II.

Banking and Assurance

A. Nature and Background Nonperforming loans → generally considered bad debts and can affect a
Banking and finance sector - primarily responsible for mobilizing domestic bank’s cash flows.
savings and converting these funds into directly productive investments. * A low ratio of NPL to total gross loans = a healthy banking sector
* Banks perform the function of safekeeping money and valuables and * 2019, the ratio of NPL in the Philippines was almost 2%
extending loans
* Large banks (particularly the universal and commercial banks) are also Bayanihan Act RA No. 11469
allowed to engage in other intermediation activities such as investment - the law requires all lenders under BSP supervision to grant a 30-day grace
banking period or extension for the payment of loans due, without imposing
additional interest, penalties or charges on their borrowers.
Two general groups of financial system:
1. Banking institutions Know-your-customer (KYC) requirements for both over the counter and
*universal, commercial, thrift or savings banks and the rural and cooperative electronic or online transactions → to make sure that Filipinos continue to
banks. have access to basic government and financial services
* allowed to collect savings and time deposits to fund loans

2. Non-bank financial institutions

*insurance companies, pension fund institutions, investment banks, financing
companies, pawnshops and mutual fund institutions.
*not allowed to collect deposits but may encourage the general public to
invest household savings in various financial instruments.

Universal and commercial banks have the largest resources and offer the
widest variety of banking services outside of collecting deposits and providing
loans
* These other services include underwriting and other functions of investment
houses, investing in equities and non-allied undertakings.

Thrift banks → include savings and mortgage banks, private development

banks, stock savings and loan associations and microfinance thrift banks
- accumulate the savings of depositors and provide housing loans
and financing for short-term working capital
Rural and cooperative banks → promote and expand the rural community by
mobilizing savings and extending loans and other financial services to farmers
to help them Nature of banking risks (PFRS 9)
* Country risk – the risk of foreign customers and counterparties failing to
settle their obligation because of economic, political and social factors
* Credit risk – arises from lending to individuals, companies, banks, and
governments
* Currency risk – loss arising from future movements in the exchange rates
* Fiduciary risk – loss arising from factors such as failure to maintain safe
custody or negligence in the management of assets on behalf of the other
parties
* Interest rate risk – a movement in interest rates would have an adverse effect
on the value of assets and liabilities or would affect interest cash flows
Overview, Updates, Statistics of the Specialized Industry in the Philippines
* Liquidity risk – loss arising from the changes in the bank’s ability to sell or
dispose an assets
The Bangko Sentral ng Pilipinas (BSP)
* Operational risk – direct or indirect loss resulting from inadequate or failed
- the independent central monetary authority of the Philippines that has
internal processes, people and system or from external events
regulatory and supervisory power over banks and non-bank financial
* Price risk – loss arising from adverse changes in market prices
institutions.
* Regulatory risk – arising from failure to comply with regulatory or legal
- supervises the nation’s banking system
requirements in the relevant jurisdiction in which the bank operates
Insurance Commission – overseen the insurance companies
* Solvency risk – loss arising from the possibility of the bank not having
SEC – overseen the investment houses
sufficient funds to meet its obligations
Note: The share of financial intermediation output to total service sector
In expressing an opinion on the bank’s financial statements, the auditor:
output as well as to gross domestic product has continually increased
* adheres to any specific formats and terminology specified by the law, the
Commercial banks
regulatory authorities, professional bodies and industry practice
- accepting deposits and offer checking account services
* determines whether adjustments have been made to the accounts of foreign
- the largest group of financial institutions
branches and subsidiaries that are included in the consolidated financial
- most popular among customers with different financial needs
statements of the bank.
because of its wide array of financial services.
When bank is required to prepare a single set of FS, auditor may express:
* October 2020 - the value of loans granted by universal and commercial banks
- totally unqualified opinion only if → the FS have been prepared in
in the Philippines amounted to nearly 9.7 trillion
accordance with both frameworks (RAP & GAAP).
* 364 billion pesos → granted for motor vehicle loans for household
- unqualified opinion in respect of compliance with that framework → if the
consumption
FS is in accordance with only one of the frameworks
* 1.6 trillion pesos → granted for production of real estate businesses
- a qualified or adverse opinion in respect of compliance with the other
framework → if the FS is not in accordance to such framework
When the bank is required to comply with RAP instead of GAAP → the auditor
considers the need to refer to this fact in an emphasis of matter paragraph.

C. Checklist of BSP Requirements

* external auditor shall start the audit → not later than thirty (30) calendar
days after the close of the calendar/fiscal year
* Audited financial statements (AFS) of banks with subsidiaries shall be
presented side by side on a solo basis and on a consolidated basis (banks and
subsidiaries).
* The FAR shall be submitted by the bank → not later than one hundred
twenty (120) calendar days after the close of the calendar year or fiscal year

PFRS 9
https://drive.google.com/file/d/1jtLa5mD-
TYgdeyGe_phrMmfliVqCbjfS/view?usp=sharing

III. BPO Industry

A. Nature and Background

Business process outsourcing (BPO)
- the transfer of a company’s non-core activities to a third party that uses
information technology for service delivery
- transfer of the management and/or day-to-day execution of an entire
business function/process to an external service provider

* ICT innovation with increasingly production processes → encouraged the

outsourcing of labor-intensive services to countries
* Philippines serves as a leading destination for BPO
* BPO sector growth in the Philippines is driven by a host of factors, chief
among them the following:
✓ low labor costs
✓ a highly skilled and educated workforce
✓ widespread command among the workforce of a relatively neutrally
accented English language
✓ competitive infrastructure
 ✓ government tax incentives. * However, in no case shall a registered pioneer firm avail of this incentive for
a period exceeding 8 years.
Types of BPO
Onshore Outsource - When an organization hires a service provider that is b. Additional Deductions for Labor Expense
located in the same country. - for the first 5 years from registration → a BOI-registered
Nearshore Outsource - When an organization hires a service provider in a enterprise shall be allowed an additional deduction from the
neighboring country. taxable income of 50% of the wage of additional workers in the
Offshore Outsource - When an organization hires a service provider in a direct labor force if the project meets the prescribed ratio of
different country. It is also called offshoring. capital equipment to number of workers set by the BOI.

Organizations contract with BPO vendors for two main areas: 2. Special Economic Zone Act of 1995 (PEZA Law)
1. Back-office services - include internal business processes, such as billing or - passed in 1995 to encourage economic growth through establishment of
purchasing. economic zones or “ecozones” that are treated as separate customs territory
2. Front-office services - pertain to the contracting company’s customers, such with minimal government intervention.
as marketing and tech support. - these ecozones are managed and operated by the Philippine Economic Zone
Authority (PEZA).
The BPO industry is also composed of seven sub-sectors: - Similar to OIC, not all business activities may register with PEZA. Registrable
1. Knowledge process outsourcing and back offices activities are limited to priority areas of investment. Registration procedures
2. Animation differ for each particular type of activity to be registered.
3. call centers
4. software development - PEZA-registered entities enjoy numerous fiscal incentives. Incentives which
5. game development may be applicable are as follows:
6. engineering design • Income Tax Holiday - A PEZA-registered BPO enjoys the same ITH incentive
7. medical transcription as a BOI registered outsourcing company.
• Special Income Tax Rate of 5% - Upon expiry of the ITH period, a PEZA-
registered entity may avail itself of a special tax rate of 5% of its gross income
in lieu of all other national and local taxes.
• Exemption from National and Local Taxes and Licenses – a PEZA-registered
entity shall be exempt from payment of all national internal revenue taxes and
all local taxes and fees. In lieu thereof, it shall pay a special 5% final tax on gross
income.
• Zero-Rate Value-Added Tax (VAT) - Sales to PEZA-registered entities are
deemed export sales; hence, such enjoy a preferential VAT rate of zero percent
(0%).
Deduction for Organization and Pre-Operating Expenses Tax and Duty-Free
Importation of Materials, Capital Equipment, Machineries and Spare Parts
• Additional Deductions from Taxable Income - Similar to a BOI-registered
enterprise, a PEZA-registered BPO can avail of the 50% additional deduction
for labor expense. In addition, it may also claim an additional deduction for its
training expenses.

3. Cagayan Special Economic Zone Act of 1995 (CEZA Law)

- established the Cagayan Special Economic Zone and aimed to effectively
encourage and attract legitimate and productive foreign investments.
- Business establishments registered with CEZA and operating within the zone
shall be entitled to the existing fiscal incentives as provided under Presidential
Decree No. 66, the law creating the Export Processing Zone Authority (EPZA
Law) or those provided under the OIC. Thus, incentives applicable to BPOs are
Incentive Regimes for BPOS
as follows:

1. Omnibus Investments Code (OIC)

Income Tax Holiday - CEZA-registered enterprises are entitled to 4-6 years ITH
- passed in 1987 to encourage investments in desirable areas of activities and
provided it belongs to qualified industries.
to provide a cohesive and consolidated investment incentives law.
Special Income Tax Rate of 5%
- The Board of Investments (BOI) → to regulate and promote investments in
Other applicable incentives under EPZA Law and OIC, such as:
priority activities as defined in the annually prepared Investment Priorities Plan
a) tax treatment of merchandise in the Zone;
* To avail of the incentives under the OIC, a company must be registered with
b) tax and duty -free importation of articles, raw materials, and capital
the BOI.
goods;
* BOI-registered enterprises may avail of several fiscal incentives subject to
c) exemption from local taxes and licenses;
the fulfillment of certain conditions. The most notable incentives are:
d) additional deduction for labor expense;
a. Income Tax Holiday - BOI-registered enterprises shall be fully
e) additional deduction for labor training expenses; and
exempt from income taxes in the following instances:
f) deduction for organization and pre-operating expenses.
a) new pioneer projects for 6 years
b) new non-pioneer projects for 4 years
B. AUDIT CONSIDERATIONS / MAJOR AREAS OF AUDIT SIGNIFICANT ON A
c) expansion projects for 3 years
BPO INDUSTRY
d) new or expansion projects in less developed areas for 6 years.
THE NEED FOR AN AUDIT
- Internal audit also helps in verifying the controls in place within the entity
* Subject to guidelines as may be prescribed by the BOI, the income tax
with regard to sufficiency and effectiveness in the light of overall business.
exemption may be extended for another year.
- Internal audit also helps in assessing the risks faced by the entity and provide - The IA is required to seek explanations from the management for
a method for management of the same. such significant fluctuations and understand the reason for such
- Internal controls and risk management are extremely important activities in fluctuations.
an entity operating in the BPO Industry. - provide an insight on the effectiveness of the management in
operations apart from ensuring that there has not been any fraud
Audit Process during the period.
1. Planning b. Significant fluctuations in Revenue from a Contract
a. Send audit notification letter - This will provide a deeper insight of the risks faced by the internal
b. Gather background information auditor and also a deeper understanding of the client’s business
c. Identify risks apart from identifying irregularities
d. Create audit program c. Revenue per Employee Project-wise
2. Entrance Meeting - the IA can compute the revenue generated by a contract during a
a. Discuss planned audit period per employee and compare the same with a different
b. Solicit input period.
c. Explain timing and resources - this would help the internal auditor to assess the change in
3. Fieldwork revenue per employee and the effectiveness of an employee on a
a. Conduct interviews project over a period of time
b. Review documentation and process
c. Test transactions and documentation d. Operating Costs to Revenue Ratio
4. Exit Meeting - The internal auditor can understand the project’s performance in
a. Discuss audit results relation to other projects
b. Resolve questions and concerns
c. Discuss corrective action plans e. Revenue Earned per Hour (Project-wise)
5. Reporting - This would help the internal auditor analyze the effectiveness of
a. Provide draft report for comments controls related to the billing cycle.
b. Obtain corrective action plans
c. Distribute final report to appropriate and required individuals f. Total Calls Handled to Total Calls Received, Calls Resolved to Calls
6. Follow-up Handled
a. Interview staff - the management, generally, have data pertaining to the total calls
b. Review new processes and documentation received and total calls handled.
c. Re-audit - to ensure that the calls handled is not significantly low as
Invoicing compared to the calls received (quality)
- BPOs, generally, follow the below mentioned billing methods and the method
is built into the contract with the client. g. Project-wise Profitability and Budgeted Profit Margins
- In, general, most BPOs bill the client for the services rendered at the end of Comparison
the month. - internal auditor to verify as to whether there is a significant
- the internal auditor should understand the billing cycle for each of the client fluctuation in profitability between projects.
and the process followed by the entity to ensure cut-off on a periodic basis. - In cases of significant fluctuations, the IA needs to verify whether
profitability ratio is in accordance with the budgeted profitability
Types of Billing ratio. Deviations should be noted and proper explanations for
1. Per Call – Generally, voice-based support service providers bill on this basis. deviations need to be obtained.
The billing can be done on the basis of no. of calls attended or on the basis of
time per call on an average. h. Delays in Raising Invoices to Total Invoices
- Reasons for such delays could throw light to inherent weaknesses
2. Per Transaction – done in the case of data entry, insurance, medical in control.
processing, etc., where the base is the no. of transactions handled.
i. Percentage of Errors and Rejections
3. Per Time – done for the no. of minutes/ hours/ days the entity has provided - verify the quality of work performed through measurement of
service to the client. In general, the client places a no. of ceiling caps to ensure ratios of total errors and rejections as against the total volume of
good performance and to prevent intentional excessive billing. work handled.
- to assess legal and compliance risk, entity’s effectiveness in
4. Full Time Equivalent – where services in the nature of research are provided handling projects apart from obtaining a deeper understanding
by the entity, the billing is done on the basis of Full Time Equivalent (FTE). about the management’s initiative.
Notes:
5. Cost plus Basis – in cases of Captive Service Provider or Wholly Owned * These ratios should be prepared and compared over a period of time.
Subsidiary, a mark-up is agreed between the holding company and its * If these ratios are inconsistent over that period, proper explanations need to
subsidiary. The billing is done on the cost-plus mark-up. be obtained
* It should also be verified whether the entity monitors such ratios on a regular
Note: Certain contracts may act as an embedded derivative, wherein the client basis.
may agree to bear the loss on account of wide appreciation in the value of
foreign currency, provided the foreign exchange rate moves below a particular Service Level Agreement Adherence
base rate. - to ensuring that the quality of work performed is in accordance with that
required by the agreement.
Analytical Procedures - in case the entity is unable to meet its SLA, for the entity to ensure compliance
a. Operational Margins Period with SLA through providing of incentives for employees, training and other
- the internal auditor may compute the operational margins methods.
- compliance with SLA requirements gains importance considering that it helps
in brand building and client satisfaction
 - the internal auditor can assess the movement in employees for a month in
A step-by-step procedure that outsourcing service providers can use for comparison with another by tracing the additions and deletions due to
ensuring the quality-of-service deliverables is given below: additions, terminations, retirements.
i. Test viability of service deliverables
ii. Tweaking the processes, if required OPERATING COSTS
iii. Deploying quality management systems a. Lease Expenses → could be of the nature of leasing of office building for
iv. Tracking project progress and providing feedback work space, or leasing of assets for official purpose or accommodation
provided to the employees.
Note: b. Communication Expenses → represents expenses in the nature of leased
* the internal auditor can verify the compliance of SLA on a month-to-month line charges and is considered significant in comparison to other costs.
basis c. Recruitment and Training Expenses → considered to be high considering
* verify whether the Service Level is sufficiently higher than that prescribed the high attrition and turnover ratio of the industry and its growth over the
by the client to ensure compliance with the terms of the agreement and also past few years. Most entities have contracts with HR Consultants and reputed
continuity of service. trainers to ensure that the costs are controlled.
d. Sub-contracting Expenses → Some BPOs sub-contract a part of their
Payroll operations to an external party. This can be done so only if agreed to by the
- the highest cost for any entity operating in the BPO Industry. parties.
- IA needs to ensure that proper, adequate and appropriate cutoff procedures e. Logistics → most employees use the logistics provided by the entity to
are in place to ensure proper computation and disbursement of salary to the commute to work place.
employees. - entities enter into contracts with logistic providers in order to limit their
liability and manage them professionally. The entity must maintain sufficient
Certain entities operating in the BPO Industry provide an opportunity for controls for proper usage of vehicles.
employees to take ownership in the company through issue of stocks.
• Stock Awards Note:
• Employee Stock Option Plan * The auditor should verify the systems, processes, controls and procedures
• Employee Stock Purchase Plan built within the system so as enable smooth and proper movement of the
The auditor through his internal audit procedures is required to find out employees to and from the work place.
whether any fictitious employees are employed in the organization. * There should also be proper controls for usage of logistics for purpose of
business only.
Time Sheet → a method for recording the amount of a worker's time spent on * The auditor is also required to verify the procedures and controls for
each job. capturing of specific expenses with regards to its sufficiency, appropriateness
- places a very important role in estimation of the cost incurred for every and efficiency.
project by the entity. * The internal auditor needs to ensure that common expenses are allocated
across these undertakings in a justifiable basis.
Analytical Procedures
Analytical Procedures
a. Productive Hours Ratio a. Total Fixed Cost
- a measure of the efficiency of the work force during a particular period. - significant increases in the total fixed cost signals expansion activity.
- the internal auditor can understand the motivation level of employees, steps - the internal auditor needs to verify the sufficiency of controls with respect
taken by the management towards maintaining efficiency and to some extent to the growing entity.
the trend of attrition.
b. Operating Cost to Revenue (Undertaking-wise)
b. Manpower on Client Project to Total Manpower - provide a basis auditor can estimate the operating cost
- helpful to estimate the importance of a project in terms of manpower - for evaluating the cost effectiveness of operating in each of the undertakings
requirement.
- if there is a decline in the manpower and if there is no consequent decline in c. Variable Cost per Man Hour per Undertaking
revenue, the internal auditor needs to verify this anomaly - compare with different periods to verify whether there has been a significant
increase/ decrease in the expense and identify reasons for the same.
c. Average Employee Cost per Head per Project
- the internal auditor may compare this information between different d. Penalty Costs to Total Cost
periods, or with other projects, where the services rendered are of a similar - the internal auditor can estimate the significance of penalty cost in must be
nature. viewed seriously by the internal auditor

d. Employee Turnover Ratio v. Interest Cost to Loans

- helps the internal auditor to verify the attrition rate and assess the entity’s - provide a basis for the estimation of the average cost of borrowed funds in
effectiveness and steps taken towards prevention of attrition and retention of the entity.
key employees. - estimate the average cost of borrowing and compare them with the existing
- in case of employee turnover ratio being higher than the industry, the internal rate to verify whether the interest paid is significantly high.
auditor must obtain explanations for the reason for such high turnover ratio.
FIXED ASSETS
e. Revenue Generated by an Employee against Incentive Paid For the BPO Industry, in general, the fixed assets may be that of the entity’s or
- by comparing the revenue earned through an employee and the incentive provided by the client:
paid to him, the internal auditor can ensure compliance of the incentive → to prevent theft of confidential information of the client which may be
schemes in place within the organization. subject to Intellectual Property Rights.
→ also include software provided by the client on which the entity might be
f. Reconciliation with Respect to Changes in the Number of Employees working or owned by the entity itself.

Analytical Procedures
(i) Total laptops and desktops to on-field employees * the work area would not be reasonably accessible by an outsider without
- the internal auditor can verify the employees on-site and the laptops proper security check and prior authorization to ensure safety of data and to
provided to them (grade-wise). prevent theft thereto.
* internal auditor needs to verify the sufficiency of control of data.
* IA should also obtain explanations for any loss/ damage of data, if any
(ii) Total EPABX to number of on-field employees during the reporting period apart from steps taken to prevent them in the
- employees / EPABX installed future.
- help the internal auditor to verify the control in laptops given to the
employees. RISKS FACED BY A BPO INDUSTRY
Business risk – change in scope of services
(iii)Asset utilization ratio Price risk – result in a loss or significant reduction in profitability
- total revenue/total assets. Political risk – degree to which social and governmental environments may
- helps the internal auditor to assess the effectiveness of assets with respect change in the future.
to the revenue generated by the entity. Process risk - possibility that the processes used to deliver a service might need
- greater the asset utilization ratio → the higher the efficiency of operations to change dramatically during the term of a sourcing arrangement.
Human capital risk – arises from the risk that an enterprise’s investment in
Note: human resources might lose value due to the departure of individuals
* If the internal auditor is required to perform fixed asset verification Brand/ Reputation risk - significant in such customer-facing “front office”
procedures too as part of the scope of his work, the auditor can refer to services. However, even non-voice interactions with customers can have the
Guidance Note on Audit of Fixed Assets. same impact on an enterprise’s goodwill.
* Audit techniques which the internal auditor can perform for verification of Systemic risk - risks to the systems that support local and global economies.
assets includes: Accessibility risk, Business continuity, Security risks – risks of loss of
- verification of laptops at the time of logging on to the accessibility to the service provider, loss of the service provider’s services and
server/network monitored through a special software impairments to the security of confidential, proprietary, trade secret, private
- verification of software licenses and validity and protected information.
- number of licenses against number of computer systems used for Technology risk – risk that an entity faces due to change in technology or
specific purpose and so on. obsolescence of existing technology.

RELATED PARTY TRANSACTIONS Maintenance of Books of Accounts and Documents

- sufficient controls should exist within the organization to ensure that all - The internal auditor is required to verify the sufficiency of controls related to
transactions with related parties are identifiable and monitored. maintenance of books of accounts by the entity.
- transactions could be in the nature of the service provided by the entity to its - The internal auditor is also required to verify the controls for allocation of
holding company or in the nature of other transactions, not related to costs between different project
operations that are transacted on a routine basis (deputation of manpower,
payment of dividends, reimbursing costs incurred on behalf of the holding Compliance with Regulations
company). - The internal auditor is required to verify the compliance of these statutes
- internal auditor is also required to verify the transfer pricing implications and report thereon as part of his internal audit.
faced by the entity with regards to controls and processes in the entity to - The internal auditor also needs to verify registration with various statutory
ensure proper estimation of arm’s length price. authorities and renewal of the same as part of his internal audit procedures.
Arm’s length price → a price which is applied or proposed to be applied in a
transaction between persons other than associated enterprises, in IV. Mining Industry
uncontrolled conditions
A. Nature and Background
DATA SECURITY
Dangers: * Mining industry sector is a major backbone of the Philippine economy
Natural Calamity → fire, flood, earthquake, falling elephants * The long history of the industry has been much affected by the vicissitudes
Theft of Data → a growing problem primarily perpetrated by office workers of the international market, as well as other domestic factors
with access to technology * The Philippines is the fifth most mineral-rich country in the world for gold,
System Crash → a condition where a program stops performing its expected nickel, copper, and chromite. It is home to the largest copper-gold deposit in
function and also stops responding to other parts of the system. Often the the world.
offending program may simply appear to freeze * A country’s socio-economic development largely depends on the extent and
Computer Fraud → using the computer in some way to commit dishonesty by composition of its natural resources.
obtaining an advantage or causing loss of something of value * Mining and mineral processing → activities for extraction and processing
System Bugs → an error, flaw, mistake, failure, or fault in a computer program minerals for commercial use.
or system that produces an incorrect or unexpected result. Most bugs arise * The mining sector is likely to contribute to the development of the economy
from mistakes and errors made by people of any country through taxes from large-scale mining companies and
Power Failure, Accidental Deletion/ Modification → common type of problem contribute to social economic infrastructural development
faced by many small entities due to lack of sufficient infrastructure and also The mining sector can:
training to the employees ✓ create employment opportunities both directly in the mines and
Hacking → indirectly on services to the mines,
Telecommunication Failure → telecommunication network fails which might ✓ provide education and health services,
result in freezing of flow of data from and to the computing system ✓ increase foreign exchange reserves, (reducing a country’s foreign
Virus Problem → a computer program that can copy itself and infect a exchange deficit),
computer. ✓ improve infrastructure like roads and water supply, and
Unknown Risks → threat to data due to other reasons not included above ✓ create other economic activities to support the mines instead of
importing all supplies from abroad.
Note:
* The data of both the client and the entity needs protection. Definitions according to the United Nations Environmental Program (UNEP)
Mining → could simply extraction of minerals be “the from the earth”.
Minerals → in this case would cover a wide variety of naturally occurring
substances extracted for human use.
* mining can also be seen as a process that begins with the exploration and - Audit Objectives
discovery of mineral deposits and continues through ore extraction and Audit Objectives should be realistic and achievable and give sufficient
processing to the closure and remediation of worked-out sites. information to audited organizations about the focus of the audit. It can be
* minerals are a non-renewable resource, so mining represents a temporary general with sub-objectives
use of the land.
- Audit Criteria
MINING LIFE CYCLE (EPM-SMA) Audit criteria are a key contributor to an audit’s strength and potential impact.
1. Exploration Suitable criteria are RUN-CR
- Exploration activities encompass all actions in the field that precede feasibility
studies. 3. Examination
Activities: - Evidence collection
- initial reconnaissance flights and geophysical surveys Main sources of evidence:
- stream sediment studies a. A review of relevant documents
- other geochemical surveys b. Interviews
- construction of access roads c. Testing of Controls and IT systems
- clearing of test drilling sites d. Site Visits
- installation of drill pads - Subject matter experts
- drilling rigs, benching - Consultation
- trenching/pitting - Results analysis
- erection of temporary accommodation - Cause and effects analysis
- power generation for exploratory drilling.
- determining the location, size, shape, position, and value of a body Challenges involved in Auditing Mining Revenues
of ore using prospecting methods • The technical complexity of extractive industries
• Lack of knowledge of business about processes in the extractive
2. Project Development industries
- conducting a feasibility study including a financial analysis to decide whether • The need for capacity building and retention of specialized staff
to abandon or develop the property; designing the mine; acquiring mining within audit offices
rights; filing an Environmental Impact Assessment (EIA); and preparing the site • Mandate limitations
for production.
Activities: B. Auditing Financial Assurances for Site Remediation
- overburden stripping and placing, * A mining company prepares and submit a remediation plan for a mining site,
- road/trail, building and/or helicopter transport complete with a remediation cost estimate
- drilling and trenching, * A government agency validates the remediation plan and the cost estimate.
- erecting treatment plants, * The government agency collects the financial assurances for the remediation
- preparing disposal areas, and constructing services * Over the operational life of the mining site, the government agency may
- infrastructure such as power line or generating plants, railways, periodically inspect the site, update the cost, and collect additional financial
water, supplies and sewerage, laboratories and amenities assurances as needed.
* Once the company cleans up the mining site, a government agency inspects
3. Mine and milling the site. If the remediation standards are met, a certificate of remediation is
4. Smelting and refining issued and the financial assurance is released back to the company
5. Mine closure
6. Abandoned mine/rehabilitation 4. Reporting
- Conclusions and recommendations
* The latest disclosure (2018 EITI Report) shows the mining sector contributes - Clearance
the most in the sector with 0.89% to GDP and 5.99% to total exports - Final Report
* the Philippines is only behind Indonesia as the world's leading producer of - Communication
nickel Report Composition:
* The Philippines has the world's third largest reserves of gold Introduction
* The Philippines has the world's fifth largest reserves of nickel - Auditor should state why they carried out the audit
- Provide an answer to “so what?” question that readers might pose
Audit Process (APER)
A. Auditing Revenues from the Extraction of Minerals Presentation
1. Audit Selection - Use of charts and diagrams in order for auditors to effectively present useful
- Strategic Planning context without using too many words IFRS/PFRS 6
- Knowledge of business and risk assessment
Recommendations
2. Planning - Requires much thought, discussion, and professional judgement
- Knowledge of business and risk assessment
Sources of Revenues: IFRS 6 Exploration for and Evaluation of Mineral Resources
* From Exploration Phase → fees charged for leases and licenses, - has the effect of allowing entities adopting the standard for the first time to
penalties, auction of exploration rights use accounting policies for exploration and evaluation assets that were applied
* From Production Phase → royalties before adopting IFRSs.
* Revenues in the form of fines paid by private sector companies - It also modifies impairment testing of exploration and evaluation assets by
- Audit focus introducing different impairment indicators and allowing the carrying amount
- Audit approach
to be tested at an aggregate level (not greater than a segment).
Distinguishing Characteristic of Natural Resources
1. Physically extracted in operations.
2. Replaceable only by an act of nature.
The IFRS:
(a) permits an entity to develop an accounting policy for exploration and Cost of Natural Resources
evaluation assets without specifically considering the requirements of 1. Acquisition Cost
paragraphs 11 and 12 of IAS 8. 2. Exploration Cost
(b) requires entities to perform an impairment test on those assets when facts 3. Development Cost
and circumstances suggest that CA > Recoverable amount 4. Restoration Cost
(c) varies the recognition of impairment from that in IAS 36 (Impairment of
Assets) but measures the impairment in accordance with that Standard Depletion → allocation of the cost to expense in a rational and systematic
manner over the resource useful life. Companies generally use units-of-output
Objective of IFRS 6 method. Depletion generally is a function of units extracted
The IFRS requires: Depletion Total Cost – Residual Value / Total Estimated Units Available
1. limited improvements to existing accounting practices for exploration and
evaluation expenditures. Depreciation of Mining Property
2. entities that recognize exploration and evaluation assets to assess such Depreciation Equipment used in mining operations is based on the useful life
assets for impairment in accordance with the IFRS and IAS 36 of the equipment or the useful life of the wasting asset, whichever is shorter.
3. disclosures that identify and explain the amounts in the entity’s financial Note:
statements arising from the exploration for and evaluation of mineral If the life of the equipment is shorter → Straight-Line Method
resources If the life of natural resources is shorter → Units of Output Method
If the mining equipment is movable → Straight-line method is used over
Scope its total useful life
An entity shall apply the IFRS to exploration and evaluation expenditures that
it incurs. Changes in Accounting Policies
An entity shall not apply the IFRS to expenditures incurred: An entity may change its accounting policies for exploration and evaluation
(a) before the exploration for and evaluation of mineral resources, such as expenditures if the change makes the financial statements more relevant to
expenditures incurred before the entity has obtained the legal rights to explore the economic decision-making needs of users and no less reliable, or more
a specific area. reliable and no less relevant to those needs. An entity shall judge relevance
(b) after the technical feasibility and commercial viability of extracting a and reliability using the criteria in IAS 8.
mineral resource are demonstrable
Presentation
Definition Classification of exploration and evaluation assets
Exploration for and evaluation of mineral resources → means the search for An entity shall classify exploration and evaluation assets as tangible or
mineral resources, including minerals, oil, natural gas and similar non intangible
regenerative resources after the entity has obtained legal rights to explore in a Examples: Tangible - vehicles and drilling rigs Intangible - drilling rights
specific area, as well as the determination of the technical feasibility and Tangible asset → is consumed in developing an intangible asset
commercial viability of extracting the mineral resource. Intangible asset → the amount reflecting the consumption of tangible asset
Exploration and evaluation expenditures → expenditures incurred in Note: However, using a tangible asset to develop an intangible asset does not
connection with the exploration and evaluation of mineral resources before change a tangible asset into an intangible asset
the technical feasibility and commercial viability of extracting a mineral
resource is demonstrable. Reclassification of exploration and evaluation assets
An exploration and evaluation asset shall no longer be classified as such when
Measurement the technical feasibility and commercial viability of extracting a mineral
Measurement at recognition - measured at cost. resource are demonstrable.
Measurement after recognition - either cost model or revaluation model
* If the revaluation model is applied (either the model in IAS 16 Property, Plant Impairment
and Equipment or the model in IAS 38) it shall be consistent with the Recognition and measurement
classification of the assets * Assets shall be assessed for impairment when facts and circumstances
suggest that CA > Recoverable amount
The following are examples of expenditures that might be included in the initial * When it is proven, an entity shall measure, present and disclose any
measurement of exploration and evaluation assets (the list is not exhaustive): resulting impairment loss in accordance with IAS 36
a. acquisition of rights to explore; * For the purposes of exploration and evaluation assets only, paragraph 20 of
b. topographical, geological, geochemical and geophysical studies; this IFRS shall be applied rather than paragraphs 8–17 of IAS 36
c. exploratory drilling; Paragraph 20 uses the term ‘assets’ but applies equally to separate exploration
d. trenching; and evaluation assets or a cash-generating unit
e. sampling; and
f. activities in relation to evaluating the technical feasibility and One or more of the following facts and circumstances indicate that an entity
commercial viability of extracting a mineral resource should test exploration and evaluation assets for impairment:
a. the period has the right to explore in the specific area has expired
Expenditures related to the development of mineral resources shall not be during the period or will expire in the near future, and is not
recognized as exploration and evaluation assets → The Framework 1 and IAS expected to be renewed.
38 Intangible Assets b. substantive expenditure on further exploration for and evaluation
of mineral resources in the specific area is neither budgeted nor
IAS 37 Provisions, Contingent Liabilities and Contingent Assets planned.
- an entity recognizes any obligations for removal and restoration that are c. exploration for and evaluation of mineral resources in the specific
incurred area have not led to the discovery of commercially viable
 quantities of mineral resources and the entity has decided to
discontinue such activities in the specific area.
d. sufficient data exist to indicate that, although a development in the
specific area is likely to proceed, the carrying amount of the
exploration and evaluation asset is unlikely to be recovered in full
from successful development or by sale

Specifying the level at which exploration and evaluation assets are assessed
for impairment
Each cash-generating unit or group of units to which an exploration and
evaluation asset is allocated shall not be larger than an operating segment
determined in accordance with IFRS 8 Operating Segments

Disclosures
An entity shall disclose information that identifies and explains the amounts
recognized in its financial statements arising from the exploration for and
evaluation of mineral resources.
To comply with paragraph 23, an entity shall disclose:
(a) its accounting policies for exploration and evaluation expenditures
(b) the amounts of assets, liabilities, income and expense and operating and
investing cash flows
Note: An entity shall treat exploration and evaluation assets as a separate class
of assets and make the disclosures required by either IAS 16 or IAS 38
consistent with how the assets are classified