Audit Considerations for Energy and Mining Entities

Why energy and mining audits differ from standard commercial audits

The audit risk profile of an energy or mining entity concentrates around four areas that rarely feature in commercial or service-sector engagements: assets that exist underground and can only be measured through geological estimation, provisions that extend decades into the future, revenue streams tied directly to global commodity prices the entity cannot control, and accounting policies (IFRS 6 in particular) that give management more discretion than almost any other standard.

ISA 315.12 requires you to understand the entity’s industry as part of risk assessment. For energy and mining, that understanding must go beyond reading the annual report. You need to know whether the entity operates producing assets or is still in exploration, because the applicable accounting framework shifts from IFRS 6 to IAS 16 and IAS 36 at the point an asset moves into development. You need to know the commodity the entity depends on, because a gold miner’s impairment triggers differ from those of an oil producer. And you need to understand the regulatory environment governing decommissioning, because a Dutch mining entity’s rehabilitation obligations under the Dutch Mining Act (Mijnbouwwet) differ from those of a Norwegian entity under the Petroleum Act.

The concentration of estimation uncertainty is the defining feature. ISA 540.13 requires you to identify and assess risks of material misstatement related to accounting estimates. In an energy or mining audit, the estimate population is large and interconnected: reserve volumes feed into depreciation (units-of-production), impairment (IAS 36 cash flows), provisions (decommissioning timelines), and revenue recognition (royalty calculations). A change in the reserve estimate ripples through the entire financial statement.

IFRS 6 capitalised exploration costs and the impairment trigger test

IFRS 6 is unusual. It permits an entity to continue applying its pre-IFRS accounting policy for exploration and evaluation expenditure (IFRS 6.7), which means two mining clients in the same jurisdiction can legitimately capitalise different cost categories. Your first job on an IFRS 6 engagement is to confirm which costs the entity capitalises and verify that the policy has been applied consistently.

The impairment test under IFRS 6 is not a standard IAS 36 test. IFRS 6.18 provides its own list of indicators, and you only need to test for impairment when at least one indicator is present. The indicators include: the exploration licence expiring without renewal plans, the entity having no budgeted or planned further expenditure in the area, and the entity deciding that exploration has not led to commercially viable quantities of resources. IFRS 6.20 then permits the entity to test at a level larger than a single cash-generating unit (CGU), provided that level does not exceed an operating segment under IFRS 8.

The practical audit risk here is twofold. First, management may argue that no IFRS 6.18 indicator is present when one clearly exists (for instance, a licence that expires in four months with no renewal application filed). Second, the aggregation allowed under IFRS 6.20 can mask impairment at the individual project level by bundling a failed exploration area with a producing asset. ISA 540.17 requires you to evaluate whether the method management used is appropriate. If the client groups exploration assets with producing CGUs under IFRS 6.20, you need to document why that grouping is justified and whether it effectively prevents recognition of a loss that IAS 36 would otherwise require.

On every IFRS 6 engagement, obtain the licence register, verify expiry dates against the mining authority’s public register where available, and compare the capitalised amount per area of interest against the entity’s board-approved exploration budget. If the budget shows zero further spend on an area that still carries capitalised costs, IFRS 6.18(a)(ii) is triggered and the client must test for impairment.

IAS 36 impairment for long-lived mining and energy assets

Once an asset moves past exploration into development or production, IFRS 6 stops applying and IAS 36 takes over. For mining and energy entities, the recoverable amount of a CGU almost always depends on a discounted cash flow (DCF) model built on reserve estimates, commodity price forecasts, and operating cost projections that extend 10 to 30 years into the future.

IAS 36.33 requires the cash flow projections to cover the asset’s remaining useful life. For a mine with a 20-year reserve life, that means a 20-year DCF. IAS 36.33(c) limits growth rates for projections beyond the detailed forecast period to the long-term average for the industry, but in mining, the “detailed forecast period” itself often extends to the end of the mine life because the entity has a reserve-based production schedule.

The four assumptions that drive the model (and concentrate your audit risk) are reserve volumes, commodity prices, operating costs per unit, and the discount rate. Each one requires specific audit procedures under ISA 540.

For reserve volumes, the entity will have a Competent Person’s Report (CPR) or equivalent reserve statement classified under the JORC Code, NI 43-101, the PRMS framework for oil and gas, or the PERC Reporting Standard used across much of Europe. ISA 620.7 requires you to evaluate whether you have the expertise to audit this estimate without a specialist. In almost every case, you don’t. The question is whether to rely on the client’s expert (the geologist who prepared the CPR) or engage your own. ISA 620.9 requires you to evaluate the competence, capability, objectivity, and scope of management’s expert. If the geologist works for the mining company, objectivity is a consideration you must document.

For commodity prices, IAS 36.33(a) requires that projections reflect reasonable and supportable assumptions. The audit procedure is to compare the entity’s price assumptions against independent consensus forecasts (the World Bank Commodity Markets Outlook, broker consensus, forward curve data from the London Metal Exchange or ICE, or published analyst reports from sector-focused research firms). Document the source, the date of the forecast, the variance from the entity’s assumption, and whether the entity’s price sits above or below the consensus range.

For the discount rate, IAS 36.55 requires a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset. Mining entities frequently use a weighted average cost of capital (WACC) with a country risk premium for operations in jurisdictions with political or regulatory risk. Your procedure under ISA 540.17(b) is to evaluate whether the rate reflects the risks already captured in the cash flows (to avoid double-counting) and compare it against sector benchmarks.

Use the ciferi ISA 570 Going Concern Calculator to stress-test whether commodity price declines that trigger impairment also raise going concern considerations under ISA 570.

Decommissioning and site rehabilitation provisions under IAS 37

Every mining and most energy entities carry a decommissioning or rehabilitation provision. IAS 37.36 requires the provision to be measured at the best estimate of the expenditure required to settle the obligation. For a mine, that obligation includes removing surface infrastructure, rehabilitating the land, and monitoring environmental conditions for years (sometimes decades) after closure.

IAS 37.45–47 requires discounting when the time value of money is material, and for a decommissioning obligation that won’t be settled for 15 to 25 years, it always is. The entity selects a discount rate, estimates future costs in nominal or real terms (and the two approaches produce different results if not applied consistently), and then unwinds the discount annually through finance costs.

The audit risk is concentrated in four assumptions: the estimated cost to decommission (often based on an engineering study that may be several years old), the inflation rate applied to escalate those costs, the discount rate, and the expected timing of decommissioning. A five-year shift in the expected closure date can change the provision by 20% or more.

Under ISA 540.18, you need to test the assumptions individually. Obtain the most recent engineering or environmental study underlying the cost estimate. Check when it was prepared. If it’s more than two years old, ask whether conditions have changed (expanded mine footprint, new environmental regulations, changes to the rehabilitation plan). Compare the discount rate to the risk-free rate appropriate for the obligation’s currency and duration. Compare the inflation assumption to central bank targets or independent forecasts for the relevant jurisdiction.

A common audit issue: the entity updates the discount rate annually (because IFRIC 1.5 requires it when using the full retrospective approach under IAS 16) but does not update the underlying cost estimate. The provision changes, but the change reflects only interest rate movements, not any reassessment of the actual rehabilitation work. ISA 540.17(a) requires you to evaluate whether the inputs to the estimate are appropriate. A stale cost estimate paired with a current discount rate is not appropriate.

When to involve a specialist under ISA 620

ISA 620.7 is clear: if you need expertise in a field other than accounting or auditing to obtain sufficient appropriate audit evidence, you involve an auditor’s expert. On an energy or mining engagement, the areas that most frequently require expertise are reserve estimation (geology or petroleum engineering), environmental remediation cost estimation (environmental engineering), commodity derivative valuation (financial modelling), land valuation for impairment purposes (property valuation), and tax structuring for multi-jurisdictional operations where royalty and resource rent calculations depend on geological inputs.

ISA 620.9–12 set out the evaluation requirements. You assess competence (qualifications, memberships in professional bodies like AusIMM, SPE, or RICS), capability (relevant experience with similar deposits or assets), objectivity (employment relationship with the client, fee dependency, personal interests), and whether the expert’s scope of work covers the specific questions you need answered. Document each element. A one-line statement that “we consider the expert to be competent” does not satisfy ISA 620.11, which requires you to evaluate whether the expert’s work is adequate for your purposes.

The decision between using management’s expert and engaging your own auditor’s expert depends on the risk assessment. ISA 620.A7 notes that when the risk of material misstatement is higher, or when management’s expert is employed by the client, you may need your own expert. For a mining entity where the reserve estimate drives €50M of asset values on the balance sheet, the question is not whether to involve a specialist but whether to engage an independent one.

When you rely on management’s expert rather than engaging your own, ISA 500.8 still applies: you evaluate the relevance and reliability of the expert’s work as audit evidence. That means reading the reserve report, understanding the methodology (kriging, conditional simulation, decline curve analysis), identifying the key assumptions, and evaluating whether those assumptions are consistent with other evidence you’ve obtained. You don’t need to be a geologist, but you need to understand enough to identify an assumption that contradicts other audit evidence.

Commodity price assumptions and going concern under ISA 570

Energy and mining entities are cyclical. A 30% drop in the commodity price can turn a profitable operation into one that generates negative cash flows, breaches debt covenants, and triggers going concern doubt. ISA 570.10 requires you to evaluate whether events or conditions exist that cast significant doubt on going concern. For a mining client, commodity price levels relative to the entity’s breakeven cost per unit are the single most important indicator.

Your procedure here connects directly to the impairment work. If the entity’s IAS 36 impairment model uses a commodity price assumption, and that same price is below the entity’s cash cost of production, you have both an impairment indicator and a potential going concern indicator. ISA 570.16 requires the auditor to evaluate management’s assessment, including the assumptions on which it is based. If management’s going concern assessment uses a higher commodity price than the impairment model (or vice versa), document the inconsistency and challenge it.

Debt covenants in mining are often tied to production volumes, reserve life, or commodity-linked ratios (like the debt/EBITDA ratio where EBITDA moves directly with the commodity price). Obtain the covenant terms from the loan agreements and test compliance at the reporting date and, where the covenant is tested quarterly, at the next test date. If a breach is projected within twelve months of the reporting date, ISA 570.A3 treats this as a going concern indicator regardless of whether the entity has obtained a waiver.

Worked example: Vanderhoek Mineralen B.V.

Client profile: Vanderhoek Mineralen B.V. is a mid-tier Dutch mining company extracting industrial minerals (silica sand and kaolin) from two sites in Limburg. Annual revenue is €38M. Total assets are €95M, of which €52M is property, plant, and equipment (the mining sites and processing plant). The entity carries a decommissioning provision of €6.2M and has €28M in bank debt with a net debt/EBITDA covenant of 3.5x.

1. Set materiality under ISA 320.10

Overall materiality: 5% of profit before tax. Vanderhoek’s PBT is €4.1M, giving overall materiality of €205K. Performance materiality: 70% of overall, so €143K. The choice of PBT as benchmark is appropriate because the entity is a stable, profitable operation (ISA 320.A4).

2. Evaluate IFRS 6 indicator for the Roermond exploration licence

Vanderhoek holds a third exploration licence near Roermond. Capitalised exploration costs: €1.4M. The licence expires in September of the current year. The board minutes from November show no discussion of renewal. IFRS 6.18(a) is triggered. The entity must test this asset for impairment.

3. Test IAS 36 impairment for the Sittard CGU

The Sittard mine is Vanderhoek’s primary producing asset. Carrying amount: €41M. The entity’s DCF model projects 12 years of remaining production based on a 2024 CPR prepared by Geodyn B.V. (an independent geological consultancy). Key assumptions: silica sand price of €42/tonne (current spot: €39/tonne), production of 480K tonnes per year, operating cost of €29/tonne, discount rate of 8.5% pre-tax.

Procedure: compare the €42/tonne price assumption to the World Bank’s industrial minerals outlook and the two-year forward price. The World Bank projects €40/tonne. The entity’s assumption is 5% above consensus. Sensitivity analysis shows that at €39/tonne, the recoverable amount drops to €38M, below the carrying amount of €41M. Document this sensitivity and challenge management on the price assumption. Evaluate the CPR: prepared by a registered geologist (EurGeol), dated within the current year, no financial interest in Vanderhoek. ISA 620.9 objectivity assessment: satisfied.

4. Test the decommissioning provision

Vanderhoek’s provision of €6.2M is based on a 2021 engineering study by Arcadis estimating €8.9M in undiscounted rehabilitation costs, discounted at 2.1% over 14 years. The entity has not updated the cost estimate since 2021.

Procedure: verify the discount rate against the Dutch government bond yield for a 14-year maturity (current: 2.6%). The entity’s rate of 2.1% understates the current discount rate, which would reduce the provision. But the cost estimate is from 2021, and construction cost indices in the Netherlands have risen approximately 14% since then (CBS Bouwkosten index). Applying the updated cost index to the €8.9M estimate gives approximately €10.1M undiscounted. Discounting at 2.6% over 14 years gives approximately €7.1M. The current provision of €6.2M is understated by approximately €900K, which exceeds performance materiality of €143K.

This worked example produces a file where every significant assumption links to an external source, every ISA requirement has a documented response, and the reviewer can trace the audit logic from risk assessment through to the adjustment.

Practical checklist for your next energy or mining engagement

1. Obtain the licence register for all exploration and production permits, verify expiry dates against the mining authority’s records, and check each against IFRS 6.18 indicators before accepting the client’s assertion that no impairment trigger exists.
2. Document your ISA 620.9 evaluation for every reserve estimate in the financial statements: competence, capability, objectivity, and scope of work of the expert who prepared it. Retain a copy of the CPR or reserve statement on the audit file.
3. Compare commodity price assumptions used in IAS 36 impairment models, IAS 37 provision calculations, and ISA 570.10 going concern assessments against each other. Flag any inconsistency between models that rely on the same underlying price.
4. Request the most recent engineering or environmental study underlying the decommissioning provision, confirm its date, and evaluate whether conditions have changed since it was prepared (expanded operations, new environmental requirements, cost inflation).
5. Run a sensitivity analysis on every IAS 36 impairment model for at least two variables (commodity price and discount rate) and document the breakeven point for each.
6. For entities with commodity-linked debt covenants, test compliance at the reporting date and at the next projected test date, using the entity’s own forecast and a downside scenario.

Common mistakes regulators flag

• Accepting an IFRS 6 impairment indicator assessment without verifying licence expiry dates against the relevant mining authority’s register. The AFM’s 2022 thematic review of extractive industry files found that auditors frequently relied on management representations for licence status without corroboration (AFM Trendzicht 2022).
• Using the same discount rate for the IAS 37 decommissioning provision and the IAS 36 impairment model without documenting why. IAS 37.47 requires a risk-free rate adjusted for the obligation’s risks. IAS 36.55 requires a rate reflecting market assessments of the asset’s risks. These are different rates with different purposes.
• Failing to evaluate the objectivity of a management’s expert under ISA 620.9 when the geologist or engineer is employed by the audit client. The PCAOB’s 2023 inspection findings flagged insufficient specialist evaluation in 31% of files involving management’s experts (PCAOB Staff Update, December 2023).

Related content

Frequently asked questions

Further reading and source references

• IFRS 6, Exploration for and Evaluation of Mineral Resources: paragraphs 7 on policy choice, 18 on impairment indicators, and 20 on CGU aggregation.
• IAS 36, Impairment of Assets: paragraphs 33–36 on cash flow projections and paragraph 55 on discount rates.
• IAS 37, Provisions, Contingent Liabilities and Contingent Assets: paragraphs 36–47 on measurement of decommissioning provisions.
• ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures: the framework for testing reserve-based estimates and provisions.
• ISA 620, Using the Work of an Auditor’s Expert: paragraphs 7–12 on evaluation of specialists.
• AFM Trendzicht 2022: findings on extractive industry audit files.
• PCAOB Staff Update, December 2023: findings on specialist evaluation in mining audit files.