Metalinc Ltd. is a mining company based in eastern Canada. Metalinc has 10 open-cut mines, most of which primarily extract iron ore. When the iron ore is extracted, a small amount of other minerals is produced as a by-product. Iron ore is sold on forward contracts to companies in other countries. The ore is shipped, unprocessed, in bulk by ship, with payment due when the ship leaves the Canadian port. Other minerals are sold on the spot market to both domestic and overseas customers.
The world market for minerals is highly dependent on economic conditions. In addition, payment is made by the foreign companies in a foreign currency, usually U.S. dollars. These conditions create major issues for Metalinc in terms of both foreign exchange volatility (which is partially hedged) and sales revenue volatility. When conditions are very adverse, Metalinc "mothballs" one or more of its mines. Mothballing is a process of closing down all operations except essential maintenance and safety operations; staff are dismissed or transferred to another mine if possible, and machinery is left idle.
Machinery is not normally transferred between mines because of the great distances between the mines. This means that depreciation is calculated over the life of the mine if that is shorter than the usual life of the machinery. Some machinery is leased, and other machinery is purchased outright. All purchase and disposal or scrapping decisions are made by the board of directors, although authority to make these decisions is granted to the mine manager for items of lesser value, in accordance with specified company policy.
Required
(a) Explain the implications of "mothballing" for auditing PPE.
(b) Design the audit procedures for PPE for Metalinc. Discuss the audit risks and their effect on your approach.