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Auditing and Assurance Services

Contents

Basis for Qualified Opinion.

Emphasis of matter.

Other Matter.

Audit procedures to obtain evidence of uncertainty of going concern.

Audit report of Qualified Opinion.

Responsibilities of the Directors for the Financial Report

Auditor’s Responsibilities for the audit of Financial Report

Other Information.

Qualified Auditor’s opinion.

Basis for Qualified Opinion

As disclosed in Note 4 & 5 of the financial statements of the company, the level of business risks faced by the company is really high and this has impacted the current financial results of the company and it is anticipated that in light of the continuing market conditions and the drop in the prices of scrap metals the financial performance and profitability of the company is likely to go down even further. The company suffered a sharp decline in its net profit for the year 2019 which went down to $152.6 million from $ 203.5 million in the year 2018. The company faces a number of business risks primarily related to fluctuation in prices of scrap metals, changes in the global trade environment, difficult weather conditions, the decline in economic growth in some of the major markets of the world. Out of all these business risks, the most serious business risk that has a significant impact on the profitability and future survival of the company is the risk attached to fall in the selling price of ferrous scrap and a huge decline in demand. Owing to the current challenges faced by the company in terms of collapse in the prices of scrap, fall in demand for scrap metals owing to slow down in the automobile industry there is a significant decrease in the revenues and gross margins of the company.

On the basis of discussions that we had with the management of the company and as per our analysis of the industry trend and current market situations, the present circumstances and challenges are expected to prevail over the next year as well. There are other factors as well which have had a major impact on the operations on the company which includes poor global market conditions characterized by slow down of manufacturing industries all over the world, fall in the growth rate of China that has impacted the growth rate of the world, continuing trade wars between China and the United States.

Emphasis of Matter

Significant uncertainty that exists in relation to the ability of the company to continue as a going concern

The financial statements of Sims Metal Management Limited for the year ended 30th June 2019 have been prepared by the management of the company. We have not been involved in the preparation of financial statements and have only provided our opinion on items included in those financial statements. The financial statements of the company for the year 2019 have been prepared on the basis of the assumption that the company will be able to run itself as a going concern entity in the future. In our opinion, the going concern assumption is not appropriate for Sims Metal Management Limited as its ability to continue as a going concern entity in the future has been affected by the adverse business environment and high business risks faced by the company specifically due to the fall in prices of scrap metal and decline in its demand from all over the world.

The present circumstances indicate that ability of the company to continue as a going concern entity in the future is dependent upon a significantly favorable change in the market prices of scrap metals and market demand for ferrous and non-ferrous scrap, and it is only if the company is able to sell its inventory at better prices that include sufficient margins to enable the company to generate sufficient working capital to fund its business operations, it would be able to continue its operations. These conditions indicate the existence of a material uncertainty that places a doubt upon the company's ability to continue as a going concern. These conditions also place doubt on whether the company will be able to able to realize its assets and liabilities at the values at which these have been reported in the financial statements of the company.

Other Matter

The high value of a large amount of inventory held by the company was reported by us as a key audit matter in the audit report of the company for the year 2019 owing to the size of the inventory held by the company and the major judgments made by the management of the company in the estimation of the net realizable value of the company. As per our independent assessment of the total value of inventory held by the company for the current year 2018-19, and on the basis of the evidence available to us regarding the market prices of ferrous and non-ferrous inventories, we are of the opinion that the company will not be able to sell its inventory at normal prices and may be forced to sell these at prices even below their purchase price. It is highly probable that the company will be selling this inventory at a loss which will have a serious effect on the financial results of the upcoming year and future years.

In consideration of the circumstances described above, and in consideration of market evidence regarding the current trend in prices of ferrous and non-ferrous scrap, we believe that value of the inventory of $ 442 million reported by the company in its financial statements of the year 2019 is overstated and this has also resulted in an overstatement of profits of the company for the same year by the same amount. The accounting treatment followed by the company in relation to the valuation for its inventory is not in accordance with the treatment pre-subscribed in Australian Accounting Standard AAS 102, which provides that inventory should be valued at cost or net realizable value whichever is lower.

Audit Procedures to Obtain Evidence of Uncertainty of Going Concerned

The following audit procedures were carried out by us in order to obtain sufficient audit evidence in relation to the uncertainty of going concern assumption for the company. The procedures carried out by us were in accordance with the requirements and guidelines provided by the Australian Auditing and Assurance Standards, with specific emphasis on Auditing and Assurance Standard 570 "Going Concern" and with due adherence to the APES 110, Code of Ethics for Professional Accountants.

  1. Evaluation of assessment made by management in relation to a going concern assumption

We had discussions with the management of the company and those charged with its governance so as to obtain an understanding of how the management of the company had assessed the ability of the company to continue as a going concern in the future. We also had discussions in relation to certain events and conditions identified by us in the course of performing our audit which provided indications that the company may not be able to carry on itself as a going concern. The significant drop in the market prices of scrap metal, a major drop in demand for scrap metal, and the selling of inventory below the purchase costs were three such major events/conditions that were identified by us. We asked the management the reasons which led them to believe that going concern assumption was not affected by such events

  1. Obtaining written representations in relation to future plans prepared by management

 We sought written representations from the management of the company in relation to plans that been made by the management for the future actions that were intended to be taken by the management and made an evaluation of the plans made by management to address these conditions.

  1. Analysis of cash flows of the company

We carried out a detailed analysis of the cash flows of the company for the period from 01.07.2018 to 30.06.2019 to evaluate how the company was doing in terms of cash flows. We checked whether the company was able to generate positive cash flows from its operations and whether the operating expenses of the company were being financed from the cash received from its operating activities. We checked the possibilities of company indulging in selling any of its assets to raise funds to be used for regular operating expenses of the company.

  1. Review of forecasts and budgets prepared by the company

We performed a detailed review of the budgets and forecasts that had been prepared by the company and also checked whether these forecasts had been given the required level of attention by the management of the company and those charged with its governance. We evaluated whether forecasts prepared by the CFO of the company took into consideration the current pattern of receipts and payments of the company. We further checked that on the basis of those forecasts, whether the company would have sufficient cash balance at the end of each month and also asked how the management intended to cover for any shortage in cash inflows.

  1. Comparison with forecasts made by other companies in the industry

We performed a comparison of forecasts made by the management with the forecasts prepared by other companies that are operating in the same industry so as to evaluate the genuineness of the assumptions made by management in preparing those forecasts and also to evaluate that whether there was the possibility of any management bias in the preparation of those forecasts.

Audit Report of Qualified Opinion

Responsibilities of the Directors for the Financial Report

The directors of the Company have the responsibility for preparing the financial reports of the company that provides a true and fair view of the financial position and financial performance of the company for the year ended 30.06.2019 and are prepared according to the requirements of the Australian Accounting Standards and the Corporations Act 2001. The directors of the Company are also responsible for putting in place such internal controls which they believe are required to be present so as to enable the company to prepare its financial statements in a manner that they provide a true and fair view and are free from any material misstatement that could arise from fraud or error.

 The directors of the Company also have the responsibility to assess the ability of the company to continue as a going concern, while preparing the financial statements of the company. The directors must disclose any matters related to going concerned and prepare the financial statements on the going concern assumptions unless they have future plans to liquidate the company or discontinue the business operations of the company. 

Auditor’s Responsibilities for the Audit of Financial Report

Our main objective in carrying out the audit procedures described in this report was to obtain a reasonable level of assurance that whether the financial statements of the company as a whole are free from material misstatement due to the possibility of existence a fraud or error and to provide our opinion on the audit of financial statements of Sims Metal Management Limited in the audit report issued by us. It must be noted that reasonable assurance implies a high level of assurance but does not provide a guarantee that the audit procedures carried out by us will always be able to detect a material misstatement that may exist in the financial statements of the company. The reason behind the existence of misstatements is either a fraud or an error that is of material nature whether considered separately or collectively.

Other Information

Opinion on the Remuneration report

We have audited the Remuneration Report of the company that has been provided on pages 56 to 57 of the director's report for the period ended 30 June 2020. In our opinion, the Remuneration Report of Sims Metal Management Limited for the year ended 30 June 2020 is prepared according to the requirements provided in section 300A of the Corporations Act 2001.

Qualified Auditor’s Opinion

According to our opinion, except those matters which have been provided in the Basis for Qualified opinion paragraph and Emphasis of matter paragraph, the financial statements of Sims Metal Management Limited have been prepared according to the requirements of Corporations Act 2001, and

(i) Provide a true and fair view of the financial position as at 30th June 2019 and the financial performance of the company for the year ended on that date

(ii) Comply with the Australian Accounting Standards (which include the Australian Accounting Interpretations) and the Corporations Act 2001.

XYZ Auditors

__________

___________

Partner

Chartered Accountants

Sydney, 12 June 2020

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