Audit Information: Tetonic Metals Company
a. How do you, as the auditor, know that all minutes have been made available to you?
b. Read the minutes of the meetings of March 5 and October 21. Use the following format to list and explain information that is relevant for the 2011 audit:
Information Relevant to 2011 Audit Audit Action Required
c. Read the minutes of the meeting of March 5, 2011. Did any of that information pertain to the December 31, 2010, audit? Explain what the auditor should have done during the December 31, 2010, audit with respect to 2011 minutes.
The minutes of the board of directors of the Tetonic Metals Company for the year ended December 31, 2011, were provided to you.
Meeting of March 5, 2011
Meeting of the board of directors of Tetonic Metals was called to order by the James Cook, Chairman of the board, at 8:30 am. The following directors were in Attendance:
Irene Arnold
Robert Beardsley
Mary Beth Cape
The board approved the minutes from the November 22, 2010 meeting. The Board reviewed the financial statements for the most recent fiscal year that ended December 31, 2010. Due to strong operating results, the board declared an increase in the annual dividend to common shareholders from $.32 to $.36 per common share payable on May 10, 2011 to shareholders of record on April 25, 2011.
Tony Williams, CEO, led a discussion of the seven core strategic initiatives in the 2011 - 2013 strategic plan. The most immediate initiative is the expansion of Tetonic operations into the Pacific Northwest. The board approved an increased budget for 2011 administrative expenses of $1 million to open offices in the Portland, Oregon area. Mr. Williams also led a discussion of a proposed acquisition of one of Tetonic's smaller competitors. The board discussed synergies that might be possible if the operations of Tetonic.
The board granted Williams and the management team approval to continue negotiations with the other company's board and management. The board continued its discussion from prior meetings about the October 2010 report from the Environmental Protection Agency (EPA) regarding dust impact at Tetonic's zinc refineries. Legal counsel for Tetonic updated the board on the status of negotiations with the EPA regarding findings contained in the report. The board asked management to include an update on the status of any resolutions for its next meeting. The board also asked management to schedule a conference call, if necessary, for the board if issues need to be resolved before the next meeting.
Officer bonuses for the year ended December 31, 2010 were approved for payment on April 14, 2011, as follows:
Tony Williams - Chief Executive Officer $275,000
Mary Beth Cape - Chief Operating Officer $150,000
Bob Browning - Chief Financial Officer $125, 000
The Audit committee and the Compensation Committee provided an update of issues discussed at each of their respective meetings. The meeting adjourned 5:30 pm.
Meeting of October 21, 2011
The meeting of the board of directors of Tetonic Metals was called to order by the James Cook, chairman of the board, at 8:30 am. The following directors were in attendance:
Irene Arnold Robert Beardsley Mary Beth Cape Brian McDonald James Cook Larry Holden Heather Jackson Tony Williams
The Board approved the minutes from the March 5, 2011 meeting. Tony Williams, CEO, provided an overview of financial performance and operating results for the nine months ended September 30, 2011. Given the volatility in the economy, Tetonic sales have fallen by over 8% compared to the same period in 2010. To address the drop in revenues, Tetonic has scaled back mining operations by a similar percentage to reduce labor and shipping costs.
Bob Browning, CFO, updated the board on discussions with banks that will be financing the acquisition of the Tetonic competitor. The terms of the $7 million financing include a floating interest rate that is 2% above prime over the ten year life of the loan. Payments will be made quarterly ad Tetonic will have to maintain compliance with certain loan covenant restrictions that are tied to financial performance. The board approved the acquisition and related loan transaction and scheduled a closing date for the financing to be November 1, 2011.
To prepare for the proposed acquisition, the board approved an increase in the capital expenditures budget of $1.5 million to cover costs of expanding computer operations, including a new server. The new equipment is needed to successfully integrate IT operations at Tetonic and the acquired company. The equipment will be installed in December 2011. Existing equipment that was purchased in 2009 will no longer be used in the IT operations at Tetonic.
The Board discussed the creation of an incentive stock option plan for senior executives as a way to better align management and shareholder incentives. Consultants from a compensation advisory firm and tax attorneys from a national accounting firm led a discussion of the components of the proposed plan, including discussion of the related tax implications. The board asked the consultants to revise the plan based on comments received at the meeting for presentation at the board's next meeting.
Tetonic's external auditor provided an update of its interim work related to tests of the operating effectiveness of internal controls over financial reporting. The audit partner presented a written report that provided information about three deficiencies in internal control considered to be significant by the auditor. Legal counsel for Tetonic updated the board on final resolution of the EPA report findings. The final settlement requires Tetonic to modify someof the air handling equipment at its zinc refineries that are expected to cost about $400,000. No other penalties were imposed by the EPA. The Audit Committee and the Compensation Committee provided an update of issues discussed at each of their respective meetings.