Task 4

This task requires you to respond to the overall risk assessment of identified significant accounts by developing audit tests. In practice, this phase requires an auditor to prepare an audit program, which outlines the audit tests (tests of controls and substantive tests) to be undertaken to reduce the risk of material misstatement to an acceptable level. If control risk is assessed as less than high, then tests of controls are undertaken to gather evidence of their existence and operational efficiency. Assessment of controls and testing their operational efficiency is outside the scope of this case study and thus, we require you to focus on substantive tests in this task.

You will note that the information for Penfolds Mining Group Ltd includes some information regarding the accounting policies and treatment applied by Penfolds Mining Group Ltd for some accounts identified as likely at risk of material misstatement.

Required

Spreadsheet tab Task 4 identifies nine financial statement accounts and related assertions assessed as being at risk for Penfolds Mining Group Ltd. For each of these nine financial statement accounts and related assertions develop one appropriate audit procedure for that assertion.

(Note: Each audit procedure must be specific to Penfolds Mining Group Ltd)

Penfolds Mining Group Ltd Audit Case Study Penfolds Mining Group Lid Audit Case Study Consolidated Statement of Financial Position Other As at 31 December 2020 S & H Partners is an Australian accounting firm with offices located in each of the major cities. 2020 2019 2018 Assets $000 $000 The firm has just been appointed to conduct the 31 December 2020 audit for Penfolds Mining Current Assets Group Ltd. Appropriate client acceptance and quality assurance procedures under Australian cash and cash equivalents 183,3 85 142,143 204,497 Auditing Standards have been conducted by S & H Partners for the audit of Penfolds Mining Tradeand other receivables 94,4 69 58,509 31,715 123,010 119,801 60,730 Group Ltd. Inventories Other financial assets 19,539 19,783 19,734 Total current assets 420403 340,536 316,676 You are employed by S & H Partners and the team that you are a member of has been assigned, Non-current Assets 8,484 8,470 B,654 by the audit partner, a number of tasks to complete in the audit of Penfolds Mining Group Ltd Receivables Non-current inventories 222 for the year ended 31 December 2020. Property, plant and equipment 113,994 97,756 77 345 Right of Use Assets 2,311 2,883 Mine properties and development 269,297 206,321 193,3 02 Deferred tax assets 59,291 32,855 12,416 Total non-current assets 453,377 348,285 291,939 Total assets 873,7 80 688,821 608,615 Liabilities Current Liabilities Leaseliability 1,10 839 Tradeand other payables 39,879 51,258 45,116 Borrowing 14,044 16,755 7,126 Provisions 24 5 84 22.854 20,168 Other financial liabilities 3,890 944 Total current liabilities 83,506 92,650 72,410 Non-current Liabilities Borrowings 511 Leaseliability 1,299 2,084 Provisions 72,616 62,034 57,754 Other financial liabilities 4,268 Total non-current liabilities 78183 64,118 58,375 Total liabilities 161 689 156 768 130.785 Net Assets 712,091 532,053 477,830 Equity Contributed equity 331,513 331,513 331,513 Retained earnings 381,747 200,716 146,243 Captial and reserves attributable to owners of Penfolds Mining Ltd 713,260 532,229 477,756 Non-Controlling Interests (1,169] 176) 74 Total Equity 712,091 532,053 477,830 Additional Information Penfolds Mining Group Led has several local and overseas bank accounts. The overseas bank accounts, used to deposit receipts from overseas customers are in US dollars. The company accountant uses the exchange rate at the close of the last business day in the financial year to convert the bank accounts in foreign currency to the equivalent AS value at the year end.1O 11 12 13 14 15 16 1? 18 19 Task 4 V B C D Designing Substantive Procedures No. Account Assertion Substantive Audit Procedure 1 Cash and bank balances Existence 2 Inventories Existence 3 Inventories Valuation 4 Accounts payable Completeness 5 Accounts payable Valuation 6 Operating Revenue/Sales Occurrence 7" Operating Revenue/Sales Cutoff 8 Mine Properties and Development Valuation 9 Provisions Valuation Font Paragraph Styles Ownership, Governance Structure and Organisation's Structure development; and downstream process improvement. The variable remuneration is paid in Penfolds Mining Group Led is a publicly listed company on the Australian Securities Exchange cash after the company's financial statements for that year have been audited and released (ASX). It has approximately 1,200,000 shares on issue which are owned: publicly. 45% by Macau Steel Manufacturing Ltd (A Hong Kong registered company which operates several steel manufacturing sites throughout China) The Entity's Selection and Application of Accounting Policies (Selected Only) and Other 40% by Anglo Australian Industrial Mining Ltd (A British registered company involved Matters mining investment) Revenue Recognition The remaining 15% of shares are owned by other entities and individuals. . Sales revenue is recognised on individual sales when control transfers to the customer. Generally, control passes, and sales revenue is recognised, when the iron ore is Penfolds Mining Group Ltd' owns several subsidiary companies: delivered to the ship on which it will be transported. However, there may be Penfolds Iron Ore Mining Pty Ltd (100%) circumstances when judgement is required when recognising revenue. In such . . Penfolds Property Group Pty Ltd (100%) circumstances, a five-step process is followed: identify the contract with a customer; Penfolds North Western Western Australia Mining Project Pty Ltd (100%) identify the performance obligations in the contract; determine the transaction price; Penfolds Diamond Mine Pty Ltd (100%) allocate the transaction price to the performance obligations; and recognise the revenue when the entity satisfies the performance obligations. The company has a highly experienced Board and management team, with particular In a limited amount of sales, the company sells product where the company is expertise in the extractive industries, steel manufacture, and financial services. Currently responsible for shipping the iron ore to the customer (termed 'Cost and Freight'). In there are five board members: such circumstances the company has determined that the freight service is a separate Mrs Margaret Ling, Chairperson (extensive experience as a senior executive of several performance obligation from the ore sale performance obligation. Therefore, the international mining companies) revenue for shipping services is recognised as the company satisfies this performance Mr Jeremiah Young, Non-executive director (currently an executive director of Macau obligation over time rather than at the point when the iron ore is transferred to the ship. Steel Manufacturing Ltd and extensive experience in company administration and The company has a right to payment at the point that control of iron ore product passes human resource management with Macau Steel Manufacturing Ltd) to the customer. Mr Hugh Stevens, Executive director (Chief Executive Officer and former director of Macau Steel Manufacturing Ltd) Inventories Mr Richard Temple, Non-executive director (extensive experience with finance, Raw materials and stores, ore stockpiles, work in progress and finished goods are stated treasury and financial risk management across several Australian and multi-national at the lower of cost and net realisable value. Cost is determined primarily on the basis organisations of weighted average costs and comprises the cost of direct materials and the costs of Mr Christopher Price, Non-executive director (extensive experience with the technical production which include: aspects of mining and mining engineering across several large multi-national miners) Labour costs, materials and contractor costs which are directly attributable to the extraction and processing of ore; The Board of the company has stated that it is committed to enhancing corporate governance Depreciation of property, plant and equipment used in the extraction and processing and has adopted practices that are consistent with the ASX's Corporate Government of ore; and Principles. It adheres to the majority of the ASX Best Practice Recommendations, with the Production overheads directly attributable to the extraction and processing of ore. exception of maintaining a separate internal audit function. The Board monitors the need for Stockpiles represent ore that has been extracted and is available for further processing. this function, taking into account the size, geographic location and complexity of the If there is significant uncertainty as to when the stockpiled ore will be processed it is company's operations. expensed as incurred. Where the future processing of the ore can be predicted with confidence because it exceeds the mine's cut-off grade, it is valued at the lower of cost Key management personnel ? are paid a fixed salary plus a component of variable and net realisable value. Work in progress inventory includes partly processed material. remuneration. The variable remuneration is based on incentives which are linked to the Quantities are assessed primarily through surveys and assays. achievement of the company's annual operational targets, the individual's personal targets and certain long term company targets. These targets include: sales of ore product; Provision for Decommissioning and Restoration operational budget outcomes, financial returns; development of mineral assets; mine Decommissioning and restoration provisions include the dismantling and demolition of vate V infrastructure and the removal of residual materials and remediation of disturbed areas. The The financial statements that are presented below are the consolidated financial statements for the group of companies and are prepared in accordance with Australian Accounting Standards. provision is recognised in the accounting period when the obligation arising from the related Settings Mr Hugh Stevens Chief Executive Officer, Mrs Claire Hewson Chie Financial Officer, Ms Gina Russell General Manager disturbance occurs, whether this occurs during the mine development or during theFont Paragraph Styles production phase, based on the net present value of estimated future costs. The costs are Costs on these producing properties are amortised over the life of the particular mine estimated on the basis of a disclosure plan. The cost estimates are calculated annually during site to which such costs relate on the production output basis. the life of the operation to reflect known developments and are subject to formal review at The carrying value of each mine property and development are assessed annually for regular intervals. impairment (see below). Financial Risk Management Impairment of Assets Foreign exchange risk - the company operates internationally and is exposed to foreign In accordance with AASB 136 Impairment of Assets, at each reporting date the company exchange risk arising from various currency exposures, primarily with respect to the US assess whether there is any indication that an asset, including capitalised development dollar. This risk arises from commercial transactions given that the company's sales expenditure, may be impaired. Where an indicator of impairment exists, the company makes revenues are denominated in US dollars and the majority of its operating costs are a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds denominated in Australian dollars and certain assets and liabilities are denominated in its recoverable amount, the asset is considered to be impaired and is written down to its a currency which is not the company's functional currency. recoverable amount. Impairment losses are recognised in the income statement. The following table shows assets and liabilities held or owed in US dollars at the Some Economic and Industry Factors respective balance date, but translated to Australian dollars using relevant exchange rates: Iron Ore Market Globally' 2020 2019 Australia, Brazil, India, China and Russia are the five largest producers of iron ore globally, but $000 $000 it is generally accepted that Brazil is a major competitor for Australia in terms of iron ore Cash and cash equivalents 99,117 43,104 production. Although there were some concerns that Chinese imports of iron ore would fall Trade and other receivables 78,694 29,848 given COVID-19 effects, Chinese government stimulus packages seem to have encouraged Trade and other payables (125) (73) steel production and therefore iron prices have been relatively strong compared to other commodities. This, coupled with a major mine issue in Brazil, has meant that Australian iron Price risk - the company is exposed to commodity price risk. During current and prior ore exports have also been relatively strong years, the price of iron ore pellets is based on a price index used in the market. Currently the company does not manage its iron ore price risk with any financial instruments. Key markets The key geographic markets for Penfolds Mining Group Ltd are China, Australia, and in the Exploration and Evaluation past Korea. The main revenue is from iron ore sales, but there had been some domestic sales Exploration and evaluation expenditure consist of costs that are directly attributable to: in property in 2020. The following table shows the main geographic area sales and products: research into mine sites; conducting geological studies; exploratory drilling and sampling; testing extraction and treatment methods; and conduciveasibility studies. 2020 2019 This expenditure also includes costs incurred in acquiring mining rights and amounts $000 $000 payable to third parties to acquire interests in projects and access to areas of interest. Iron ore sales Exploration and evaluation expenditure is charged against profit and loss as incurred, Australia 41,667 24,704 except for expenditure incurred after a decision to proceed to development is made. In China 469,318 313,738 these cases, the expenditure is capitalised as an asset. Korea 30,159 The company charges exploration and evaluation expenditure to earnings as and when incurred. However, once the decision to develop the area of interest is made or Property sales acquisitions costs are incurred the expenditure is capitalised as an asset. As a result, a Australia 15,339 significant amount of expenditure incurred on the development of the new ore pit in 526,324 368,601 the Frenchman's Cap region has been capitalised (see mine properties and development on the balance sheet). Trade disputes Mine Properties and Development As noted above, the key market currently for the iron ore product of Penfolds Mining Group. Mine properties and development (see balance sheet) represent the accumulation of Ltd is China. Although there is yet to be any adverse action taken against Australian iron ore vate all exploration, evaluation and development expenditure incurred by the company in exports, the Chinese government has imposed trade sanctions on Australian exports of barley, relation to areas of mining interest in which mining of a mineral resource has Go to SettingFont Paragraph Styles beef and lamb, wine, cotton, lobsters, timber, and coal*. Although alternate export markets provides them with a component of variable remuneration which is based on incentives have been found for most of these products, volatility still exists in the relationship between linked to operational performance and long term strategic performance. These Australia and China, which may be further exacerbated when Australian exporters of barley incentives are paid in cash (after financial statements have been audited and released pursue action at the World Trade Organisation. publicly). One customer, Macau Steel Manufacturing Ltd (who is also a major shareholder), COVID-19 accounts for approximately 35% of Penfolds Mining Group Ltd's total sales of iron ore Penfolds Mining Group Led has been able to maintain full production during COVID-19 product. because of strong work plans and controls and attention to the health and well-being of employees. Despite this, the situation is not clear with respect to: Financial Information COVID-19 related supply chain issues (e.g. national lockdowns in other countries The income statements and balance sheets for 2020, 2019 and 2018 are shown below: hampering sea supply chains); and COVID-19 related manufacturing issues (e.g. national lockdowns in customer countries hampering steel production). However, national vaccination programs in other countries may mitigate these issues. Other Factors During 2020 1,100,000 dry metric tonnes (DMT) of iron ore was sold to Macau Steel Manufacturing Ltd (2019 - 852,489 DMT). This represented $182,147,000 of revenue in 2020 (2019 - $131,600,000). At 31 December 2020 the trade receivables balance included an amount owing by Macau Steel Manufacturing Lid of $32,350,000 (denominated in US dollars, but translated to Australian dollars (2019 - $2,900,000). Most of Penfolds Mining Group Ltd's export sales are conducted in United States dollars, so the company is exposed to fluctuations in exchange rates. The Australian dollar fluctuated significantly against the US$ in the 2020 year. As noted above, some of the receivables related to these sales are also denominated in US dollars. Some key revenue information: 2020 2019 Iron ore pellet sales (dry metric tonne) 2,376,029 2,096,673 Iron ore chip sales (dry metric tonne) 113,611 35,921 Total iron ore product ,489,640 2,192,086 Average realised product price (US$/tonne, Free on Board (FOB] Macquarie Harbour) 136.85 109.95 Average realised exchange rate (AUD to USD) 0.6955 0.6944 Average realised product price (AS/tonne, FOB Macquarie Harbour) 196.77 158.33 Key Stakeholder Influences One of the directors, Mr Jeremiah Young, is an executive director of a major shareholder and major customer of Penfolds Mining Group Ltd. Mr Hugh Stevens CEO, Mrs Claire Hewson CFO, Ms Gina Russell General Manager are Activa three key executive officers of the company. Their continuation with the company is critical to its future direction. As noted above, to retain their services, the company Go to SPenfolds Mining Group Ltd Audit Case Study Penfolds Mining Group Led Audit Case Study Consolidated Statement of Comprehensive Income Cost of sales information for 2020 and 20195: For the year ended 31 December 2020 2020 2019 2018 2020 2019 5000 5000 5000 Revenue from operations 526,324 368,601 368,204 Cost of sales 295,505] [2 85,072) [23 8,938) Cost of sales - mining Gross profit 230,818 82,529 129,266 Mining costs 139,992 133,656 Production costs 114,971 107,960 Administration expenses (5,218) (5,949) (5,177) Changes in inventories (11,010) (32,443) Operating profit before other Income 225,600 76,5 80 124,089 Mining and production costs 243,953 209,173 Freight costs 21,103 21,533 Exploration and evaluation expenditure (1,414) [1,235 (822] Government royalties 19,646 9,511 Other Income 386 174 281 Depreciation and amortisation expense 21,056 21,991 Operating profit before finance costs 224,572 75,519 123,548 Mine properties and development Finance Income 5,344 7,991 13,648 - capitalised during the year 0 (14,525) Finance expenses [21,0371 (1, 884] [1,868) - amortisation expense 7,035 6,659 Profit before Income tax expense 208,879 81,626 135,3 28 Deferred stripping Income tax expense (5,693) [4.292) (27390) - capitalised during the year (69,308 (3,989) Profit for the year 203, 186 77.334 112,938 - amortisation expense 31,127 35,832 Foreign exchange gain / (loss) 4,554 (113) Total comprehensive (loss)/Income for the year 203,186 77.334 112,938 Total cost of sales - mining 279,166 286,072 Total comprehensive Income/[loss) for the perlod attributable to: Owners of the parent 204,179 77,561 112,938 Cost of sales - property development Non Controlling Interes to 993) (327) (387) Property costs 13,771 203, 186 77.334 112,551 Inventory provision 2,569 0 Total comprehensive (loss)/Income attributable to: Total cost of sales - property development 16,340 Owners of the parent 203,186 77 334 112,551 203, 186 77,334 112,551 Total cost of sales 295,506 286,072