The mining and extractive industry operates under a set of specific financial reporting standards
and regulations. Below are some of the key areas auditors should focus on:

Philippine Financial Reporting Standards (PFRS): PFRS has several standards that directly apply to
the mining and extractive industry. These include:

PFRS 6: Exploration for and Evaluation of Mineral Resources: This standard provides guidance on
the financial reporting of exploration and evaluation expenditures.

PAS 16: Property, Plant and Equipment: This standard covers the accounting for assets such as
plant, machinery, and equipment, which are significant in the mining industry.
PAS 36: Impairment of Assets: Impairment testing is critical for mining and extractive companies
due to the significant amount of capital expenditure they incur.

PAS 37: Provisions, Contingent Liabilities and Contingent Assets: This standard is relevant for
recognizing environmental remediation liabilities and decommissioning costs.

IFRIC 1: Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 20: Stripping Costs in the Production Phase of a Surface Mine

Regulatory Filings: In many jurisdictions, mining and extractive companies have to file specific
reports with government agencies or securities regulators. Auditors should understand these
reporting requirements, including the formats, deadlines, and contents of these filings.

Environmental, Social, and Governance (ESG) Reporting: With the increasing focus on
sustainability and corporate social responsibility, many mining and extractive companies now
report on their ESG performance. Auditors should understand the guidelines and standards for
ESG reporting, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting
Standards Board (SASB).

Tax Laws and Regulations: Mining and extractive companies often operate across multiple
jurisdictions and are subject to specific tax regulations, including those related to royalties and
resource rents. Understanding these tax requirements is crucial for auditors, especially in
verifying tax provisions and contingent tax liabilities.

Industry-Specific Regulations: Mining and extractive companies are subject to various industry-
specific laws and regulations, such as health and safety regulations, environmental laws, and
licensing requirements. Understanding these regulations can help auditors identify potential
compliance risks.

Engagement team selection and competence

The selection of an appropriate audit engagement team is crucial for the successful completion
of an audit, particularly in specialized industries such as mining and extractive. The audit team
must not only be competent in general auditing principles and practices, but they must also have
a good understanding of the industry, its operational complexities, and associated risks. Here are
some important considerations when selecting an audit engagement team:

Knowledge of the Industry: The engagement team should ideally include members who have
prior experience with mining and extractive companies or have specialized knowledge of the
industry. This includes an understanding of the industry-specific business practices, accounting
policies, and the regulatory environment. The team's collective industry knowledge will help in
identifying and assessing the unique risks associated with mining and extractive companies.
Audit Skills and Experience: The engagement team should have a good mix of skills and
experience levels. This includes members who are competent in core audit areas such as financial
statement auditing, internal control assessment, and risk management, as well as those who are
proficient in specialized areas such as environmental auditing, IT auditing, or forensic auditing.

Regulatory Knowledge: The audit engagement team should be knowledgeable about the
regulatory requirements applicable to mining and extractive companies. This includes
understanding the local and international laws and regulations related to environmental
protection, occupational health and safety, tax, and financial reporting.

Ethical Standards: All members of the engagement team should adhere to the highest ethical
standards, including independence, integrity, objectivity, confidentiality, and professional
behavior. These are fundamental to ensuring the quality and credibility of the audit.

03.5 Audit Procedures and Techniques in Mining Companies/Extractive Industry

Revenue recognition and sales

In the mining and extractive industry, revenue recognition and sales auditing are significant due
to the complex nature of the sales cycle and the high volume of transactions. Here are some
considerations auditors need to take into account when performing audit procedures in this area:

• Revenue Recognition Principles: According to the Philippine Financial Reporting Standards

(PFRS), specifically PFRS 15, revenue from contracts with customers should be recognized
when (or as) an entity satisfies a performance obligation by transferring a promised good
or service to a customer. In the mining industry, revenue is typically recognized at the point
of sale when control of the minerals or other extractive goods passes to the customer.

• Sales Contracts Review: Auditors should review the company's sales contracts to
understand the terms of sale, pricing mechanisms, and any unique arrangements with
customers. This can also help auditors verify that revenue has been recognized in line with
the terms of the contracts.
• Sales and Dispatch Documentation: Auditors should examine sales invoices, dispatch
documents, and shipping documents to confirm that sales have actually occurred and that
the goods have been delivered to the customers. The shipping documents can also be
used to verify the timing of revenue recognition.

• Cut-off Testing: Cut-off tests can be performed to ensure that sales are recorded in the
correct accounting period. This typically involves reviewing sales transactions around the
year-end to confirm that they have been recorded in the correct financial year.
• Sales Price Verification: In the mining and extractive industry, the sales price can be
subject to fluctuations due to changes in commodity prices. Auditors should verify the
 sales prices used for revenue recognition by comparing them with market prices or the
price indices for the relevant commodities.
• Revenue Reconciliation: Auditors can perform a reconciliation of the sales ledger with the
general ledger to identify any discrepancies. This can also help identify any unusual or
irregular transactions that may require further investigation.

• Assessment of Management Judgements: In certain situations, revenue recognition may

involve significant management judgement, such as when there are complex contract
terms or when there is a need to estimate variable consideration. Auditors should critically
assess these judgements and consider whether they are reasonable and consistent with
the applicable accounting standards.

Inventory valuation and stockpile measurement

Inventory valuation and stockpile measurement are critical areas in the audit of mining and
extractive companies due to the inherent complexities and significant judgments involved.
Auditors must pay special attention to how these companies measure and value their inventory,
which often includes mineral reserves, work in progress, and finished goods. Here are the key
considerations:

• Inventory Recognition and Classification: In the mining industry, inventory typically

includes raw materials, work in progress, finished goods, and supplies. Raw materials
could be in the form of unprocessed ores while work in progress could be partially
processed ores. Finished goods are typically processed minerals ready for sale. Auditors
should review the company's policies for recognizing and classifying inventory to ensure
they are consistent with industry practices and accounting standards.

• Stockpile Measurement: The measurement of stockpiles can be complex due to the

physical characteristics of the stockpile, like the uneven shape and the possible mixed
quality of the minerals. Companies often use measurement techniques such as drone
technology, 3D imaging, or traditional surveying methods to estimate the volume of the
stockpile. Auditors need to understand these measurement techniques, evaluate their
accuracy, and may consider using experts if necessary.

• Inventory Valuation: Inventory is typically valued at the lower of cost or net realizable
value, in line with the accounting standard PAS 2. The cost of inventory can include costs
of acquisition, production, and conversion, including appropriate allocation of overheads.
Given the fluctuations in commodity prices, auditors should also assess the net realizable
value, i.e., the estimated selling price in the ordinary course of business less the estimated
costs of completion and sale.
• Impairment Assessment: If there are indications that the value of the inventory has been
impaired (for example, due to a decline in market prices, spoilage, or obsolescence), an
 impairment test should be conducted, and any impairment losses should be recognized in
the profit or loss.
• Internal Controls over Inventory: Auditors should assess the company's internal controls
over the inventory process, including controls over the recording of production output,
the physical security of inventory, and the periodic inventory counts.

• Observation of Inventory Counts: If practical, auditors should observe the year-end

inventory counts to verify the quantities of inventory. Any discrepancies between the
company's count and the auditor's observation should be investigated.

Capital expenditure and depreciation of mining assets

Mining and extractive industries are capital-intensive, involving substantial investment in plant,
property, and equipment (PPE), including land, buildings, machinery, vehicles, and mine
development costs. The appropriate capitalization and depreciation of these assets are critical for
the accurate representation of a company's financial position and performance. Here's how
auditors approach these areas:

• Capital Expenditure: Auditors need to confirm that expenditures are correctly classified as
either capital or expense. According to the Philippine Accounting Standard (PAS) 16, an
item is capitalized if it is probable that future economic benefits associated with the item
will flow to the entity, and the cost of the item can be measured reliably. This typically
includes costs directly attributable to bringing the asset to its working condition, such as
installation costs, and in the case of mining, the costs of mine development and stripping
costs. Auditors should review the supporting documentation for significant capital
expenditures, such as invoices, contracts, and management approvals, to ensure they
meet the capitalization criteria and are correctly classified. They should also review the
company's capitalization policy to confirm it's consistent with accounting standards
.
• Depreciation: Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life. Auditors need to assess whether the company's depreciation
methods, rates, and useful life estimates are reasonable and consistent with the nature of
the assets and the industry practices. In the mining industry, assets often have a shorter
useful life due to the intense nature of extraction operations. For instance, the
depreciation of certain mining assets may be linked to the depletion of the mineral
resources. This approach, often referred to as units-of-production method, involves
calculating depreciation based on the proportion of the asset's output in the period
compared to its total estimated output.

• Impairment: According to PAS 36, at each reporting date, an entity is required to assess
whether there's any indication that an asset may be impaired. In the mining sector,
indicators of impairment could include significant declines in commodity prices, changes
in mineral reserves estimates, or adverse changes in the legal or regulatory environment.
 If any such indication exists, the entity should estimate the recoverable amount of the
asset. An impairment loss is recognized if the carrying amount of the asset exceeds its
recoverable amount.

• Verification of Existence and Condition: Auditors should also verify the existence and
condition of the capitalized assets. This may involve physical inspection of the assets or
review of asset registers, maintenance records, and insurance documents.

Asset impairment and reserve estimation

In the mining and extractive industry, two critical aspects that need auditors' special attention are
asset impairment and reserve estimation. Both these aspects have significant financial reporting
implications and often involve complex calculations and professional judgments.

• Asset Impairment: The carrying values of assets used in the mining and extractive
industries, such as property, plant, and equipment (PPE), and exploration and evaluation
assets, could be significant. As per Philippine Accounting Standard (PAS) 36 - Impairment
of Assets, companies must ensure that assets' carrying amounts are not more than their
recoverable amounts (the higher of fair value less costs of disposal and value in use).
Indicators of impairment could include significant declines in commodity prices, adverse
changes in the technological, market, economic, or legal environment, or the asset is idle,
part of a restructuring or held for disposal. If any such indication exists, the entity must
estimate the recoverable amount of the asset, and an impairment loss should be
recognized if the carrying amount exceeds the recoverable amount. Auditors should
critically assess the company's impairment testing process, the reasonableness of the
assumptions used, and the accuracy of the calculation of the recoverable amount.

• Reserve Estimation: Mineral reserves are the economically mineable parts of a company's
measured or indicated mineral resources. The estimation of these reserves can have a
significant impact on the financial statements, including the valuation of mining assets,
depreciation and amortization charges, and provisioning for decommissioning and
restoration costs. Reserve estimates are typically based on various geological, technical,
and economic factors, and often involve significant judgment and expertise. Auditors need
to understand the company's process for estimating reserves and the key assumptions
used. They should also consider whether an expert is needed to evaluate the
reasonableness of the reserve estimates. The disclosure of mineral reserves is also
important for the users of financial statements, and auditors should verify that the
disclosures comply with the regulatory requirements and accounting standards. In
auditing these areas, auditors should be mindful of the inherent uncertainties and the
potential for management bias, and they should exercise professional skepticism.
Environmental and decommissioning liabilities

Mining and extractive companies have significant environmental responsibilities and potential
decommissioning liabilities. The activities in these industries can have considerable
environmental impact and are often subject to strict regulatory requirements. As a result,
companies must recognize and estimate the costs of site restoration and closure, or
decommissioning liabilities. Auditors must pay special attention to these areas during the audit:

• Recognition of Decommissioning Liabilities: As per Philippine Accounting Standard (PAS)

37 - Provisions, Contingent Liabilities and Contingent Assets, a provision should be
recognized when the company has a present obligation as a result of a past event, it is
probable that an outflow of resources will be required to settle the obligation, and the
amount can be reliably estimated. In the mining industry, a decommissioning liability is
often recognized when the asset is acquired or developed. The corresponding cost is
capitalized as part of the cost of the related asset and depreciated over the asset's life.

• Estimation of Decommissioning Liabilities: Estimating decommissioning liabilities involves

significant judgment and expertise, considering the long time frames over which the
liabilities will be settled, the uncertainties regarding the methods and costs of
decommissioning, and the changes in the regulatory environment. Auditors should assess
the reasonableness of the company's estimates, including the underlying assumptions
about the timing and the amount of the future costs, the discount rates used, and any
changes in the estimates. Auditors might need to engage experts to evaluate the technical
and cost assumptions used in the estimates.

• Recognition and Measurement of Environmental Liabilities: Environmental liabilities could

arise from legal or constructive obligations to manage the environmental impact of mining
activities, such as obligations to treat and manage waste, to remediate environmental
damage, or to compensate for environmental damages. Auditors should evaluate the
company's process for identifying and measuring its environmental liabilities, and verify
that these liabilities are adequately recognized and measured in the financial statements
in accordance with PAS 37.

• Disclosures: Companies are also required to disclose information about their

decommissioning and environmental liabilities in their financial statements, including the
nature of the liability, an estimate of the timing of the outflows of resources, and the
major uncertainties affecting the amount or timing of those outflows. Auditors should
verify that the disclosures are complete and comply with the accounting standards. The
audit of environmental and decommissioning liabilities is critical due to the potential
materiality of these liabilities and the significant judgment involved in their recognition
and measurement.
Exploration and evaluation expenditure

The exploration and evaluation phase is a significant aspect of mining and extractive operations.
It involves searching for mineral resources, determining their commercial viability, and estimating
the volume and grade of the reserves. The accounting treatment of these exploration and
evaluation expenditures can significantly affect the financial statements of mining and extractive
companies. Here's what auditors need to know:

• Recognition of Exploration and Evaluation Expenditure: According to Philippine Financial

Reporting Standard (PFRS) 6 - Exploration for and Evaluation of Mineral Resources,
companies can choose their own accounting policy for exploration and evaluation
expenditures. They may either expense these costs as incurred or capitalize them as an
asset if certain criteria are met. Auditors should review the company's accounting policy
to ensure it's consistent with PFRS 6 and applied consistently.
• Capitalization of Exploration and Evaluation Expenditures: When the company's policy is
to capitalize exploration and evaluation expenditure, such costs are recognized as an asset
when it is probable that future economic benefits will flow to the entity and the costs can
be measured reliably. Typically, these costs include surveying, drilling, sampling, and
assessing technical feasibility and commercial viability. Auditors should review the nature
of the costs capitalized and ensure they meet the criteria for capitalization under IFRS 6.
They should also verify the accuracy of the amounts capitalized by examining invoices,
contracts, and other supporting documents.
• Impairment of Exploration and Evaluation Assets: Exploration and evaluation assets
should be assessed for impairment when facts and circumstances suggest that the
carrying amount may exceed its recoverable amount. PFRS 6 provides specific guidance
on the sources of information to consider in making this assessment and when to test
these assets for impairment. Auditors should assess whether the company has
appropriately considered the relevant indicators of impairment and whether any
impairment losses have been correctly measured and recognized.
• Disclosure of Exploration and Evaluation Assets: Companies are required to provide
disclosures about their exploration and evaluation assets and the related expenditures in
their financial statements. Auditors should ensure that these disclosures comply with the
requirements of PFRS 6.

Taxation and royalties

In the Philippines, mining and extractive companies are subject to several types of taxes and
royalties, which contribute significantly to their operating costs and financial performance.
Therefore, auditors need to understand the taxation and royalty obligations of these companies
and ensure these are correctly accounted for and reported. Here's an overview of these
obligations and the key audit considerations:
 • Corporate Income Tax: Mining companies, like other corporations in the Philippines, are
subject to Corporate Income Tax. Auditors should review the calculation of taxable income,
the application of the tax rates, and the recognition of income tax expense and liabilities.
They should also evaluate the treatment of tax losses and deferred tax in accordance with
the Philippine Financial Reporting Standards (PFRS).

• Excise Tax on Mineral Products: Under the Tax Reform for Acceleration and Inclusion
(TRAIN) Law, an excise tax is imposed on mineral products. The excise tax is based on the
actual market value of the mineral products, excluding actual and direct mining, milling,
and processing costs. Auditors should verify that the excise tax is correctly calculated and
paid, and that the tax expense is correctly recognized in the financial statements. They
should also assess whether the company complies with the related reporting and filing
requirements.

• Royalties to Indigenous Peoples: Mining operations in the ancestral lands of Indigenous

Peoples are required to pay royalties to the Indigenous Peoples, in accordance with the
Indigenous Peoples' Rights Act. The royalties are typically based on a percentage of the
gross output. They should also assess the company's compliance with the terms of the
agreements with the Indigenous Peoples and the related regulatory requirements.
• Other Taxes and Fees: Mining companies may also be subject to other taxes and fees, such
as Value Added Tax (VAT), local business taxes, environmental fees, and occupational
mining fees. Auditors should evaluate whether these taxes and fees are properly
accounted for and reported.

• Disclosures: Companies are required to disclose information about their taxation and
royalty obligations in their financial statements, in accordance with PFRS. Auditors should
verify that these disclosures are complete and accurate.

03.6 Audit Reporting and Communication

Auditor's opinion and report

The auditor's opinion and report communicate the auditor's findings and conclusions on the
company's financial statements and compliance with relevant regulations.

Examples:

Issuing an unqualified opinion if the auditor concludes that the financial statements are presented
fairly and in accordance with applicable accounting standards.
Issuing a qualified opinion, adverse opinion, or disclaimer of opinion in cases where the auditor
identifies material misstatements or limitations in the audit scope.

Key audit matters (KAMs) in the mining/extractive industry

KAMs are matters that, in the auditor's professional judgment, were of most significance during
the audit. They should be communicated in the auditor's report.

Examples:

• Complex valuation of mineral reserves and resources.

• Assessment of asset impairment and the reasonableness of key assumptions.
• Recognition and measurement of environmental and decommissioning liabilities.

Management representation letters

Management representation letters are written confirmations provided by the company's
management to the auditor, asserting the accuracy and completeness of information provided
during the audit.

Examples:

• Confirmation of management's responsibility for preparing the financial statements and

maintaining adequate internal controls.
• Representation that all significant transactions and events have been properly recorded
and disclosed in the financial statements.

Communicating with audit committees and regulators

Effective communication with audit committees and regulators is crucial for addressing audit
findings, discussing potential issues, and ensuring compliance with regulatory requirements.

Examples:

• Presenting audit findings and recommendations to the audit committee, discussing

significant judgments and estimates, and addressing any concerns raised by committee
members.
• Reporting any identified non-compliance with laws and regulations to the appropriate
regulatory authorities, as required by professional standards or local legislation.