You are a first-year trainee accountant at Phiwe Tsombe a medium-sized audit firm. You are one of six audit team members to audit the Limberg Mining Company (Pty) Ltd. In preparation for the audit of Limberg Mining Company (Pty) Ltd, your audit senior presented you with the following information on the Limberg Mining Company (Pty) Ltd.
LIMBERG MINING COMPANY (PTY) LTD
BUSINESS BACKGROUND
Limberg Mining Company (Pty) Ltd was established in 1976 in South Africa. Its core business is the mining and smelting of chrome ore. Chrome ore is converted to ferrochrome through intense metallurgical processing. Limberg Mining Company (Pty) Ltd. is one of the largest integrated ferrochrome producers in the world with an annual capacity of one million tons. Limberg Mining Company (Pty) Ltd produces three grades of ferrochrome, namely charge chrome, intermediate chrome, and low carbon ferrochrome, each used in different areas of the stainless-steel smelting process. Limberg Mining Company (Pty) Ltd mining operations employs a workforce of 10 000 employees.
In April 2024, PHIWE TSOMBE was awarded a tender to audit Limberg Mining Company (Pty) Ltd. and its newly acquired subsidiary company, Happlycoal (Pty) Ltd for the year ended 31 August 2024. Annual general meeting as stated in the revised memorandum of incorporation of the company. The appointment of PHIWE TSOMBE as the auditors of Limberg Mining Company (Pty) Ltd was a direct result of the previous auditors filing a notice of resignation because they did not possess the professional competence and resources to service Limberg Mining Company (Pty) Ltd.due to the company’s growth. When PHIWE TSOMBE contacted the previous auditors, they confirmed that they had enjoyed the long association with Limberg Mining Company (Pty) Ltd has a good reputation in the industry.
Limberg Mining Company (Pty) Ltd. acquired a 55% shareholding in Happlycoal on 11 September 2023. At the time, the year end for Happlycoal was on 31 March. To ensure consistency in group reporting, the financial year end of Happlycoal was changed to 31 August. The core business of Happlycoal is the mining of coal. Happlycoal has three coal-mining sites in various areas of Mpumalanga and a newly established mining site in Limpopo. Each coal mining site has accounting staff responsible for capturing financial data. The head office of Happlycoal is situated in Middelburg.
During mid-March 2024, Ryan Reynold, the audit partner on the audit, was approached by Sipho Platinum Mines Ltd, an 80% shareholder of Limberg Mining Company (Pty) Ltd., to negotiate the sale of its shares in Limberg Mining Company (Pty) Ltd. The sale was completed successfully in May 2024. This resulted in the delisting of Limberg Mining Company (Pty) Ltd from the JSE Ltd. The new shareholding of Limberg Mining Company (Pty) Ltd.
In May 2024, the Limberg Mining Company (Pty) Ltd was affected by the South African Transport Union’s strike that lasted for a month. Employees of Limberg Mining Company (Pty) Ltd also went on a strike in July 2024 over salary increases. This strike lasted for two weeks. The Limberg Mining Company (Pty) Ltd was not able to export ferrochrome and coal to overseas customers during this period. These customers represent 80% of the group’s customer base. As a result, the group recorded a loss for the 2024 financial year, for the first time in years. Automation plays a crucial role in modern mining operations, enhancing efficiency, safety, and productivity. Mining companies utilize various software systems and technologies to automate and optimize their processes.
Mining companies employ autonomous vehicles and equipment, such as haul trucks, drills, and loaders, equipped with advanced sensors, GPS, and navigation systems. These vehicles can operate without direct human intervention, improving safety and productivity by reducing the risk of accidents and optimizing operations. Limberg Mining Company (Pty) Ltd uses geospatial and Geographic Information System (GIS) software was used by mining companies to manage and analyse spatial data related to exploration, mining, and environmental monitoring. These systems enable visualization of geological features, mineral deposits, and infrastructure assets, facilitating decision-making and risk assessment.
Limberg Mining Company (Pty) Ltd environmental monitoring and compliance software systems help mining companies track and manage their environmental impact, ensuring compliance with regulatory requirements and sustainability goals. These systems monitor air and water quality, waste management practices, and ecological impacts, enabling proactive risk mitigation and reporting.
On 30 June 2024, the service contract of both the chief executive officer (CEO) and the managing director (MD) of Limberg Mining Company (Pty) Ltd came to an end. The majority shareholders decided at a general meeting not to renew their contracts. Both the CEO and MD had been employed by Limberg Mining Company (Pty) Ltd for more than 10 years. It has been reported in the business press that they are mainly to be credited for the financial success of Limberg Mining Company (Pty) Ltdover the years. The search is on for two candidates with the required skills, knowledge, and experience to fill the vacant positions. In the meantime, the financial director is acting as both the CEO and MD.
To ensure that the Limberg Mining Company (Pty) Ltd. is well manage, a significant part of the remuneration of directors is incentive based. The director’s remuneration is determined by the audit committee. A week before the Limberg Mining Company (Pty) Ltd.’s financial year end, the audit partner became aware of the following article in the financial press:
HAPPLYCOAL MINES ON CULTURAL HERITPHIWE TSOMBE SITE
The Department of Water Affairs and Forestry has raised concerns about the illegal mining operations performed by Happlycoal on the cultural heritage site in the Gauteng province. The site is home to more than 470 bird species, as well as more than 50 different species of endangered plant life. James Taylor, on 5 September 2024, the attorneys of the Limberg Mining Company (Pty) Ltd indicated that the court was likely to rule in favour of the Department of Water Affairs and Forestry. The estimated cost set to restore the site amounts to approximately R10 000 000.
According to the Department, Happlycoal has already destroyed 10 square kilometres of the indigenous forest for them to perform their mining activities. A spokesperson for the Department of Minerals and Energy stated that Happlycoal owns the mining rights to a portion of land situated close to the site. The Department of Water Affairs and Forestry has filed a lawsuit against Happlycoal for the damage it has caused to the cultural heritage site. The acting CEO has informed PHIWE TSOMBE that the new holding company requires the audited financial statements of the Limberg Mining Company (Pty) Ltd within two weeks after the year end. The shareholders require this information as soon as possible to determine if the group might need to be steered into a different direction.
REQUIRED
BASED ON THE CASE STUDY ANSWER THE FOLLOWING
QUESTION 1
(a) With regard to the opening paragraph and the Limberg Mining Company (Pty) Ltd Discuss the matters to consider and the concerns PHIWE TSOMBE would have prior to accepting the Limberg Mining Company (Pty) Ltd as an audit client.
(b) How would you apply auditing software systems in the case study. Make reference to existing software
(c) Perform substantive testing and analytical procedures to obtain audit evidence regarding the accuracy and completeness of financial reporting related to chrome mining activities.
Question 1
(a) Prior to accepting Limberg Mining Company (Pty) Ltd as an audit client, PHIWE TSOMBE would need to consider several key factors and potential concerns. These include:
1. Professional competence and resources: PHIWE TSOMBE would need to assess whether they have the necessary expertise and resources to effectively audit a company of Limberg Mining Company (Pty) Ltd's size and complexity, especially considering their recent growth and the issues that led to the resignation of the previous auditors.
2. Reputation and integrity of the company: PHIWE TSOMBE would need to evaluate the reputation and integrity of Limberg Mining Company (Pty) Ltd, including any potential risks related to fraud, non-compliance, or ethical issues.
3. Materiality and significant risks: PHIWE TSOMBE would need to identify any material risks that could impact the financial statements of Limberg Mining Company (Pty) Ltd and assess the potential impact on the audit.
4. Regulatory and legal requirements: PHIWE TSOMBE would need to ensure that Limberg Mining Company (Pty) Ltd complies with all relevant regulatory and legal requirements, including any industry-specific regulations related to mining and environmental compliance.
(b) To apply auditing software systems in the case study, PHIWE TSOMBE can utilize various existing software tools to enhance the audit process. Some of the software systems that can be used include:
1. Data analytics software: This software can help analyze large volumes of financial data to identify trends, anomalies, and potential risks in the financial statements of Limberg Mining Company (Pty) Ltd.
2. Audit management software: This software can aid in the planning, execution, and documentation of the audit process, ensuring efficiency and accuracy in audit procedures.
3. Continuous auditing software: This software can help PHIWE TSOMBE in real-time monitoring of financial transactions and activities of Limberg Mining Company (Pty) Ltd to detect any discrepancies or irregularities.
4. Collaborative audit tools: These tools can facilitate communication and collaboration among the audit team members, enabling efficient coordination and management of audit tasks.
(c) To perform substantive testing and analytical procedures regarding the accuracy and completeness of financial reporting related to chrome mining activities, PHIWE TSOMBE can consider the following steps:
1. Substantive testing of mining assets and revenues:
- Conduct physical inventory counts of chrome ore and finished products.
- Verify the valuation of mining assets and the recognition of revenue from the sale of ferrochrome products.
- Confirm the existence and ownership of mining rights and mining equipment.
2. Analytical procedures:
- Compare revenue and production volumes with industry benchmarks and historical data to assess reasonableness.
- Analyze cost of goods sold and production costs to identify any significant fluctuations or abnormalities.
- Review the financial performance of Limberg Mining Company (Pty) Ltd's competitors to benchmark key financial ratios and indicators.
By performing these substantive testing and analytical procedures, PHIWE TSOMBE can obtain audit evidence to support the accuracy and completeness of financial reporting related to chrome mining activities at Limberg Mining Company (Pty) Ltd.