Inherent Risk & Going Concern Assumption - Assignment Example

ONE TEL CASE STUDY ANALYSIS ON INHERENT RISK & GOING CONCERN ASSUMPTION Student’s Name Professor’s Name Course University Name Question 1 According to Florea (2012, p.45), inherent risks is an overall level of risk that is made up of a given possibility of there being a high degree of errors within the financial reporting of a firm, its operations, environment affecting this activities as well as the underlying nature of the accounts it operates at any given moment in time. It is crucial to note that these general risks are considered to be specific to each of the entities and will likely directly influence all of their operations with distinct effects for the entire audit processes (Florea, 2012). These implications are widely perceived whenever there is the generation of possible set of errors that impact the entire financial statements as a whole. It is crucial to note that each company, and depending on the industry for which it operates; structure; size and organisation, possesses its own set of attributes that makes it more or less possibility of realising the underlying potential risks. To successfully control entities, auditors are called to come up with strategies of identifying attributes that differentiates it from others. Following this line of reasoning, the five factors that will likely affect inherent risks at the financial level for One Tel company can be identified as follows; Integrity of the Management team; is a factors that helps to contribute to increase in inherent levels of risk for a company. For this case; if the management team of One Tel. are considered to be lacking integrity, then they possess an enormous level of probability of giving the firm a poor reputation within the overall business community as a whole (Public Company Accounting Oversight Board, 2016). It is important to note that the lack of integrity, in this case, relates to the efforts made by the management team to restrict an auditor’s access to specific employees within the company or even refusing to provide enough informational data needed for conducting an efficient and effective audit procedures (Public Company Accounting Oversight Board, 2016). The management will be seen to be creating unnecessary levels of bureaucracies in a bid to discourage the auditor to access pertinent information due to possible wastage of time. Management Team’s Level of Experience, Knowledge and Alterations made during the Operational Period; is yet another significant factor. It is important to from the One Tel. case study that due to the robust growth levels being witnessed within the overall industry, there has been an enormous limitation on overall managerial experiences (Public Company Accounting Oversight Board, 2016). This facet has the ability to contribute to inherent risks levels given that inexperience of management and its overall lack of knowledge could possibly affect the immediate formulation and disclosure of financial reports. For instance, in the event that the auditor is able to observe a high rate of employee turnover and especially those holding managerial positions, the level of inherent risks would definitely increase due to the simple fact that honest employees would rather engage in resigning from their management positions as opposed to taking time to devise ways of propelling fraudulent behaviours that would amass their resources and drain the company to greater levels. Uncommon level of Pressure mounted on Management Team; is a factor that increases inherent risk levels and can also be effectively identified in the course of strategic business risk assessment process (Knechel, 2007). This factor is usually propagated whenever there might be incentives offered to the management team to engage in misstatement of a financial report. For most cases, these incentives are offered to those entities that are facing a great deal of issues that range from cash flow problems; insufficient liquidity position and inefficient operational results. This factor can be easily identified in the course of strategic business risk assessment especially in the case where management compensation packages are directly tied to earnings or even stock process (Knechel, 2007). Management will likely embark on manipulating earnings and cooking specific revenues figures and as such misstate the outcomes for purposes of enjoying bonuses for their work done. Nature for which One Tel. Conduct its business; is a factor that acts to increase the level of inherent risk and can be easily identified whenever engaging in strategic business risk assessment. For example, given that One Tel has the potential of benefitting from the already developed telecommunications industry in Australia, it is unless the firm make efforts to formulate and sustain a positive reputation and a reliable revenue source then it will be considered to be inherently risky affair. There are other set of factors that are attributed with the overall nature of an entity’s overall business operations and can also be easily identified with a strategic business risk assessment (Public Company Accounting Oversight Board, 2016). For instance, if One Tel portrays a distinctive set of complex capital structure, this will likely result to an increase in the level of inherent risk at any given moment. The overall presence of related-party transactions can also increase the level of inherent risk since these transactions cannot be easily accessed by an independent stakeholder. Inherent Risk is also increased by factors that are considered to be affecting the sector for which a company operates; especially that which relates to possible alterations in economic and competitive situations (Public Company Accounting Oversight Board, 2016). From the case study, it is indicated that prior to the deregulation of Australia’s telecommunications industry in 1997, there were only 2 carriers, however; with the effect of this process there has been an increase in their number to 35 that are possibly former service providers that leased network capacity from Telstra. In fact, it is as a result of this major influx of small and medium carriers in the industry that has propelled the major developments in the generation of crucial competitive outcomes within the overall deregulated market as a whole. The industry market is thus characterised by a high level of competition rates given that at the moment, Telstra’s market share stands at 57%; Optus at 31% and Vodafone at 11%. It is further safe to note that this factor can be identified using strategic business risk assessment given that it extends to what pricing and promotion strategies that One Tel should put in place order to cut down on unnecessary competition and increase its business revenues. Question 2 At the account balance level, some of the possible factors that would have resulted to an increase in the level of inherent risk assessment include; Accounts would likely require adjustments; meaning that there will be a great deal of misstatement of items within the periods that do not up or when the consolidated accounts do not match up with what is being reflected as a total of parent company and the subsidiaries (Public Company Accounting Oversight Board, 2016). For instance, in this case; One Tel, consolidated total non-current assets for the period ended 2000 should be readjusted accordingly. The parent company provides an amount that is uncommonly higher than what is being reflected at the consolidated statements. The same is also replicated in the period ended 1999 where the parent entity posts high total non-current assets when compared with the consolidated statement, which is usually not the case in basic financial reporting. Other possible misstatements include; the total non-current liabilities in 1999 for the parent entity being higher than what are reported in the consolidated statement. Complexity of the existing transactions; is a factor that increases the level of inherent risk at any given moment since it gives the preparers, in this case the management, to post account balances without any direct explanation, which results to poor understanding by the general users of accounting information and especially those that do not sufficient accounting knowledge. Judgements adopted whenever determining account balances; further acts to either increase or decrease the level of inherent risks for any given entity. It is important to note that there is a possible difference in the way each of the management team can make a judgement affecting a single transaction hence the variances that could occur would certainly result to different account balances (Florea, 2012). Even in the case where similar accounting principles and policies are adopted, the possibility of making different judgements that can result to a great variance in the level accounts from the management team is still high. Possibility of Assets to being subjected to loss or misappropriation; like in the case of One Tel, the total non-current assets to have been intentionally subjected to a loss or even misappropriated given that the figures reported at the parent entity levels is relatively higher than what is posted in the overall consolidated statement (Florea, 2012). The possible occurrences of uncommon and even far-much complex transactions especially at or near the year end; is another factor that can easily result to enormous increase in the level of inherent risks at the account balance level (Florea, 2012). Some of these items as witnessed in One Tel. are the payments that were made in regards to deferred considerations, which are considered to be complex for the common user of the general purpose financial statement to fully understand. Question 3 It is important to note the going concern assumption is a crucial principle that is adopted in the course of preparing financial statements. Under this assumption, a firm is basically perceived to be continuing in business for a foreseeable future with no intention for favourable liquidation position; possibility of halt in trading process or even ability to seek protection from creditors in relation to the underlying laws and regulations at hand (IAASB, 2009). It is focused on ensuring that the assets and liabilities are both recorded on the premise that the firm will be able to effectively realise its assets and discharge its liabilities and thereafter; obtain a great deal of refinancing in the normal course of business operations. The assessment of a company’s capacity to continue with its operations into the future is the direct responsibility of its management team and this depends on auditor consideration on each and every of the audit engagement made. It is noted that neither the management nor the auditor of a given entity is able to effectively predict future events or circumstances that would result to the cease of it continuing as a going concern (IAASB, 2009). Despite of this, the underlying operating environment within the telecommunication industry for which One Tel operates cannot alter management’s or auditor’s responsibility that relates to the going concern assumption. According to the ISA, there a set of factors that are considered to be crucial for management to adopt in order actualise going concern assumption. These factors include; the probability of fixed-term loans approaching maturity while there are unrealistic prospects of renewal repayment or even when there is excessive reliance on short-term borrowings to finance long term assets; losses in major markets or when there are pertinent indications of possible withdrawal of support from crucial creditors (PwC, 2012). In my opinion, the area of going concern for One Tel should be assessed as being low. It is currently true that the company’s net assets stands at a favourable position and can meet the commitments related to paying-off liabilities as and whenever they fall due. However, the company is currently operating on a loss, which can be a result of loss of major market share or even principal suppliers for its telephony services. This blurs the capacity of the company to meet its borrowing repayment mechanisms in the future due to less cash flows needed for meeting this obligation. Another important thing to note is that One Tel seems to be operating at higher levels of short-term borrowings that are used for financing long-term assets. In fact, the level of both short and long term borrowings have increased significantly over the 1999 and 2000 that is disproportionate to the level of net asset within the same period. References List Florea, R. 2012. ‘The Implications of Inherent Risks Assessment in Audit Risk Limitation. Economy Transciplinarity Cognition. Vol.15, no.1, pp.45-49 IAASB. 2009. Audit Considerations in Respect of Going Concern in the Current Economic Environment. Staff Audit Practice Alert. p. 1-11. Accessed from http://www.ifac.org/system/files/downloads/IAASB_Staff_Audit_Practice_Alerts_2009_01.pdf Knechel, W.R., 2007. The business risk audit: Origins, obstacles and opportunities. Accounting, Organizations and Society, vol.32, no.4, pp.383-408 PwC.2012. Assessing Going Concern: Stakeholders would benefit from clarity in the US disclosure requirements. Point of View. P.1-4. Accessed from http://www.pwc.com/us/en/cfodirect/assets/pdf/pov-going-concern.pdf Public Company Accounting Oversight Board. 2016. Auditing Standard No.12: Identifying and Assessing Risks of Material Misstatement. Accessed from https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_12.aspx Read More