You are a senior manager in Audit Services Associates, a national audit firm with offices in Lusaka, Ndola, Kitwe, and Livingstone. On 1 February 2022, your firm was appointed to audit Southern Coal Mining Plc.’s financial statements for the year ended 30 June 2022. The company’s principal activity is coal mining and draft financial statements for the year ended 31 July 2022 show revenue of ZMW794 million (2021: ZMW980 million), profit before tax of ZMW97 million (2021: ZMW130 million), and total assets of ZMW412 million (2021: ZMW546 million). 

You are planning the final audit for Southern Coal Mining Plc. for the year ended 30 June 2022, and have noted the following issues from a meeting held with the company’s Chief Financial Officer. Southern Coal Mining Plc. supplies coal to three key customers, two of whom are based in South Africa while the other is based in Tanzania. Payment for the coal is due in two installments: 50% is received when the order is confirmed and the remaining 50% is on delivery. Generally, it takes four months from the order is finalized until delivery. On 30 June 2022, there is an amount outstanding of ZMWK20 million from Pelica Enterprises Ltd. The amount is a disputed payment. 

Pelica Enterprises Ltd is refusing to pay until Southern Coal Mining Plc. delivers coal of the grade specified in the order. On 15 June 2022, a local newspaper ran a story to the effect that Southern Coal Mining Plc. was under investigation for illegal dumping of waste from its mining activities. The newspaper story stated that the local council had embarked on an exercise to clamp down on illegal dumping by mining companies and had recently imposed a fine of ZMW15 million on a mining company for similar illegal dumping. The company is vigorously defending its case. The UN Global Warming Fund gave a grant of ZMW10 million to Southern Coal Mining Plc. in May 2022 to assist with costs associated with the installation of devices in its purification equipment to reduce the toxicity of waste from its mine. Southern Coal Mining Plc. must install the devices by 30 September 2022 and reduce toxicity to undetectable levels. In order to address cash flow challenges encountered during the quarter to 30 June 2022, Southern Coal Mining Plc. applied for an overdraft facility from one of its bankers on 20 June 2022. 

The bank has requested audited financial statements for the year ended 30 June 2022 and cash flow forecasts for the next year. 3 Meanwhile, in May and June 2022, the company sold a number of plots of land that it had developed for farming purposes. Due to falling market prices, Southern Coal Mining Plc. made a loss of ZMW9.9 million on the sale of the plots. About half of the land, with a book value of ZMW30 million, is yet to be sold. 

Evaluate SEVEN business risks facing Southern Coal Mining Plc.

Answer rating: 100% (QA)

1 The company may have difficulty collecting payment from Pelica ... View the full answer