- 15 Marks
Question
XYL Limited has been granted a license to operate in the extractive industry in the middle belt of the country, where there is an abundant mineral resource called Topaz. This mineral is in great demand in the manufacturing industries of Western Europe.
Due to the need for heavy equipment requiring intensive capital outlay, indigenous companies could not invest in the sector. Moreover, the technical expertise required in mining this product is not locally available.
The company was not only granted the license but also granted a pioneer status. The local community where operations take place supply the necessary labor, both skilled and unskilled. After a year, the workers’ union found out that they were paid far less than what the company is paying in similar operations in nearby countries. As a result of labor union activities, many workers were retrenched, and the company started making use of locals who had just completed secondary school education. Union activities were proscribed.
Being an extractive industry, the local people were affected as they could no longer carry out their economic activities as before.
Your firm has just been appointed as auditors of XYL Limited after three years of operation.
You are required to:
Explain SEVEN areas of concern that would be of interest to you as auditor and provide reasons for their importance. (15 Marks)
Answer
SEVEN Areas of Concern and Their Importance:
- Verification and Confirmation of Pioneer Status:
- Verify the reliefs and incentives available due to the pioneer status.
- Ascertain the duration of the pioneer status and ensure compliance with its conditions.
- Stock (Inventory) Taking:
- Evaluate the qualification and experience of the specialists involved in valuing stock.
- Ensure the value of inventory reflects a true and fair view of the company’s financial position.
- Determination of Mineral Reserves:
- Engage an expert to evaluate mineral reserves.
- This assessment determines the going concern status of the company. If reserves are depleted, the company may cease operations.
- Use of Amortization:
- Review the amortization policy for the depletion of mineral mines.
- Amortization should replace general depreciation for accurate expense allocation.
- Impact on the Local Environment:
- Assess the environmental and social impact of operations.
- Any pending litigation or liability must be disclosed in the financial statements for transparency.
- Employment Generation and Community Empowerment:
- Examine whether the company fulfills its obligations to the local community.
- Employment and empowerment align with stakeholder expectations and governance best practices.
- Social Services Rendered to the Environment:
- Review investments in infrastructure, hospitals, schools, and other community benefits.
- Verify compliance with commitments reported in annual disclosures
- Topic: Audit of Specialized Industries
- Series: NOV 2013
- Uploader: Dotse