Semester 1, 2018: Auditing and Assurance Report on Coal Company

This report provides a comprehensive analysis of Allegiance Coal Ltd, focusing on its operations, financial performance, and associated risks. The executive summary highlights the company's activities in the coal industry, emphasizing its production of metallurgical coal and sales strategies. The report delves into specific reporting requirements, including government policies, lease terms, and health and safety regulations within the mining sector. It identifies four significant risks, namely, escape of acidic water, fines, penalties, climate change, and discusses three key areas of concern for the company, including pollution, regulatory scrutiny, and cleanup costs. Financial ratios such as current ratio, quick ratio, debt ratio, gearing ratio, return on equity, and EPS are calculated and analyzed to assess the company's liquidity, profitability, efficiency, and overall financial position. The analysis reveals the company's weak financial standing, marked by net losses and negative EPS, and emphasizes the need for improved management strategies. The report concludes with a risk assessment that highlights the company's risk management framework and its efforts to mitigate various threats.

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Assignment Semester 1, 2018 Auditing and Assurance (ACC3AUD)
Department of Accounting La Trobe University

Allegiance Coal Ltd
Executive summary
Allegiance Coal Ltd has been selected for this report that will assist in understanding whether
the company has performed effectively and the risks that are associated with a mining
company. Further, a vivid discussion will be done on the mining industry and the manner of
operation of the company. Moreover, the approaches and measures used to encounter risks
have also been provided through this report by analyzing the annual report of the company.
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Allegiance Coal Ltd
Contents
1. Overview of the operations...........................................................................................................3
2. Specific Reporting Requirements...................................................................................................3
3. Four major significant risks for Allegiance.....................................................................................5
 Escape of the acidic water.............................................................................................................5
 Fine, penalty and assessments......................................................................................................5
 Climate change..............................................................................................................................5
4. Three areas of Concern for Allegiance Coal...................................................................................6
5. Comment on Financial performance.............................................................................................8
Risk Assessment....................................................................................................................................9
References...........................................................................................................................................10
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Allegiance Coal Ltd
1. Overview of the operations
The company Allegiance Coal Limited is a listed on the securities exchange board of
Australia. The main focus of the company is to produce and retain the best quality
metallurgical coal and then sell them to earn good revenue and have the low political risk.
The company should always keep in mind that the assessment of the projects is made
according to the capital expenditure budget which was formalized earlier. They should check
that any of the projects is not hampering their budget and thus they should also try to spend
less than the budget formalized because savings is the key to success. The company should
also engage in maintaining good and formal relationships with its clients as their happiness
will prove to carry out a healthy and sustainable business. The Allegiance Coal limited is one
of the most known companies in its field and is having a sustainable business of coal
exploration. It has explored coal in more than 14 granted tenements within the Queen’s land
provinces and has also discovered few traces in the Bowen and Surat basins. The company
also aims to become the largest coal producer in the year 2017 after it comes up with its first
coal (Allegiance Coal Ltd, 2017).
Australia has been the fourth largest coal producer in the world and also it is one of the
largest exporters as it exported more than 24% of the total world steam coal in the year 2015.
It also has exported cooking-coal to the countries like India, Taiwan, Japan, South Korea and
China. It has also been announced by predicted about the coal industries of Australia that they
will be playing a very important role in the future market and will increase steadily by
reaching 232MMt by the year 2020 and thus keep on increasing till the year 2040.
The coal quality of Australia has proved to be very vigorous. They have also been seen with
many problems to grow. The coal export services require a lot of investment for the building
of the infrastructure of the rail and port which is not possible for the firm to invest as there is
not a very suitable condition in the market to invest in the new plans (Allegiance Coal Ltd,
2017). The government has also enforced many new taxation strategies upon the mineral
resource and the carbon emissions which have let to increase the cost of the overall
production of coal. The company has hence tried new and effective measures so that it can
get reasonable returns on its investments.
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Allegiance Coal Ltd
2. Specific Reporting Requirements
 Government policies
The government has issued the retention/mineral development license. This license was
issued so that the holders can perform the process of mining operations and carry out their
operation in only commercially viable places (Douma & Hein, 2013). There are many of the
major territories and states which have been included in the retention title.
A mining lease is provided to the producers when they have found a place for the coal
exploration which is making no commercial violations and also by the use of the mining
lease, only some specified minerals can be extracted in from the field which is mentioned in
the lease. These leases can be held by an individual or by and firm and is also transferable to
different parties.
 Lease/license/concession term
A time period of about one to six years is generally granted for an exploration license but the
time span may vary according to different areas. There can be alterations to the same which
can be done by the State/Territory government if any special case arises.
Preservation titles are permitted for a time span of five years after which they call for
renewal. If the cases related to mining leases are concerned then it is seen that they are
permitted for a time period of 21 years after which they demand renewal (Francis et. al,
2013). The time period also depends on the State/Territory which can be changed by the
government of the same (Allegiance Coal Ltd, 2017).
 Health and safety
There is s set of rules that must be followed in mining operation which governs the health and
safety during such undertaken tasks. These laws are the same as in every State/Territory
which are under the health and safety constitution topic. According to the laws embedded in
the constitution, it is necessary for the mine operator to see that there is no harm or threat to
the lives of the workers working in the mine. If the above-written rules are not followed as
mentioned then it would result in serious criminal penalties charged (Connelley, 2012).
It is seen that in some states, there are mine related safety laws other than the base ones.
These additional laws are based on the site-specific safety features. These laws see that the
mine is fully safe for work with all preventions taken (Peirson et. al, 2015).
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Allegiance Coal Ltd
3. Four major significant risks for Allegiance
 Escape of the acidic water
Escape of the acidic water either from coal mines or from metal mines is termed as Acidic
mine drainage. It can also happen that previous mining tasks have brought the rocks
containing sulfur pyrites to the surface and these pyrites react with air and water forming
sulfuric acid and then are carried away by water which is disposed of in the nearest water
body.
 Damaging the atmosphere
Sulfur-dioxide and nitrogen-oxides along with particulate matter (PM) are the ones that are
disposed of in air which forms smog by mixing with the air moisture and this is all due to the
power plants which use coal to generate resources (Allegiance Coal Ltd, 2017). These gases
and smog may cause numerous respiratory, cardiovascular, and cerebral and vascular
diseases.
 Fine, penalty and assessments
Because of the above-mentioned points, the fines and penalties being imposed are increasing
further which may seem heavy to the mining companies. Canada and Argentina are at the top
of the list in slamming the mining companies with heavy fines and penalties for disruption of
the environment.
 Climate change
The operations that are undertaken by the mining companies are releasing such harmful
elements that are disrupting the natural environment of the world. This climate disruption will
have to be taken into account while embedding the risk management plans into operations
like refineries, smelters, crushing operations, mills and open pit mines which cause
deforestation (Allegiance Coal Ltd, 2017). Also, the reduction of the ozone layer
continuously is a matter of great threat and concern to the climate disruption.
Allegiance Coal Ltd has various operations in different countries that have made it vulnerable
to various types of risks like financial risks, compliance, risks, operational risks, etc. Besides,
the company operates in a market that is posed by a threat of competition and entry of rivals
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Allegiance Coal Ltd
that can affect its financial performance over the years if proper risk management measures
are not taken into consideration (Allegiance Coal Ltd, 2017).
4. Three areas of Concern for Allegiance Coal
The three main areas of concern for Allegiance coal are as follows:
 New Pollution matter from the operations of the current scenario
Operations that pertain to mining and refining release contaminants into soil, air and water
and this proves to be a matter of concern for Allegiance. Hence, there is a liability for bodily
injury and third party damage from such risks that can be attributed to the various
geographical region (Allegiance Coal Ltd, 2017). There is a major danger when it comes to
the regulation of government. Further, there are various mines that are inclosure state and
post-closure there is a big responsibility attributed to water quality treatment. Hence, it
projects a significant risk (Bauer & Hann, 2010).
 Pollution condition
Regulatory scrutiny has become the need of the hour and such has brought attention to the
performance of Allegiance Coal. There has been various decision by the court regarding the
mining industry and new rules were established for the maintenance of the financial
responsibility (Gay & Simnet, 2015). It needs to be noted that coal companies here the
Allegiance Coal works with the hazardous substance that is a risk burden. Hence, it projects
that the cleanup costs need to be borne by the company (Allegiance Coal Ltd, 2017). Various
environmental incidents can crop up and that belongs to the company which is of high risk.
 Cleanup costs
There are various regulations that apply to the coal company and when it comes to Allegiance
coal it needs to adhere to the various regulations imposed by the government. Reassessment
of a site by the government can bring a new judgment that needs to be adhered by the
company and hence, needs financial cost for the maintenance.
Ratios
Allegiance RATIOS
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Allegiance Coal Ltd
2017 2016
Current assets 18,59,295 14,29,101
current liabilities 3,50,010 20,63,015
Current ratio = CA/Cl 5.31212 0.6927245
Quick ratio
2017 2016
Cash+ cash equivalents +trade and other
receivables 18,59,295 14,29,101
current liabilities 3,50,010 20,63,015
Quick ratio =Cash+ cash equivalents +trade
and
other receivables/current Liabilities 5.31212 0.6927245
Debt Ratio
2017 2016
Total Debt 9,33,232 20,63,015
Total Assets 50,77,298 16,79,101
Debt Ratio = Total debt/total assets 0.183805 1.2286426
Gearing ratio 2017 2016
Total liabilities 9,33,232 20,63,015
total equity 41,44,066 -383914
gearing ratio = total liabilities./ total equity 0.225197 -5.373638
Managerial efficiency 2017 2016
Net income -9,79,673
-
32,63,070
/shareholders’ equity 41,44,066 -383914
Return on equity= Net income/ equity -0.2364 8.4994817
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Allegiance Coal Ltd
Profitability
EPS -0.80 -9.25
5. Comment on Financial performance
• Liquidity –the current ratio and quick ratio projects that the company has huge surplus of
current assets. This means that the liquidity is available and the company can meet the
obligations. However, huge surprise us is lying idle and the company cannot earn a return
from it (Brigham & Daves, 2012).
• Profitability - the profitability of the company is weak because the EPS is weak. This
means that the company is losing money.
• Efficiency – the return on equity has declined meaning that the company has lost money.
Hence, it is a strict alert for the investors.
• Overall financial position – as per the analysis, it can be commented that the financial
position of the company is weak because the company is having a net loss. Moreover, the
EPS runs negative. Another factor like surplus current assets is not helping the company to
generate returns (Bodie et. al, 2014). Therefore, it is imperative that the management should
look into the prospect and determine the policies to salvage the company.
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Allegiance Coal Ltd
6. Risk Assessment
Allegiance Coal has undertaken an efficient risk management framework to mitigate various
risks posing a threat to its affairs. Further, ratios have also assisted in enhancing the
discussion on the company’s risk management measures. Yes, the audit of the company can
be undertaken at all the details pertaining to the company is available and through it, the audit
can happen. The risks are clearly disclosed together with the presence of ratios that would
lead to a proper audit assessment.
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Allegiance Coal Ltd
References
Allegiance Coal Ltd. (2017) Allegiance Coal Ltd Annual report & accounts 2017 [online].
Available from: http://www.allegiancecoal.com.au/irm/PDF/1252_0/2017AnnualReport
[Accessed 30 April 2018]
Bauer, R. and Hann, D. (2010) Corporate environmental management and credit risk.
Maastricht University.
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill
Brigham, E. & Daves, P. (2012) Intermediate Financial Management. USA: Cengage
Learning.
Connelley, T. (2012). Aspects of leadership, Ethics, law and Spirituality. Marines Corps
University Press
Douma, S & Hein, S. (2013). Economic Approaches to Organizations. London
Francis, R. N., Harrast, S., Mattingly, J. and Olsen, L. (2013) The relation between
accounting conservatism and corporate social performance: An empirical investigation.
Business and Society Review. [online]. 118 (2), p. 193 - 222. Available from: doi:
10.1111/basr.12008 [Accessed 30 April 2018]
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 30 April 2018]
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th
ed. North Ryde: McGraw-Hill Australia.
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