Topic: audit, assurance and compliancePaper details:KARRICK Gold & Copper Ltd. (KGC Ltd), an Australian mining firm listed on theAustralian Stock Exchange (ASX), has been operating a large Open Cast (Pit) gold andcopper mine in the Star Mountain Range in Papua New Guinea (PNG) for 30 years. TheStar Mountain Range in PNG is very isolated (no roads) and has a wide range of exoticplants and animals found nowhere else in the world.Other Information—KGC Ltd. has:1) Revenues of $30 billion Australian dollars (AUD) a year and, in the absence of new orefinds, has only seven years of ore reserves.2) The Net Book Value (NBV) of the PP&E is $16.5 billion AUD and another $5.0 billionAUD is needed over the next seven years.3) There is no active prospecting for additional reserves of ore—because the firm’s currentlicense from the PNG government to mine in that region will expire in eight years.4) While there have been several rich “shows” of silver and lead ore,1nothing so far is ofcommercial quantity and quality. However, the mine manager expects that over the nexteight years large deposits of commercially-viable silver-and-lead ore will be found within themine property or adjacent.5) The KGC Ltd. employs 3,400 full-time employees in its PNG mine, offices, and processingplant—3,000 are PNG citizens and reside in the Star Mountain Range. The labourparticipationrate in that region of PNG is 32 percent and the unemployment rate (amongthose 32 percent) is 45 percent.NB: If KGC Ltd. shuts down its mining operations in the Star Mountain Range in PNG, theunemployment rate among the 32 percent participating in the labour market will rise to 95percent and there are few if any alternative sources of employment.6) The KGC Ltd. PNG operations pay $4 billion in royalties to the traditional owners of theland where they mine and process ore and $6 billion in taxes to the PNG government. Also,they built and operate the only water-processing plants, grade schools, hospitals, and healthcentres in the Star Mountain Range in PNG.1 A “show” of a mineral is a small finding of noncommercial amounts. A show of a mineral is a strong indicatorthat there may be commercial amounts of the ore but is not definitive.HI6026 AUDITING AND ASSURANCE SERVICESTRIMESTER 1, 2016GROUP ASSIGNMENTAssessment Value: 20%Instructions:7) In the last few decades, the Christian-animist residents of the Indonesian half of the Island ofNew Guinea (the Indonesians call their half of the island “Irian Jaya” or “Papua”) have beenagitating for independence from Indonesia (it is estimated that 100,000 of them have died inthe conflict and some of the tribes have resumed headhunting with the Indonesian soldiersand settlers being targeted. The PNG tribes near the border with Papua are closely related tothe tribes across the border and there is fear the conflict and the police actions by theIndonesian army will spill into the PNG portion of the Star Mountain Range.8) A recent collapse of a “tailings” pond dumped 5 million litres of ore-waste sludge into a riverfrom which two local villages draw their drinking water, fish, hunt, harvest lotus root andwater their taro root, yam and cassava crops.2 While most of the sludge flushed through tothe ocean in a few days, many environmental groups in Australia are screaming that KGCLtd. is environmentally irresponsible. The complaints got especially loud and strident afterthe General Manager of the PNG mine stated at a public meeting: “First) The sludge quicklyflushed out to sea; Second) “At sea the sludge was vastly diluted; Third) The solution topollution is dilution; and Fourth) The peoples of the Star Mountain Range in PNG depend onthe KGC Ltd. operations for most of their jobs, clean potable water, health care, andeducation.”9) The cost of remediating the sludge spill (i.e. a combination of clean-up, fines, offsetting workelsewhere, and compensating cash payments) is expected to range between $6 billion and$60, billion, depending on the outcome of a court case in PNG that has been initiated by anecological group from Australia. Please note: KGC Ltd. is claiming that the annual benefitsof the KGC Ltd. operations in the Star Mountain Range in PNG offset the harm of themining and processing (including the rare sludge spill) by manyfold and that should the minebe shutdown, the loss to that region and PNG in general would be devastating.While this case study is adapted from real events and circumstances, names have beenchanged to protect the innocent and to avoid lawsuits. Please answer the followingquestions using the above information and supplementing it (as needed) with content fromthe course, internet, and other literature. Marks will be awarded for clarity of thought andsuccinctness of presentation.Required (HI6026): Marksa) Discuss the steps that you need to consider before accepting to do an audit of the KGCLtd. mine in PNG? 30b) If the inherent risk of the KGC Ltd. mine in PNG is estimated as 80% and the controlrisk and detection risk are estimated at, respectively, 10% and 50%, should your auditfirm accept the role of doing an audit of the KGC Ltd. mine in PNG? (Explain)30c) List and discuss what should be included in an audit program for the KGC Ltd. mine inPNG. Your program should include general coverage plus items 1 to 8, above.40d) If KGC Ltd. revalues its major PPE assets from historic cost to fair market value, whatare the major concerns for the auditor and what tests should the auditor perform toresolve those concerns?15e) Review of the future prospects of the mine 20f) In a triple-bottom line addendum (i.e. addition) to their GPFS, KGC Ltd. described theiroperations as being socially responsible and environmentally friendly. Are you willingto sign-off on that statement as being true and fair? (Explain)25g) KGC Ltd. is hoping to raise $5 billion AUD, KGC Ltd. via a share issue. In the shareprospectus,3 KGC Ltd. that its PNG operations are its principal asset and describedthose operations as low risk and that it expected them to be indefinite (permanent) induration. Are you willing to sign-off on that prospectus as being true and fair? (Explain)