Inherent Risk and the Audit Term Paper

Excerpt from Term Paper :

Admiralty may be pressured to raise funds and misstate financial information to soothe investors and attract new investors. The risk of misstatements to the financial reports in light of reduced financing due to the global recession may hit Admiralty if their fundamentals were not in order to begin with, hence pressuring the company to alter their financials to appear in a growth position when they might not actually be so.


To: Partner X, Auditor

From: Partner Y, Auditor

Re: Inherent Risks to the Financial Report Audit for Admiralty Resources NL.

This memo is to discuss some specific areas of risk to the Audit Plan for Admiralty Resources NL. Admiralty Resources is a global diversified mining company, with primary operations in South America (Chile and Argentina) and Australia. They mine and explore for iron ore, nickel, zinc, and cobalt. Admiralty owns three subsidiaries directly involved in the mining process, with one more subsidiary brought on board in 2009 which will commence mining operations in Argentina soon. These mining operation subsidiaries are Pyke Hill Resources Party Ltd., Bulman Resources Party Ltd., and SCM Vallenar Iron Company. Other subsidiaries are ADY Investments Pty Ltd., which is an investment holding company, Five Star Resources Party Ltd., which is engages in mineral exploration, and Fortune Global Holdings Company, which is a holding company for SCM Vallenar. Additionally, during the period 2009, Admiralty acquired S.B. Granelas S.A., a mining company in Argentina, as well as completed the remaining acquisition of share interests in SCM Vallenar

In 2009, they were coming off the heels of a sale of one of their subsidiaries, Rincon Lithium, as well as engaging in the acquisition of the remaining share of SCM Vallenar. Clearly there were a lot of business deals happening during 2009 for Admiralty, which is why as auditors we need to be extra cautious in indentifying potential areas of risk of material misstatements in the financial reporting of the company.

During the Analytic Review portion of assessing risks to the audit plan, some items raised concern that we should address. First, the company profile shows a global firm with operations in two different countries. Cash flow issues across borders can be tricky, and since major sales and acquisitions have happened for Admiralty during 2009, we should be extra cautious in scrutinizing costs as they are stated on the company's financial reports.

The company has experienced a steady decline in EPS and in market share over 2009, which shows to be the trend historically over the last 10 years. While the Company's Annual Report that they publish on their website is very positive and talks about growth, it does not talk about the issues that may face us as auditors in determining potential misstatements in the financial reporting.

The 2009 Annual Report shows a decline in operating income, with decreases in operating cash flow and financing cash flow. However, in 2009 there is a significant increase in investment cash flow. In the spring of 2009, Admiralty made two large stock issuances. Between those stock issuances, they settled an acquisition for SCM Vallenar from Wyndham Exploration, becoming sole owner of the subsidiary. The issue in this deal is that there were legal suits happening between SCM Vallenar and Wyndham, which Admiralty settled within their acquisition deal. This should be of concern to the audit process as we are dealing with cross-border money transfers, unknown inventory allocations, and possibly faulty misstatements on the value of Property, Plants, and Equipment. Also, the stock issuances which occurred in this climate of upheaval in the company was made in part to pay down a convertible loan, though on their annual report this is not stated to investors; rather it is stated as a capital raising venture to open their mining market operations in Argentina.

In light of the sales, legal settlements, acquisitions, stock issuances, declining market position and overall declining EPS performance, the following areas are highlighted as potential material misstatements in the account subject to audit:

1. Short-Term Debt

2. Total Current Liabilities

3. Total Liabilities

4. Property, Plant, and Equipment

5. Net Assets

6. Investment Cash Flow

7. Expenses

8. Tax Expenses

9. Related financials of their investment holding company.

Additionally, we need to keep in mind that the global credit crunch may have impacted how Admiralty wanted to represent themselves to potential investors, especially in a climate of decreasing EPS and market performance. Investors have choices in the mining and metals industry, and Admiralty has not been demonstrating any great profits over the last year, and even over the last 10 years. In a time when the company may have really needed to float some debts while they were acquiring mining operations in South America, they may not have been able to secure a loan, especially since at least some part of their 2009 stock issuance went to pay down debt for a convertible loan they already had.

In summary, there are areas of concern that may be material misstatements in the audit process plan for Admiralty Resources, as identified above, and all related to sales and acquisitions, legal settlements and stock transactions, during the volatile business climate that Admiralty was engaging in during the 2009 period.


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Online Sources Used in Document:

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