Overview of Target Energy Ltd
Auditing plays an important prospect for analysing the financial statements of the company. The financial statement and the Auditing of the Target Energy Ltd was done thereby to assess the overall financial and operations of the company.
Name: Target Energy Ltd
Address: SE 5 6 Richardson Street Perth WAS 6005
Year of Establishment: 2006
Field of Operations: Development and Exploration of gas and oil properties in United States.
Period of Financial Report under consideration: 2017
Type of Financial Report: Consolidated Financial Statement
- Economic Condition: Theeconomic condition of the Australian Energy Industry has been growing with the production of coal (Targetenergy.com.au. 2017).
- Law and Regulation applicable:Australian Accounting Standards, Corporation Act 2001 and the National Gas Law 2008.
- Level of Competition:High
- Name of Main Competitors: Themain competitors operating in the industry are 88 Energy Ltd, Red Emperor Resources, Oil Basins, Mossman Oil & Gas Ltd and ROC Oil Company Limited are some of the main competitors of Target Energy Ltd.
- Level of Government’s Support: The Australian Government for supporting the Energy Industry has made several policies like Renewable Energy Target (RET) AND State Based Feed-in-Tariff (FIT) schemes(Energy.gov.au. 2019).
- Level of Demand for various goods and services: The demand for the goods and services of the energy has been rising for the overall energy industry in Australia after the demand for oil and gas increased on a global basis. Australia Energy Industry has been the major supplier of key energy components like Oil, Coal and Gas.
- Current or Potential Industry or Market Barriers: Rising competition in the overall industry with the volatile raw input prices for the companies has been the key reason for low profit margins. With tighter government regulations in regard to the emission of CO2 and various other environmental policies have redefined the workings and operations of these companies. The Australian Government has various laws, rules and regulations that needs to be analysed for the purpose of operational work of the companies. Despite of the above issues and implementation of various policies the Australian Energy Industry has shown a well growth trend and is expected to carry on because of the rising global demand for energy based resources.
- Operations: TheTarget Energy Limited is an Oil and Gas exploration and production company focusing on the drilling of Oil from Oil Wells with better Oilfield technology which the company deploys in both conventional and unconventional oil reserves that is owned by the company. The operations of the company is currently focused in the Texas area as the resources and the raw material availability in the country is high with minimum laws, rules and regulations in the country. The operations of the company with better connectivity of operational, technological and minimum legal requirements provides various growth and development opportunities for the Target Energy ltd (Cludius, Forrest and MacGill 2014).
- Dependency of Customers:The customer base for the Target Energy has been spread widely. The company is not having any major customer from which the operations of the company will be affected.
- Major Suppliers:The operations of the company is primarily based and the company does not intake major supplies instead it uses technologies and various other tools and equipment’s which are helpful in the operations of the business.
- Ownership Structure and Corporate Governance: Theownership of the company is primarily done by the Equity capital, which is the primary source of capital for financing the activities and operations of the company. The corporate governance policy of the company is in accordance with the ASX Corporate Governance Council. The board members of the Target Energy Ltd Company approved the corporate governance statement, which states the policies and the corporate governance programmes that will be followed by the company. For the basis of operations and administration of better control and accountability conducted by the company, the company follows the corporate governance policy. However, it is crucial to note that Wyllie Group Pty Ltd and Invest Met Ltd are the major shareholders of the company holding about 9.42% and 7.61% of equity ownership in the overall company (Appendix 1).
- Operational Structure: The operations of the company is primarily based in theTexas where the company operates its operation and has it core operations based in Texas due to the resources availability and lower environmental regulations. Energy Ltd has two current projects primarily where the production of oil and operations of the company is based. The East Chalkley Oil Field- Cameron Parish, Louisiana is an Oil field appraisal and development programme. After the successful negotiation between the Target Company and East Chalkley Oil Field, the company is expected to have a 100% working interest. The Fairway Project- Howard & Glasscock Counties, Texas where the company is having around 35-60% of working interest.
The Main Accounting Policies analysed for the Target Energy Ltd are:
- Policies regarding property, plant and equipment: The property, plant and equipment is stated at cost less depreciation accumulated and impairment losses. The stated cost includes cost which are incurred by the company for their business activity is eligible for the purpose of capitalizingwhen such costs are incurred. Depreciation on the assets of the company is done by applying the straight line basis depending on the useful life or the remaining life of the assets of Target Energy Ltd (El Hanandeh 2015).
- Inventory Policies: Target Energy Ltd did not have any inventories in their books of accounts. However, the accounting policies of the company is well linked with the Australian Accounting Standards Board that helps the companies in the classification and measurement of the inventories of the company. The AASB 102 sets out the inventory policies for the company in the recognition and classification of the inventory of the company.
- Accounts Receivables Policies: Theaverage credit policies for the company and the service period allowed by the company is around 30-90 days. The capital raising receivables are subsequent to year-end. Impairment of the trade receivables were in accordance with the accounting year of 2008-2009.
- Financial Instruments Policies:The financial instruments of the company will be recognized and followed as per the AASB 9, which defines the valuation and the recording of the financial instruments of the company. The recognition and the measurement of various financial instruments of the company are classified as fair value through profit and loss, available for sales and held till maturity. The classification and recognition of the financial instruments of the company is dependent on the classification and nature of the asset class and the holding period of the assets of the company.
- Intangible Assets Policies: Target Energy Ltd did not have any intangible assets in their books of accounts like goodwill, patents and copyright. However, the accounting policies of the company is well linked with the Australian Accounting Standards Board that helps the companies in the classification and measurement of the intangible assets of the company. The relevant policy that would be applicable for the company for the intangible assets of the company would be following the AASB 138.
- Revenue Recognition Policy:The revenue recognition policy of the company is in accordance with the AASB 15 “Revenue from Contracts with Customers”. The accounting standard guides the company in the case of the recognition of the revenue. Revenue received from contracts includes a variable amount and is subject to revised conditions for the recognition of the revenue of the company.
- Leasing Policies:AASB 16 if followed by target Energy for classifying the leasing activities of the company as either operating or financing lease. The recognition of the value of the lease is recognized by defining the present value of all cash outflows and discounting the same using an appropriate discount rate to recognizer the same in the books of accounts of company (Chapman, McLellan and Tezuka 2016).
- Working Interest:Target Energy Ltd has two current projects primarily where the production of oil and operations of the company is based. The East Chalkley Oil Field- Cameron Parish, Louisiana is an Oil field appraisal and development programme. After the successful negotiation between the Target Company and East Chalkley Oil Field, the company is expected to have a 100% working interest. The Fairway Project- Howard & Glasscock Counties, Texas where the company is having around 35-60% of working interest.
- Related Party Disclosures:The Target Energy Ltd has disclosed all the related party disclosures for the company with respect to the equity interest held by the company and the change in the equity interest from the year 2016-17 is highlighted in the figure below:
- Other Related Parties: Target Energy Ltd has disclosed majorly all the related party disclosures in the financial year reporting of 2017. The figure below shows the amount by related parties in the financial year 2017 and 2016.
- Change in Accounting Policies and their Impact: The Company Target Energy Ltd has reviewed all the new and revised standards of the Australian Accounting Standards. It has also discussed the implementation of the new policies in the books of accounts for the company, which are outlined below:
- AASB 9 Financial Instruments: The AASB 9 (2014), replaces the existing financial standards on the financial instruments, which was previously done with the help of the AASB 9 (2009), (2010), and AASB 139(Christensen et al. 2016). The Company has reconsidered the accounting policies and has made required impairment for the recognition and classification of the financial instruments in accordance with the AASB (2014).
- AASB 15 Revenue Recognition:The introduction of the AASB 15 removes the existing accounting standard AASB 111 Construction contracts, AASB 118 Revenue recognition and AASB 104 Contribution. The new accounting standards guides the company based on criteria for recognizing the revenue and the aspects for the recognition of the revenue for the company (Tepalagul and Lin 2015).
- AASB 16 Leases: The AASB 16 Leases is a more classified and detailed leasing standard for various operating and financing lease activities, which will replace the old AASB 17 leasing standards (Jha and Chen 2014). The AASB 16 recognizes all the leasing activities of the company on the financial statement company thereby capitalizing the lease of the company with the help of the discounting and capitalizing the same in the books of accounts for the company (Pizzini, Lin and Ziegenfuss 2014).
- Expected Impact because of Accounting Policies Change: The change in the accounting policies of the company will be affecting the financial and books of accounts for the company (Simshauser 2014).
- Financial Instruments: Thecurrent impairment policy for the company will be based on forward looking “expected loss model” which was initially as incurred loss model for the company (Krarti 2016). The change in the accounting policy for the company will be based by the adoption of the AASB 9 (2014).
- Revenue Recognition:The recognition of the revenue for the company will be based on probable economic benefit flowing to the company. The interest income for the company will be taken into account for the company based on the effective yield on financial assets of company (Fleming and Measham 2015).
- Leasing Activity: The leasing activity of the company will be in accordance with the AASB 16 Leases for the company. The adoption of the new leasing standards for the company will be in accordance with the changes to be made by capitalizing the leasing activity or the cash outflows of the company(Lennox, Wu and Zhang 2014).
- Potential Impact on the Audit Work: Thepotential impact of the Audit work on the Target Energy Ltd Company would be in accordance with the new accounting policies under which the recognition and classification of the assets and liabilities of the company would be done. The Auditor of the company would need to reclassify the financial statements of the company with the new revenue recognition policies (Vincent et al. 2014). The auditor needs to analyse whether the company has followed and recognized the revenue of the company based on the current accounting standards. The Leasing standards of the company would also be based on the AASB 16 Lease where the auditor would have to identify the various operating and financing lease for the companies and the reclassification of the same. Financial instruments of the company would be also reclassified in accordance with the AASB 9 and the probable future and loss from the financial instruments of the company will also need to be reinstated by the company (Groomer and Murthy 2018).
- Ratio Analysis: The ratio analysis for the Target Energy Ltd was conducted with the help of the financial statement of the company for the year 2017. The ratio analysis was done covering the various aspects of the company including the current ratio, quick ratio, debt to equity ratio, net profit margin and accounts receivable turnover ratio(Ettredge, Fuerherm and Li 2014).
- Analysis of Financial Ratio:The financial ratio for the company analysed were:
- Current Ratio: Thecurrent ratio for the company was calculated by applying the formula Current Assets/Current Liabilities. The current ratio of the Target Energy was around 0.055 times in the year 2016 and was around 0.014 times in the year 2017. The current ratio of the company is significantly down from the current standard level signifying that the company is running a heavy risk by maintain such low level of liquidity in the company (Dobele et al. 2014). The low current ratio can significantly affect the operations of the work (Appendix 2).
- Quick Ratio: Thequick ratio for the company shows the net liquidity position of the company. The quick ratio for the company was around 0.055 times and 0.014 times in the year 2016-17. The quick ratio for the company is very poor for the company indicating poor liquidity position of the company (Vithayasrichareon, Riesz and MacGill 2015). The quick ratio and current ratio was the same for the company as the company did not have inventories in there book of accounts (Appendix 2).
- Debt to Equity Ratio:The debt to equity ratio shows the effect and leverage taken by the company in contrast to the overall equity of the company. The company is not having major long term interest bearing liabilities however the current debt to equity ratio for the company is around 0.22 times and 0.23 times in the year 2016-17 (Hua, Oliphant and Hu 2016). The company is having a negative overall equity share capital for the company, which has been due to the significant accumulated loss in the financial statement of the company (Appendix 2).
- Net Profit Margin:The net profit margin for the company was around -5.75% in the year 2017 and was around -23.17% in the year 2018. The declining net profit margin for the company indicates that falling profitability in the long term could harm the sustainability and growth of the firm (Appendix 2).
- Accounts Receivable Turnover Ratio: Theaccounts receivables turnover ratio for the company shows the amount of receivables due for the company with respect to the overall sales of the company (Hall et al. 2015). The Accounts Receivable Turnover ratio for the company has been around 1.882 times in the year 2017 and was around 10.411 times in the year 2016. The Sharp fall in the ratio for the Target Energy indicates that the company is having a higher amount of accounts receivables due with respect to the overall sales of the company. Thus, it is crucial for the company to have a stable receivable turnover ratio for the company (Appendix 2).
- Company Ability as a Going Concern:The going concern ability of the company shows the net cash outflow of the company from the operating and investing activities of the company. For the year ended 30th June 2017, Target Energy had a net cash outflow from the operating activities and financing activities of the company. An amount of $433,586 was the investing cash outflows and the company reported a net loss of around $2,252,936 in the financial year 2017. The overall loss reporting done by the company and the degrading financial performance of the company may significantly affect the operations and sustainability of the company as a going-concern.
- Financial Performance Review: The financial performance of thecompany has been poor due to the falling revenue of the company and the rising expenses of the company. The director’s remuneration for the company has been stable for the company with the inability of the company in paying up the remunerations of the directors of companies. The liquidity position of the company has been poor for the company and the same signifies the inability of the company in paying off the obligations of the company.
- Potential Impact on future Audit work: The changing accounting policiesfor the company with the change in the Australian Accounting Standard policies requires extensive auditing of various assets and liabilities and accounts of the company.
Objectives, Strategies and Business related risks
- Objectives and Strategies: Theobjectives and strategies for the company in the form of introduction of new products and services was not observed due to the degrading financial performance and high business risk associated with the company.
- Related Business Risk: Poor financial performance and falling revenue of the company with the increase in the liabilities of the company in contrast to the assets of the company.
- Impact on Audit Work: The impact on audit work for the company will be based on the objectives and strategies placed by the company. However, it is crucial to note that since there was not much operational changes found in companies in respect to objectives and strategies of the company and regarding the business risk of the company. The impact on future audit work will be minimum.
Conclusion
The Audit Program covered the major aspect of the financials of the company and general information about the company covering the operational information and various other business and macro-economic environment factor analysis.
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