CA Gagan Bareja
Dubai’s main business is mixed with trade, tourism, aviation, real estate and gold and gem Jewellery. When we talk about gold and jewellery, it has become the centre point of international business to attract Traders, Retailers, Manufacturers and even customers across the world. Due to tax heaven and the availability of DMCC(Dubai Multi Commodities Centre), Dubai Gold & Jewellery Group, and strategic free zones, it has taken a lead in the world with respect to international trade of gold, gems and diamond jewellery. Since this market is not fully regularised and customer and sales-centric, we generally do not give much importance to a strict auditing and compliance environment functioning. This is a billion-dollar industry that comprises financial processes that demand accuracy, transparency, and regulatory compliance. Auditing gems and jewellery businesses is not an ordinary financial review, and it requires:
1. structured process with accuracy
2. technical knowledge of valuation
3. An understanding of regulatory and compliance
4. appropriate documentation
5. Monitoring the challenges because of high-value, portable assets and fluctuating valuations
Although there are many challenges in this industry, we will outline a few of the major challenges in auditing procedures within Dubai’s gems and jewellery industry, along with their viable solutions.
1. Complex Valuation and Measurement of Inventory
The most critical challenge auditors face is the accurate valuation of inventory. Each gemstone or jewellery piece is different from another, with value measured and affected by multiple factors such as 4Cs(carat, clarity, cut, and colour). The price of gold is unstable in the global market and even has many classifications, which can lead to uneven or independent valuations, by which there is inherent risk for misstatements in financials.
Solution:
To cover up the above-mentioned uncertainty or challenges, the companies should follow standard valuation methods which comply with International Valuation Standards (IVS) and relevant IFRS principles, such as IAS 2 for inventories, which says Inventories are measured at the lower of cost and net realisable value and particularly IFRS 13 – Fair Value Measurement, which defines how fair values can be measured.
Audit should verify the valuation reports of the certified gemmologists or independent valuers to avoid conflicts of interest and ensure an unbiased valuation. If inventory can be monitored digitally will add real-time movability data, and an audit trail can be identified or established.
Auditors should review the process to identify the proper controls and place and test of detailed procedures to be done, such as:
- BOM to be checked thoroughly while calculating the cost of manufactured jewellery
- What is the treatment of wastage and pilferage in manufacturing or polishing
- Verification of purchase contracts and vouching of suppliers’ invoices
- Pricing methodology for valuation
- FIFO/Weighted average method used for costing
The above-mentioned procedure is subject to and not limited to the size, nature and location of inventory. The focus is on ensuring the value of stock reflects real market value and not overstated profits.
2. Physical Verification of Inventory
Physical verification of inventory plays a key role in the audit of inventory in gems and jewellery. The small size and difficulty in distinguishing the similar will consume more time in the inventory count in comparison to other industries. The high value of jewellery items poses a significant challenge during the physical verification of inventory.
Manual inventory counts and poor documentation may lead to misstatement of stock balances. Limited internal controls increase the risk of financial loss to the business by theft or missing inventory.
Solution:
While doing the inventory count auditor can rely on RFID tagging, barcode systems or any other tracking tools for of inventory count. Conducting surprise stock count verification during audits improves accuracy. For completeness, of inventory audit should verify the list of stock as per the system with the inventory count checklist. The auditor should consider the samples from the inventory categories from a value perspective to mitigate the risk of misplacement.
Below are some of the steps to follow for the inventory count procedure:
1. Stop inventory movement
2. Tag and seal stockrooms & display counters.
3. Obtain inventory reports from the system.
4. Carry proper equipment to identify the stock, like a bar code reader, etc.
5. Inventory listing SKUs / item codes
6. Carry weighing scale
7. Equipment for purity (karat) or quality
8. Category-wise listing (gold ornaments, loose diamonds, stones, etc.)
3. Compliance and Anti–Money Laundering (AML) Risks
Globally, the gems and jewellery sector is classified as a high-risk industry for potential money laundering due to its cash-intensive nature and ease of cross-border transactions. Ensuring compliance with the UAE’s AML and CFT (Counter Financing of Terrorism) regulations is therefore a top priority.
Below are certain regulations or laws, or other procedures applicable in Dubai:
- UAE VAT Law
- DMCC Rules – Especially for companies located in DMCC Free Zone
- Anti-Money Laundering & CFT Regulations – Customer KYC, record retention, transaction reporting
- Customs & Import/Export Documentation
Non-compliance with the above may invite penalties or regulatory challenges.
Solution:
First of all, auditors should understand above all the laws and regulations applicable to the gems and jewellery industry. Auditors should review the entity’s internal controls, customer KYC are in place, and risk-based compliance frameworks. Audit procedures should be AML-focused. Periodic Internal audits will help to mitigate the risk of non-compliance at a later stage. Training the audit staff with respect to laws and regulations and their criticality, and also technology-enabled compliance monitoring tools, further helps mitigate exposure.
For e.g. every sale above AED 55,000 needs KYC and Beneficial Ownership documentation.
If any AML officers have been appointed by the business owners, then adhere to their report on the same.
4. Evolving Regulatory and Reporting Standards
Dubai is known for transparency and security in the world, because of which it is a point of attraction for the world. To maintain the growth and increase in the business opportunity in one must follow the regulations and reporting standards completely and consistently. Auditors and Business owners both should know the applicable standards issued and updates. Majorly Dubai Multi Commodities Centre (DMCC), the Ministry of Economy, and the International Financial Reporting Standards (IFRS) regulation to comply with.
Solution:
Continuous professional development through training programs, seminars, and regulatory workshops helps professionals stay up to date. Continuous or periodic interaction between management and auditors ensures the timely adoption of new standards, strengthening both compliance and investor self-assurance.
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