J & K Mining Company operates in the Abuakwa Community of the Eastern Region as a Sand Wining Company. The youth of the area had been opposing the activities of the company of late. Sasana the Managing Director of J & K Mining Company approached Kaku & Associates, a Chartered Accounting firm to accept an attest engagement to examine and report on the environmental issues of J & K Mining Company Ltd. for the year ended 31 December, 2013.
Required:
i) Evaluate the environmental issues that may lead to the risk of misstatements in the Financial Statements. (3 marks)
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- Provisions e.g. for site restoration costs.
- Contingent liabilities, e.g. arising from pending legal action.
- Assets values, e.g. inventory or non-current assets which may be subject to environmental concern.
- Accounting for capital or revenue expenditure on cleaning up the production process or to meet legal or other standards.
- Product redesign costs.
- Product viability/going concern considerations. (1 mark each or any 3 valid points)
ii) Recommend the actions and the audit procedures that Kaku and Associates should undertake when they realise that J & K Mining Company Ltd. has environmental issues that may affect the Financial Statements. (7 marks)
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Actions that should be undertaken
- Obtain an appropriate understanding of the company, its operations and in particular, its environmental issues.
- Evaluate whether there is any possible risk of misstatement in the financial statements as a result of environmental issues.
- Enquire of management as to any systems or controls which are in place to identify risk, evaluate control, and account for environmental matters. (1 mark each or any 3 valid points)
Audit Procedures
- Obtain an understanding of the control environment operating within the client.
- Obtain written representations from management on any environmental matter.
- Obtain evidence from environmental experts where this is necessary.
- Seek corroborative evidence of any statements by management.
- Use professional judgement to consider whether the evidence in relation to environmental matters is sufficiently persuasive.
- Consider minutes of directors, board, committees or environmental officers.
- Review documentation.
- Review all assets for impairment.
- Review liabilities and provisions to ensure all have been included.
- Review contingencies and ensure adequate disclosure.
- Include environmental issues in the review of the appropriateness of going concern. (1 mark each for any 4 valid points)