1. TANZANIA MINERALS AUDIT AGENCY TANZANIA MINERALS AUDIT AGENCY (TMAA)

2. 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

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

4. TANZANIA MINERALS AUDIT AGENCY 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. AUDITING IN GENERAL

5. TANZANIA MINERALS AUDIT AGENCY  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.  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 PHYSICAL AUDIT

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

7. 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 Photo 2.TMAA auditor analyzing sample

8. TANZANIA MINERALS AUDIT AGENCY Post-reporting Physical Audit  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 IMPORTANCE OF PHYSICAL AUDIT (cont’d)

9. TANZANIA MINERALS AUDIT AGENCY 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. IMPORTANCE OF PHYSICAL AUDIT (cont’d)

10. TANZANIA MINERALS AUDIT AGENCY 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 Photo 5.Equipment in use IMPORTANCE OF PHYSICAL AUDIT (cont’d)

11. TANZANIA MINERALS AUDIT AGENCY Valuation: 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 Photo 7. Heavy Mining Equip IMPORTANCE OF PHYSICAL AUDIT (cont’d)

12. TANZANIA MINERALS AUDIT AGENCY  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  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. IMPORTANCE OF PHYSICAL AUDIT (cont’d)

13. TANZANIA MINERALS AUDIT AGENCY 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. IMPORTANCE OF PHYSICAL AUDIT (cont’d)

14. TANZANIA MINERALS AUDIT AGENCY  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 CHALLENGES OF PHYSICAL AUDIT

15. TANZANIA MINERALS AUDIT AGENCY THANK YOU