Metalinc NL is a mining company based in Western Australia. 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 Australian 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 US dollars. These conditions create major issues for Metalinc in 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 smaller value items in accordance with specified company policy.

Required

(a) Explain the implications of ‘mothballing’ for auditing PPE for mining companies.

(b) Design the audit procedures for PPE for Metalinc NL. Discuss the audit risks and their effect on your approach.