North Queensland Metals Ltd ("NQM") is a company based in Townsville. Its main operations comprise of the mining and refining of iron ore and nickel in Northern Queensland. Your firm has been appointed as external auditor for NQM and you are the audit partner in charge of the audit. The previous external auditors ABC & Co have voluntarily resigned due to disagreements with NQM management. No further information is forthcoming from ABC & Co other than the fact that these disagreements relate to the application of certain accounting standards. NQM has had a net profit after tax exceeding $2 million for the last five years. It has however been highly leveraged due to the nature of its operations which requires capital intensive investment. The following has become apparent during the planning for the NQM audit: . Due to the recent collapse in the prices of iron ore and nickel, NQM is concerned about its cash-flow from operations. NQM'S regular clients have been shopping around for cheaper metals and as a consequence NQM has had to resort to serious discounting of its products in order to maintain market share. . As a result, revenue has suffered and NQM's ability to service its loans are in doubt. The management of NQM led by the CEO of NQM, Terry Able, had initiated discussions late last year with its lenders to extend the repayment length of its loans. However, Able has resigned last week to take up a lucrative job opportunity overseas. The CFO of NQM, Penny Wise has been appointed by the board of directors of NQM to continue negotiations with its lenders and she is confident that all the loans with its lenders can be restructured. This is because Penny is of the view that the prices of metals have bottomed out and will recover. All the employees of NQM (including Penny) have not been paid for several months now and they have agreed to work without pay until such time when NQM is able to resolve its debt restructuring with its lenders. There appears to be some interest in the assets of NQM which comprise of the refinery and its wholly owned mines. Angel Investors Ltd has had preliminary talks with the board of NQM to purchase some of these assets but so far nothing has come to fruition. . Your interim audit findings to date appear to have confirmed all of the above information. However, there appears to be discrepancies with the way in which inventory has been valued in the last five years. All the NQM directors are keen for the audited financial statements to show that the company has strong fundamentals in order for the debt restructuring with its lenders to be completed as soon as possible. REQUIRED 1. In your view, does NOM have any going concern issues? Please provide support for your arguments. (5 marks) 2. How will this be handled in the financial report and audit report? Give reasons for your answer. North Queensland Metals Ltd ("NQM") is a company based in Townsville. Its main operations comprise of the mining and refining of iron ore and nickel in Northern Queensland. Your firm has been appointed as external auditor for NQM and you are the audit partner in charge of the audit. The previous external auditors ABC & Co have voluntarily resigned due to disagreements with NQM management. No further information is forthcoming from ABC & Co other than the fact that these disagreements relate to the application of certain accounting standards. NQM has had a net profit after tax exceeding $2 million for the last five years. It has however been highly leveraged due to the nature of its operations which requires capital intensive investment. The following has become apparent during the planning for the NQM audit: . Due to the recent collapse in the prices of iron ore and nickel, NQM is concerned about its cash-flow from operations. NQM'S regular clients have been shopping around for cheaper metals and as a consequence NQM has had to resort to serious discounting of its products in order to maintain market share. . As a result, revenue has suffered and NQM's ability to service its loans are in doubt. The management of NQM led by the CEO of NQM, Terry Able, had initiated discussions late last year with its lenders to extend the repayment length of its loans. However, Able has resigned last week to take up a lucrative job opportunity overseas. The CFO of NQM, Penny Wise has been appointed by the board of directors of NQM to continue negotiations with its lenders and she is confident that all the loans with its lenders can be restructured. This is because Penny is of the view that the prices of metals have bottomed out and will recover. All the employees of NQM (including Penny) have not been paid for several months now and they have agreed to work without pay until such time when NQM is able to resolve its debt restructuring with its lenders. There appears to be some interest in the assets of NQM which comprise of the refinery and its wholly owned mines. Angel Investors Ltd has had preliminary talks with the board of NQM to purchase some of these assets but so far nothing has come to fruition. . Your interim audit findings to date appear to have confirmed all of the above information. However, there appears to be discrepancies with the way in which inventory has been valued in the last five years. All the NQM directors are keen for the audited financial statements to show that the company has strong fundamentals in order for the debt restructuring with its lenders to be completed as soon as possible. REQUIRED 1. In your view, does NOM have any going concern issues? Please provide support for your arguments. (5 marks) 2. How will this be handled in the financial report and audit report? Give reasons for your
