Gold Explorers Inc. is a major Canadian gold mining corporation. Gold Explorers has mines and development projects in Canada (Northern Ontario and British Columbia), the United States, and South America. Shares of Gold Explorers trade on three major international stock exchanges—New York, Toronto, and London. Gold Explorers is known as one of the lowest-cost producers of gold worldwide, and in the current fiscal year it achieved record gold production levels. Due to the record levels, revenues increased this year. Revenues grew from $1,357 million last year to $1,432 million in this year’s draft financial statements (all dollar figures are U.S. dollars). Corresponding gross profit figures are $642 million for last year and $678 million for the current year.

Terrence, chair and CEO of Gold Explorers, is known throughout the Canadian mining industry as a man of principle and integrity. He governs Gold Explorers in accordance with three key guiding principles, which he articulated in 1978 when he founded the company. These principles are entrepreneurial management, financial discipline, and corporate responsibility. Adherence to these principles has given Gold Explorers a stable and dedicated workforce, and a strong balance sheet that includes $623 million in cash, virtually no net debt, and shareholders’ equity of just over $3 billion ($3,023 million). In addition, Gold Explorers boasts an “A” credit rating and has access to a $1-billion line of credit. Gold Explorers’ efforts with respect to corporate responsibility have been recognized internationally, and the company was awarded eight major awards for environmental protection in the past four years. In spite of this, however, Gold Explorers has had to expend some money on site restoration in the past in order to meet the requirements of environmental compliance orders.

Your firm has been Gold Explorers’ auditors for the past eight years. In that time, there have been very few misstatements discovered during the audits that have required adjustments to the draft financial statements. In fact, Raj, the partner in charge of the audit, and Margaret, audit manager, have found the audit to be almost routine in the past four years of their involvement with Gold Explorers. However, this year promises to be a little different. Responding to the need for consolidation in the industry, Gold Explorers merged this year in an all-share deal with a major U.S. gold company that had significant mining operations in Canada. Furthermore, immediately prior to year end, Gold Explorers reassessed the carrying value of its capital assets. The reassessment resulted in a $1.1-billion writedown of Gold Explorers’ property, plant, and equipment assets to a carrying value of $3,565 million. Even with this writedown, Gold Explorers’ total assets remain at a substantial $4,535 million; however, the writedown resulted in a significant net loss before taxes of $944 million in the current year, compared with net incomes before taxes of $441 million and $443 million in the preceding two years.

Required

a. Identify eight factors that Margaret needs to consider that would affect her assessment of audit risk, inherent risk, and control risk for this year’s audit of Gold Explorers. For each factor you identify, indicate which one of the three risks would be affected and state whether the factor is likely to increase or decrease Margaret’s assessment of that risk relative to other companies in other industries. In addition, for each factor, explain why the risk will increase or decrease. Set up your answer in the following manner:

b. Identify the most appropriate basis for determining materiality for this year. Justify the basis of the materiality you selected and explain why other bases are not appropriate.