Financial Performance Analysis: Allegiance Coal Limited Audit Report

This report provides a comprehensive analysis of Allegiance Coal Limited, focusing on its operations within the Australian mining industry. It examines the company's business risks, including cash optimization, access to capital, joint ventures, and energy costs, and highlights concerns regarding liabilities, subsidiary financial results, and sales revenue. The report assesses Allegiance's financial performance, evaluating liquidity, profitability, and efficiency, and comments on its overall financial position. Additionally, it discusses relevant reporting requirements for Australian mining companies, such as the Offshore Minerals Act, Mineral Titles Act, Planning and Development Act, and Mineral Resources Development Act. The report concludes by evaluating the feasibility of conducting an audit of Allegiance Coal Limited, emphasizing the need for a thorough review of financial accounts to ensure the accuracy of the annual report.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student:
Name of the University:
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Table of Contents
Executive Summary:........................................................................................................................2
1. Overview of the operations and industry of Allegiance Coal Limited:.......................................3
2. Four specific reporting requirements for the Australian mining companies:..............................4
3. Four significant business risks for Allegiance Coal Limited:.....................................................6
4. Three areas/accounts of concern for Allegiance Coal Limited:..................................................8
5. Comment on the financial performance of Allegiance Coal Limited:........................................9
5.1 Liquidity:.............................................................................................................................10
5.2 Profitability:.........................................................................................................................12
5.3 Efficiency:............................................................................................................................12
5.4 Overall financial position:...................................................................................................13
6. Evaluating of whether the audit work of Allegiance Coal Limited would be undertaken:.......13
References:....................................................................................................................................14

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Executive Summary:
The current report aims to deal with evaluating the current standing of Allegiance Coal
Limited in the mining industry of Australia. It has been evaluated that the revenue of this sector
has declined over the past five years despite the rise in output. With the surge in global
development, most of the Australian mining organisations invested in new projects leading to
increase in capital investments and mining volumes. However, the rising supply has resulted in
significant price fall in for various division products in the past five years. Moreover, the
organisation is prone to certain business risks like cash optimisation, access to capital, access to
energy and joint venture agreements. Significant concerns are inherent in its annual report in
terms of liabilities, sales revenue and financial results of its subsidiary. Based on the financial
analysis, it has been assessed that Allegiance is struggling to sustain in the market due to
negative profit level and inability to raise funds through debt. Even though the audit work of
Allegiance Limited could be undertaken, the auditor needs to have a thorough review of all the
accounts, income and expenses for ensuring the validity of the financial information in the
annual report.

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1. Overview of the operations and industry of Allegiance Coal Limited:
Operations of Allegiance Coal Limited:
Allegiance Coal Limited is listed on the Australian Stock Exchange with a ticker symbol
of AHQ. The organisation is involved in acquiring and exploring for metallurgical coal
tenements. The primary investment focus of Allegiance includes advanced, near producing
projects or production in nations having sound records of investment and minimised level of
political risk. The organisation considers the capital expenditure in its projects seriously for
assuring that they sit at the back end of the cost curve (Allegiancecoal.com.au 2018). Finally, it
is committed to the formation of effective working relationships with indigenous individuals,
with whom the organisation is associated for the projects.
Industry overview of the Australian mining industry:
Due to the huge supply of hydrocarbon, mineral and non-mineral reserves, the mining
companies in Australia extract, develop and sell these reserves. Since these resources are of
greater quality, they help in maintaining global price competitiveness of the mining division. The
sector is reliant mainly on export and nearly 70% of the overall revenues have been earned in
2017 from exports (Ibisworld.com.au 2018). This is due to the industrialisation of the global
nations like India and China driving demand for natural resources. However, the revenue of this
sector has declined over the past five years despite the rise in output. With the surge in global
development, most of the Australian mining organisations invested in new projects leading to
increase in capital investments and mining volumes. However, the rising supply has resulted in
significant price fall in for various division products in the past five years. Hence, it could be

4AUDITING AND ASSURANCE
said that the main success factors for the Australian mining industry include resource
availability, proximity to transport and effective controls related to cost.
2. Four specific reporting requirements for the Australian mining companies:
There are certain specific reporting requirements for the mining organisations in
Australia and they are elucidated briefly as follows:
Offshore Minerals Act 1999 and Mining Act:
According to this act, the offshore mining regulation needs to be restricted to the area,
which is outside the coastal waters of the state. In addition, it could be observed that a
corporation could not explore and recover minerals from the coastal waters, unless a licence or
special purpose content authorises such exploration or recovery. Any violation of this rule might
impose penalty on the organisation up to $30,000 (Legislation.nsw.gov.au 2018). The mining
companies need to consider the environmental concerns before exploration and recovery. In
other words, they need to ensure protection to the fisheries and scenic attractions in the areas of
exploration. Moreover, the Australian government often appoints inspectors to conduct
compliance inspection for examining stuffs utilised for mining or exploration purposes like
equipment and documents. These are carried out for assuring that the Australian mining
companies are abiding by the regulations laid down in the Act.
Mineral Titles Act 2010:
This particular act aims to develop a framework in order to grant and regulate mineral
titles, which authorise exploration, extraction and processing of minerals and related products. In
addition, another aim of this act is to help in commercialising activities conducted under mineral

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titles by authorising the formation and switch over of title interests. Furthermore, this act deals
with the authorisation of other activities associated with minerals and mineral-related products to
be carried out in the absence of mineral titles (Legislation.nt.gov.au 2018). The entities are
needed to conduct preliminary exploration of land for finding out whether the land is potential
enough for future exploration of minerals and other related products. Such exploration might
constitute of investigating the geographical characteristics or air-borne geo-scientific survey with
prior approval. For such exploration, the mining companies could not use metal detectors;
instead, hand-held and non-mechanical tools could be used.
Planning and Development Act 2007:
The aim of this act is to provide planning and land system contributing to the sustainable
and orderly development of the act. This system is formulated in accordance with effective
financial principles. Thus, it becomes necessary for the Australian mining companies to ensure
sustainable development while carrying out their mining operations. According to this act,
sustainable development indicates the sound integration of environmental, economic and social
considerations in the processes of decision-making, which could be accomplished with inter-
generational equity principle and precautionary principle (Legislation.act.gov.au 2018). The first
principle states that the present generation is required to ensure health, productivity and diversity
for the upcoming generations. On the other hand, the second principle states that if there is
possibility of serious environmental damage, lack of overall economic certainty need not be used
as a cause to postpone measures for restricting environmental degradation. Hence, the mining
companies need to take into account these principles while performing their exploration and
recovery work.

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Mineral Resources Development Act 1995:
This act aims for the progress of mineral resources which is consistent with effective
environmental, economic and land use management. The mining companies of the nation need to
use effective equipment and machinery for extracting and processing minerals. The intention
would be to ensure the environmental protection and limit land or soil erosion (Mrt.tas.gov.au
2018). The Tasmanian Mineral Resources is involved in administering the approval of ongoing
works, exploration and special exploration licences, production licences, retention licences along
with mining leases for ensuring the safety of the overall community.
3. Four significant business risks for Allegiance Coal Limited:
The four significant business risks that could be identified in the context of Allegiance
Coal Limited are summarised as follows:
Cash optimisation:
The unpredicted volatility of the market and the change in the prices of the mineral
products result in uncertainty, which signifies risk (Boskou, Kirkos and Spathis 2018).
Allegiance Coal Limited is confronted with rising challenge to plan for the long-term due to the
limited visibility of demand and price. Such change could place the balance sheet statement of
the organisation in risk, which might eventually lead to material misstatement. In this case, cash
could be used for managing the liquidity of the balance sheet with the help of sustainable cost
minimisations; however, they need not dissolve value. Such minimisations need to raise
concentration on working capital along with enhancing the effectiveness of capital.
Access to capital:

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The mining companies often encounter significant issues when it comes to raising capital.
As pointed out by Carson, Fargher and Zhang (2016), the overall capital that the mining
companies had raised in 2015 was 10% lower year-over-year (YOY). In addition, the loan
funding to the sector has been falling as well. Allegiance has obtained such loans previously and
it has been engaged in reusing them for improving its current infrastructure rather than investing
in new projects. Even though it has guaranteed security for backing the debt, it has been faced
difficulties for obtaining further bank loans. As a result, certain amount of interest expense needs
to be included in the income statement out of the debt security and any inaccurate estimation
could eventually lead to material misstatement. Thus, Allegiance is required to look for
alternative sources of finance along with realigning portfolios for overcoming this challenge.
Joint ventures:
If the joint venture agreements are managed effectively, it could result in providing
greater value to the stakeholders (Fuhrmann et al. 2017). These ventures could improve the
portfolio values and in few instances, they could enable in providing access to reserves and
capabilities. This denotes that risks could arise in relation to reserves and any wrong estimation
would result in loss of time and money for the organisation. As observed from the annual report
of Allegiance in 2017, it has entered into joint venture agreement with JOGMEC, from which it
has realised $31,590 from this venture and it is depicted under cash flow from investing
activities. This amount, if wrongly estimated, could result in material misstatement for the
organisation.
Access to energy:

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According to Heenetigala and Armstrong (2017), energy consumption could account for
15% to 40% of the overall operating budget of a mining firm. At the time of selecting energy
price, cost is of utmost significance. Allegiance Cost Limited is no exception to this issue as
well. If cost is overstated or understated, material misstatement might arise in the income
statement of the organisation.
4. Three areas/accounts of concern for Allegiance Coal Limited:
The three most significant areas or accounts of concern for Allegiance Coal Limited
constitute of the following:
Liabilities:
Significant concern is inherent in the liability stated in the balance sheet statement of the
organisation. This is because the overall liability base of Allegiance Coal Limited might be
understated, since it has not recognised or disclosed any provision in its financial statements. In
addition, the disclosures related to contingencies might not adequately disclose the exact net
amount to be recovered from the tax authority. Furthermore, it has been identified that the
organisation does not have any long-term borrowings, which is another concern to carry out its
audit work.
Financial results of subsidiary:
There is high chance that the financial results of the subsidiary, Telkwa Coal Limited
might be manipulated. The aim might be to impact the market value of the shares prior to the
sale of the transaction (Simnett, Carson and Vanstraelen 2016). Thus, it could be stated that the
organisation might not have estimated properly the overall worth of the subsidiary.

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Sales revenue:
It has been observed that the sales revenue of the organisation is significantly lower in
both 2016 and 2017. The organisation currently realises sales revenue based on estimates in
respect of its exploration sites. Such estimate could be biased and it might not be dependent on
realistic assumptions in relation to the sales price. As a result, the impact of provisional pricing
and any revisions in future might not be revealed adequately in the financial statements (Soh and
Martinov-Bennie 2015).
5. Comment on the financial performance of Allegiance Coal Limited:
Formula
Result
s 2017
Result
s 2016
Liquidity
Current ratio Current assets/ Current liabilities 5.31 0.69
Quick ratio
Cash+ Cash equivalents + trade
and other receivables/ Current
liabilities 4.95 0.69
Gearing ratio Total liabilities/ Total equity 0.23 (5.37)
Debt ratio Total debt/ Total assets 0.18 1.23
Profitability
Ordinary earnings per Per annual report (cents)

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share (0.80) (9.25)
Managerial efficiency
Return on equity Net income/ Shareholders' equity (0.24) (8.50)
5.1 Liquidity:
Based on the liquidity ratios, the following figure has been represented as follows:
Current ratio Quick ratio Gearing ratio Debt ratio
-6.00
-4.00
-2.00
-
2.00
4.00
6.00
Liquidity Ratios
2017
2016
The above figure clearly states that the current ratio of Allegiance Coal Limited has
increased significantly from 0.69 in 2016 to 5.31 in 2017. The higher the ratio, the more feasible
it is for an organisation (Leung et al. 2014). However, if the ratio is too high, it could be stated
that most of the business cash is stuck and it has remained idle. The situation is same for
Allegiance as well in 2017 due to high increase in trade receivables and significant decrease in
trade payables.

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Quick ratio, on the other hand, is a better measure of liquidity, since it excludes the
amount of inventory while evaluating the overall business performance (Moroney and Trotman
2016). In case of Allegiance, the same trend is observed as in case of current ratio, since the
organisation has extended its receivable terms. As a result, large amount of cash has remained
with the debtors.
The gearing ratio of the organisation has improved highly in 2017; however, it could be
observed that equity is used for funding majority of its business operations and projects. This is
because it has failed to obtain short-term debts from banks because of the significantly lower net
income and revenue earning capacity. As a result, it needs to pay greater dividends to its
shareholders for retaining them in order to fund its business operations and upcoming capital
projects.
Finally, it could be observed that the debt ratio of the organisation has declined
significantly from 1.23 in 2016 to 0.18 in 2017. This is because of the significant increase in
non-current assets, especially exploration and evaluation along with significant decline in short-
term borrowings. Hence, it could be inferred that Allegiance Coal Limited is going through a
poor liquidity position in the Australian market.