TANZANIA MINERALS AUDIT AGENCY TMAA TANZANIA MINERALS AUDIT

TANZANIA MINERALS AUDIT AGENCY (TMAA) TANZANIA MINERALS AUDIT AGENCY

TOPIC: PHYSICAL AUDIT AND ITS IMPORTANCE Presented at a Workshop in Lusaka, Zambia, 18 -19 April 2012 at Cresta Golfview Hotel TANZANIA MINERALS AUDIT AGENCY

CONTENTS Auditing in General Meaning of Physical Audit Importance of Physical Audit Challenges of Physical Audit TANZANIA MINERALS AUDIT AGENCY

AUDITING IN GENERAL • Auditing is a systematic examination and verification of a firm’s books of accounts, transaction records, operations and other relevant documents in order to establish compliance to the applicable laws/regulations or standards. • For the case of tax auditing, records examined include tax related records for the purpose of checking compliance to the tax laws. TANZANIA MINERALS AUDIT AGENCY

PHYSICAL AUDIT q Physical Audit (PA) is a systematic undertaking of verifying and observing entity’s operations to declarations and records to assess its compliance to applicable laws, regulations and standards. It is a procedure through which auditor witnesses, verifies or inspects operations or selected declared items. q Physical Audit can be done before (Pre-reporting) and/or after reporting (Post-reporting). Good example of Pre-reporting PA is the mineral audits done by TMAA TANZANIA MINERALS AUDIT AGENCY

IMPORTANCE OF PHYSICAL AUDIT • Pre-reporting Physical Audit q Upfront capturing of values and data q Reduction of backlogs of audit information at the end q Prevention compliance of auditee cheating-Encourages voluntary q Facilitates collection of reliable data TANZANIA MINERALS AUDIT AGENCY

IMPORTANCE OF PHYSICAL AUDIT (cont’d) • Pure example of Pre reporting PA as done by TMAA Photo 1. TMAA auditor taking sample TANZANIA MINERALS AUDIT AGENCY Photo 2. TMAA auditor analyzing sample

IMPORTANCE OF PHYSICAL AUDIT (cont’d) • Post-reporting Physical Audit q Reliable audit evidence. For auditors to come up with reliable and substantive audit evidence, they must confirm the following audit assertions by carrying out physical inspection in addition to document review: Existence Cut-offs Valuation Classification TANZANIA MINERALS AUDIT AGENCY

IMPORTANCE OF PHYSICAL AUDIT (cont’d) • Existence: Existence Physical audit confirms physical existence of an asset in the location where it is being used/deployed. Photo 3. Mining Equipment in use at Mine site. TANZANIA MINERALS AUDIT AGENCY

IMPORTANCE OF PHYSICAL AUDIT (cont’d) • Cut-offs: Cut-offs For tax purposes, capital allowance has to be granted in the same year of income the asset is purchased and put in use. Physical inspection on site helps to confirm whether assets were owned and put in use in the respective period. Photo 4. Equipments assembling TANZANIA MINERALS AUDIT AGENCY Photo 5. Equipment in use

IMPORTANCE OF PHYSICAL AUDIT (cont’d) • Valuation: Value of assets as per documents should at least give fair and reasonable reflection to the physical appearance of the asset in question • Classification: Classification Transaction and events have been treated and recorded in the appropriate account according to their nature and class so as to be accorded with proper tax treatment. Photo 6. Light Vehicle TANZANIA MINERALS AUDIT AGENCY Photo 7. Heavy Mining Equip

IMPORTANCE OF PHYSICAL AUDIT (cont’d) q From the above it is clear that documentary review/examination alone, can not confirm some of the important audit assertions such as existence, cut offs etc. PA is therefore very important q From tax audit perspective, physical audit is more important to confirm that capital allowances are lawfully granted in the case of assets existence and use. TANZANIA MINERALS AUDIT AGENCY

IMPORTANCE OF PHYSICAL AUDIT (cont’d) Examples of exhibited benefits to the Government as a result of Post -reporting physical audit conducted by TMAA: • Case 1: Non-existence of Non-Current Asset On-site physical inspection/audit conducted at one mining company revealed non-existence of the declared asset on site. • Case 2: Cut-offs problem (Premature Claim) On-site physical inspection/audit conducted at one mining company revealed some assets claimed were not in use as declared. Instead, the assets were in parts (Photo No. 4). Capital expenditure in relation to such assets were therefore wrongly/prematurely claimed. TANZANIA MINERALS AUDIT AGENCY

CHALLENGES OF PHYSICAL AUDIT § Resource consuming in terms of time and cash. § Poor timing may lead to useless results. § Increased audit paper works. § May lead to resistance by auditee to site accessibility § Needs wider knowledge and experience TANZANIA MINERALS AUDIT AGENCY

THANK YOU TANZANIA MINERALS AUDIT AGENCY