Internal Review and Auditing of Payments
This area includes all the systems and processes to ensure the accuracy and completeness of all royalty payments made by leaseholders. This can include inspections, data validation, recalculations, and audits of payments. While these controls are not necessarily applied to all payments and usually require specialized expertise for their execution, they complement the routine controls over the processing of payments and together they form an integrated system.
Royalty payments are usually based on production and/or profit data provided by leaseholders. Many factors can enter into the calculations of royalties payable, such as production volumes, market prices, exchange rates, and various deductions. Governments have an incentive to ensure that this data is complete and accurate in order to receive the full amounts they are entitled to. For this purpose, governments may regulate measurement equipment and practices to ensure accuracy and consistency in production measurement. They may also conduct regular inspections to ensure requirements are met and reduce the risk of fraud (for example, diversion of minerals before measurement points or false declaration of production numbers).
The assessment of royalties can therefore be complex. In the absence of robust internal controls, there is a risk that governments will not receive all the amounts they are entitled to for the extraction of minerals in their jurisdiction.
Table 7 includes examples of knowledge of business questions about the review and internal audit of payments that performance auditors can ask during the planning phase. Examples of related audit objectives and criteria are provided in later sections of the Practice Guide.
Table 7 – Review and Auditing of Payments: Examples of Knowledge of Business Questions
Sub-topic |
Knowledge of Business Questions |
---|---|
Data validation |
|
Audits of payments |
|
Inspections of production measurement equipment |
|
Quality management system |
|
Staffing and training |
|
Coordination |
|
Once auditors have obtained answers to their knowledge of business questions, they can better assess the risks related to the completeness and accuracy of payments made by mining companies for the extraction of publicly owned natural resources. Performance auditors can also benefit by considering the results of the work done by financial auditors as part of the audit of the Public Accounts in making their assessment on completeness and accuracy of payments.
Auditors should consider including the completeness of revenues from the extraction of minerals in their audit plan if their preliminary audit work indicates the following:
- The data provided by mining companies is not validated by the responsible organization or by an independent third party. (i.e. there is significant reliance on self-reported data from the private sector.)
- There are significant data validation, audit, or inspection backlogs.
- Audits and inspections are not conducted on a timely basis because of staffing issues (for example, high turnover, long recruitment processes).
- Auditors in responsible organizations are not receiving all the information from mining companies they are entitled to.
- The site inspection strategy is not risk-based.
This list of potential audit issues is indicative, not exhaustive. It is the responsibility of audit teams to review and analyze the information they collect in the planning phase in order to identify and assess significant risk areas. Only after conducting this work will auditors be able to decide whether to include the completeness of mining revenues in their audit plan.