Zimplats Holding Limited: Auditing, Accounting, And Financial Analysis

Key Business Risks

The company that has been selected for this order is Zimplats Holding Limited; the company is a leading mining company, it specialises in a variety of metals that includes platinum and the associated metals, the company has been in operations since a long time and has been based in Zimbabwe. The overall share price of the company is very high and the overall revenue of the company runs into millions. Minning sector is such an industry in which the revenue is always high but there are different rules and regulations that are applicable to such a sector and thus it becomes imperative that accounting and auditing should be done in such a manner that the overall financial position is closely reflected. In case of mining sector, the environmental risks are also high so companies need to keep a note of the same. The competition is also high, because there are no private companies and most of the companies are publically listed companies and thus it is hard to curb competition in such sector. The companies also needs to make sure that all their activities is as per the rules that have been set by the government and in case there are any issues then any deflation should be reported beforehand and proper disclosures should be given. Zimplats as a company is based in many countries and the operations are spread all over, Zimbabwe and neighbouring countries. The company is a subsidiary of Impala Platinum BV.

The key business risks will include the following-

1. Whether the overall impairment of assets has been recorded correctly and there is no mistake in the way the assets are recorded in the financial statements of the company.
2. Whether the company has complied with all the necessary accounting policies and given all the necessary disclosures in the annual report of the company.
3. Whether the company has complied with the CSR policies and has given a supporting sustainability report for the management of the company.
4. Whether the company has recorded all the assets and liabilities to the correct of its valuation and there is no over or under statement with regards to that.
5. Whether there is any fraud or falsification of the accounts of the company, and in case there are any the management of the company has accounted the same and made the necessary changes.

These are few of the audit risks that have been identified in case of the given company and the auditor’s needs to give their opinion on such items and make sure that there are no mistakes in complying with all the necessary provisions of accounting and giving necessary disclosures with regards to that.

In case of the given company, the risk of material misstatement is very low and the auditors have also mentioned that the books of the company have been prepared properly and have said that there are no high risk items, the only item that they have mentioned in their annual report with regards to the company includes impairment of the assets and its accountability. Rest there are no such items that have been misstated.

In case of inherent risks few items that can be included is that the management of the company has falsified the accounts, the mining industry on its own requires a lot of disclosures when it comes to environment protection and that is also a big inherent risk in such companies.

Audit Risk Model

In case of control risk the few items that can be included are that there are no proper controls in the company to manage the operations,  control risk can be said to be low as there are enough control elements that can detect instance of fraud and error in the financial statements of the company (Chiapello, 2017).

In case of applying the audit risk model it can be seen that the result would be following-

AR= f(IR*CR*DR)

IR = 0.3

CR= 0.5

DR=0.2

The overall AR is less than 1 and thus it can be said in case of the given company that risk rating is low, in case of the company’s inherent risk assessment and control risk assessment.

In case we see that AR is low, it can be assumed that the detection risk would also not be high, also that the overall books of the company does not have many items that are materially misstated, it can be presumed that the books of the company are free from all kind of errors and there are not many items that needs to be taken care of by the auditors. The management of the company is also providing total support to the auditors and providing them with all the necessary information, so this makes the chances of fraud very low and the company can be said to be a very low audit risk company (Han, et al., 2017).

Current ratio is the ratio between the current assets and current liabilities of the company. It indicates the liquidity position of the company. Current ratio is used to check the financial position of the company. It helps us to know whether the company is in a position to meet its short term obligations without affecting the fixed assets of the company. The current ratio is calculated by dividing the current assets of the firm with its current liabilities.

In this case the current ratio of Zimplats holdings limited is very high and is rising over the years. In 2016, it was about 274 times which increased to about 371 times in 2017 and 1042 times in 2018. This shows that the current ratio of the company is continuously increasing over the years. Moreover the current ratio is very high which shows that the company’s liquidity position is very sound and the company wil not face any issue while paying off it’s current liabilities.

Financial Analysis

Debt equity ratio indicates the proportion of the total debts and equity of the firm. It shows the ratio between the total equity and debt financing used by the company. It is sometimes also known as the leveraging ratio. It is calculated by dividing total liabilities of the firm by the shareholder’s equity. Higher debt equity ratio indicates high risk for the company (Maynard, 2017).

In this case the debt equity ratio of the company is very low. This indicates that the company has a very sound financial position as the shareholder’s equity of the company is much higher than the total liabilities. The debt equity ratio of the company decreased continuously over the years during the analysed period. This shows that the company does not want to take any risk and want to depend more on the equity shareholders for its financing needs.

Gross margin ratio is the ratio between the gross profit and the net sales of the company. This ratio indicates the profitability of the company. This ratio is always less than one.  The nearer the value to 1 the better is the gross margin ratio of the company (Prasad & Chand, 2017).

In this case the gross margin of the company is below 0.5. This indicates that the gross profit ratio is less than 50%. But the ratio is increasing continuously increasing over the years during the analysed period. This shows that the company is growing day by day as its profits are increasing with every passing year.

Assets turnover ratio is the ratio between the company’s net sales and its total assets. It indicates the ability of the company to generate sales from its assets. The higher the value of this ratio, the better is the position of the company.

In this case, the asset turnover ratio of the company is 2.69 times in 2016, 2.86 times in 2017 and 3.09 times in 2018. Thus showing an increasing trend. The asset turnover ratio of the company shows that the company is using its assets very efficiently to generate more and more sales. The increasing trend also indicates that the increase in efficiency of the company throughout the analysed period (Sweeting, 2017).

The material account balances are those items reflected through the financial statement which if misstated or omitted then such omission or misstatement causes significant affect on the economic decisions supposed to be taken by its users on the basis of such financial statement. This is an important step in the process of Audit planning usually followed by the auditors. The determination of the materiality consists of the use of both the quantitative and qualitative factors. It is also to be kept in mind that the determination of the materiality is itself a matter of professional judgement (Abbott & Kantor, 2017).

Material Account Balances

The few of the  major qualitative factors for determining the materiality are as follows:

1. Misstatement resulting from the  fraud or illegal acts
2. Amount that may affect the contractual obligations
3. Amounts that may affect the trend of earning
4. misstatements causing an increase management compensation
5. amounts that may result an entity missing its forecasts
6. Industry conditions
7. Past number of misstatements(Alexander, 2016).

In the case of the Zimplats Holding limited the basis of selectin of a material item is completely based on the qualitative factors.

Based on our judgement for the determination of the materiality aspect the major material account balances are as follows:

1. Income tax expense- The major reason for choosing it is that the company is registered in tax heaven and hence it is reasonably expected that it may be engaged in such activities as revealed by the panama paper leakage as tax heavens are engaged in the tax evasion activies.
2. Profit before tax- It has been chosen as material due to the same reason as there is high prospect that figure of the profit might have been manipulated.
3. The revenue generated from the sale of platinum- It is because more than 50% of its revenue is the result for the sale of the Platinum.
4. Amount paid o the various government that is amounting to $86 million , but there is lack of proper accounting that for which purpose how much amount has been paid off.
5. The gain made by the shareholders in form of just 1% of the $5.3 billion generated by the company for last fifteen years significantly becomes material as there is huge prospect that the company may be providing gains to its shareholders through some illegal means.
6. The holding of its plant, property and equipment it has been considered material just because its half year ending report on 31st December is saying that a significant portion of its piece of land is to be taken up for the freeway reservation(Birt, et al., 2017).

Category	Item	Audit Assertions	Audit Procedures
Asset	Plant equipment and Property	The plant, property and equipment has been been recognized as net of depreciation, impairment losses and accumulated depreciation on the asset along with the additions made. The same is owned by the group The reason behind the applicability of the same is that it is clearly reflected in the notes to the financial statement and the same is the part of the independent audit report	The company should check the validity of the same by applying vouching and checking that the companies legally owns the assets and also the depreciation has been properly charged and recorded.
Revenue	Sale of the platinum	The sale of the platinum in the financial statement of the group reflects the total amount of the revenue expected to be realised with the certainty and is expressed in the currency in which it is to be realised The reason behind the same is as explained above in the case of plant property and equipment (Burke & Clark, 2016)	The company should check the sales document and should see that any profit or loss from the same has been accounted in the income statement of the company with relevant disclosures.
Expenses	Income tax expenses	The income tax expenses represent the amount of tax on the profit generated in the relevant financial year as per the applicable rules and provisions made and applicable for the entity The reason behind the assertion is that the amount has been incorporated as a part and parcel of the financial statement audited by the audit firm	The auditor should see that the rate of taxes are correct and there is no mistake in that and proper disclosures regarding that have been given.
Revenue	Profit before tax	The figure of the profit before tax has been calculated by deducting the various operating and non operating expenses along with the respective amount of depreciation as applicable and has complied with the requirements of the relevant provision The presentation of the income statement clearly justify this assertion	The auditor should  properly vouch all the transcations that are related to the revenue that has been recorded and see that proper disclosures have been given.
Revenue	Amount of the export incentive received	The amount of the export incentive reflected is adequately supported by the relevant documents as has been presented before us The assertion is true because we have checked all the relevant documents in this regard and duly cross verified the same (Chariri, 2017)	The auditor should check the documents with relation to the export revenue and check that proper custom duties have been paid.
Expenditure	Total payment made to the governement	The total amount paid to the government represents the figure paid in terms of income tax, and other taxes, but is not reflecting the payment individually made to the various governments The reason is that the document presented before us is not adequately reflection such bifurcation under different heads and for different governments	The auditor should see that none of the payments that have been made is not made on false ground and proper justification for all is given.
Asset	Cash and Bank balances with the Banks	Cash and bank balances have been verified by us by taking the copy of the passbook and the cash book along with the physical counting of the cash and is representing the true figure The reason behind such assertion is that the physical counting and cross verification of the pass book have been done by our audit team (Crosby & Henneberry, 2016)	The auditor should obtain all the documents and also prepare a bank reconciliation statements and all items that are of very high value should be checked.
Asset	Trade and other receivables	The figure of the trade receivables have been taken into consideration the figure of the credit sales made and their certainty of realisation and is true We have adequately verified the sales book	The auditor should properly verify and vouch the trade receivables and should also see that the overall provision for bad debt has been done.
Asset	Inventory especially platinum	The inventory reflects the various items kept in the warehouse at the year end date along with their roper value We have conducted the physical verification of the inventory to justify our assertion	The auditor should see that the inventory has been properly recorded in the statements with respect to the disclosures that has been given in the annual reports of the company
Assets	Pre or advanced payment made to parties	These represent the amount paid in advance to various suppliers for the procurement of the inventory  along with the advance request made by those providing servicesWe have adequately vouched each and every item of the pre payment	In case of advance payments the terms of payments should be checked to make sure that they are not harmful for the company.
Liabilities	Share based compensation	These represent the payment made to the shareholders These have been adequately verified through the assistance of the concerned register relating to the payment and the verification  of such payment	Terms of share based compensation should be checked to make sure that there is no loss for the company and it is as per the regulations that has been set by the government (Dichev, 2017).
Liability	Environmental rehabilitation provision	These provisions have been made based on the appropriate judgement made by the management These provisions have been adequately verified from the cross verification of the estimates made by the management along with the verification of their compliance with the relevant laws	The auditor should check that the company has accounted for the same by following the necessary guidelines
Liability	Current income tax liability	The current income tax liability has been calculated keeping in mind the provision f the income tax applicable for the current year. It has been cross verified by performing the analytical procedure by the members of our audit team	The auditor should see that proper rate of taxation has been applied and proper disclosures has been given.
Liability	Borrowings made as non current liability	These borrowings have been resorted to for the period of less than one year. The same has been verified from the register of the borrowings and the cross verification of the bank statements where such amount has been credited (Fay & Negangard, 2017)	The auditor should see that whether these borrowings are NPA and make relevant disclosures with respect to that.
Liability	Trade payables	Trade payables represent the amount as lied outstanding to be payable to the supplier and it has been cross verified with the invoices received from them. This is the reason behind the assertion made by us	The auditor should vouch and verify the trade payable statements and see that proper disclosures has been given.

Audit Sampling is applying the method of auditing prodcures to less then 100 items in a group and then checking the validity of the same in the group. Audit Sampling is done so that the auditor does not have to spend a lot of time in auditing the financial statements and it is one of the smartest ways to check the validity of the financial statements of the company. There are various types of sampling methods that can be used. In case of the given company the auditors can apply different method of sampling like simple sampling, starified sampling, cluster sampling and systematic random sampling. All of these are very definitve methods of sampling, and helps in auditing of large group of items. The company in this case should resort to easy method of sampling as most of items are not very complex and should apply simple method of sampling that will help in selecting samples and then test those samples for verification. From a group of 1000 items the company should randomly select 100 items and then apply audit procedures to them to know their validity and then that would help the auditors to make an opnion on the books of accounts of the company (Guragai, et al., 2017). The auditor can befircate the items into two groups of assets and liabilities and for the assets each item must be tested with 100 samples and with each group of liability the items should be tested for 150 items again.

Conclusion

Based on the overall analysis it can be said that Zimplate has managed to prepare the books of account to the best of its ability and there are no such erros that can be reported to be very high. All the analysis has been done above for the reference.

References

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