- The several factors that would have contributed to an increased inherent risk assessment at the financial reporting level area as follows:
- The basic nature of the business of client: The present scenario is having technology which is changing fast. The company is in the telecommunication industry and innovations are taking at rapid rate. The products that are introduced by the company may become obsolete and there may be problem in the valuation of the inventory and this may bring high level of inherent risk in the company and thus the auditor will be conducting more extensive measures in order to reduce the inherent risk.
- The results found in the audit of the previous period: the audit report of the previous period also affects the level of inherent risk in the company as if the level of material misstatement was high in the audits of previous period then this may be contribute to the situation that there will be high material misstatements in the current year also hence the audit report of the One Tel. of previous year will be analyzed in order to know the level of inherent risk. Thus the material misstatement in the previous period may affect the inherent risk assessment.
- Repetitive engagement of auditor: The new auditor takes various possible measures to identify the different material misstatements in the company but the appointment of the same auditor will lead to situations of high material misstatements and high errors and manipulations as the repetitive auditor may become redundant in its operations which may require increased assessment of the inherent risk. (Gary S. Monroe, Juliana K.L. Ng, David Woodliff, 2008)
- Level of transactions between the related parties: the transactions between the subsidiaries and the parent companies take place at price which is not fair in terms of the arm length price going in the market and also the transactions between the board of directors and the shareholders of the company also take place at a subsidized price and thus both the transactions may not present the true and fair view of the financial statements of the company which may require increased assessment of the inherent risk.
- Transactions that are not routine in nature: the non recurring transactions such as acquisitions of big property, writing off and impairment loss and implementation of the new service lines etc. that may take place in One Tel. may affect the level of assessment of inherent risk as the transactions that take place in the company rarely and there may be errors and manipulation of recording the transactions. Hence the lack of knowledge of the company may lead to un-correct recording of the transactions and thus the increased assessment of the inherent risk is required by the auditor due to presence of high risk.
- Level of exercise of the judgment: the accountants and the management of the company requires to take decisions and judgments in various situations and they also take judgment in regard to recording of various transactions such as method of recording investments, method of calculating depreciation, warranty payable on the products and services, and the recording of bad debts. Thus the level of judgments in One Tel. may become a factor for increased assessment of inherent risk as high level of judgments may lead to problems of misstatements in the company which leads to high level of inherent risk. (Gregory Shailer, Margo Wade, Roger Willett, Kim Len Yap, 1998)
- People present in the population: The activities of different persons in the population needs to be evaluated in order to get information in regard to the material misstatements. If the material misstatements are high then there will be high level of inherent risk which will require huge investigations and greater assessment.
The factors which are to be identified during strategic business risk assessment are:
- The basic nature of the client is to be taken into consideration in order to properly assess the level of strategic business risk in One Tel.
- The results of the previous audit are to be identified in order to take into consideration the level of material misstatement in one Tel.
- The transactions between the related parties are to be clearly taken into consideration in order to minimize the level of strategic risk in the business of One Tel.
- The level of judgments exercised in the business as the judgments may bring errors and manipulations which may lead to high level of strategic business risk. (Colbert, J.L., 1988)
- The several inherent risk factors that would contribute to an increased inherent risk assessment at the account balance level are as follows:
- There are various accounts that may require adjustment and the adverse adjustments may lead to high level of inherent risk and thus the adjustments need to be carefully evaluated by the auditor of one Tel. in order to minimize the level of inherent risk in the account balances.
- The results of the audit of previous year of One Tel. may indicate that there were many errors and manipulations in the recording of the accounts receivable and it may lead to manipulations in the account balances also and the overall financial position of the company.
- The high level of complexity in the transactions that are being received in the organization and it may lead to inherent risk in the various accounts balances thus the complexity in the transactions should be clearly observed in One Tel.
- The company is having high amount of accounts receivables which show that significantly high amount are overdue towards the company. Thus One Tel. needs to clearly manage accounts receivable as there is high inherent risk.
- There are various situations where judgment needs to be applied in regard to determining account balances and it may lead to inherent risk in One Tel also as the management is taking various decisions in regard to determination of account balances. (Richard Cascarino,, 2007)
- One Tel. may have situations of loss of the assets and the misappropriation of assets thus there is no adequate balancing of the asset balances thus the misappropriation should be adequately controlled in the organization in order to ensure that the high level of risk inherent in the account balances will be minimized.
- One tel. may face problem of complex and unusual transactions at the end of year which may lead to un-correct recording hence leading to in-correct account balances.
- The inadequate pricing of the inventory in One Tel. by the management and accountant may create problems and danger for the company posing in regard to the inherent risk in regard to account balances.
- The company had prepared provision in regard to the bad and doubtful debts as the company believes that the certain percentage of customers will not provide payment for the services provided to them but there is a risk that the estimate of management in regard to the recording of bad and doubtful debts is not true and thus may lead to risk of inadequate recording of the account balances. (Lula Puncel, 2007)
- The company may face various problems in regard to cut off problem of the inventory hence leading to situation of irregular inventory thus the account balances are not accurate.
- One Tel. may face situation of transactions which are not related to the regular processing and thus there will be wrong accounting and recording leading to irregular balances of the accounting transactions.
Thus the above represents various inherent risks that may arise from various situations hence leading to problem of indefinite account balances. Thus the auditors need to carefully assess the financial position of the company in order to assess the actual areas which may be affected by the adverse situations. The inherent risk is always present in the organization and the auditor needs to properly assess the material misstatements and the errors and manipulations. The high level of inherent risk in the account balances will make the financial statements ineffective hence reducing the productivity of the financial statements prepared by the company. The inherent risk prevalent in the account balances will also lead to inherent risk in the strategic business risk thus the assessment of inherent risk should be of great importance in the business. (AASB & AARF, 2002)
- The going concern is the most important principle which is used in the preparation of the financial statements. The continuation of the principle of going concern of the entity is the prime responsibility of the management of the organization. The matter of applicability of the assumption of the going concern should be properly checked by the auditor of the organization. The assumption of the going concern means that the business will be continued for an indefinite period and there are no chances that business will be liquidated in the near future and thus accordingly the financial position of the company is solvent and it is having adequate assets to pay off the liabilities which stand against the company. The uncertainty and the unfavorable condition which may adversely affect the principle of going concern must be shown in the notes to the accounts clearly. (Catherine Aird, 1993)
The area of going concern in the business should be assessed as medium. The various factors affecting the medium going concern decision area as follows:
- The sales of One Tel had increased in the current year in regard to the previous year but comparatively the cost incurred on providing goods and services are high which show that the company is incurring operating losses. The company had incurred high operating loss in the company.
- The company had received less amount by way of sales in comparison to the amount that had been paid to the suppliers this shows that the liquidity position of the company is not strong and the current ratio of the company is also less than 2:1 which shows that short term financial position of the company is not strong.
- The company had incurred heavy loss during the year which had adversely affected the return on assets and investment and it may also negatively affect the financial position of the company. The investors will withdraw the investment from the company believing that company may incur more losses in the coming year. The heavy withdrawal of investment from the company may decrease the share price of the company heavily.
- The reserves of the company is also very low but it cannot be used for any kind of expansion purpose in the future period thus the lack of reserve may lead to lack of scope of expansion hence stopping the business at the same position where it is actually present which may give a sign that company may not grow in the future period leading to loss of success in comparison to the competitors. (AASB, 2009)
- The company is having high level of inherent risk in the business due to inefficient accounting, negligence behavior on part of the management, and thus leading to situation of high strategic risk. There are some risk and material misstatement which cannot be mitigated from the organization.
- The company is not proper expanding in other countries thus it is not able to take over the telecommunication market in an effective manner and the proportion of revenue from other countries is very less in comparison to the revenue of the home country.
- The company is having high equity capital which shows that the level of owned funds in the company is very large. The proportion of debt in comparison to equity os very low which shows that the long term position of the company is solvent and strong financial position. But the proportion of equity may decline in the near future due to declining profits in the coming year thus the company needs to take measures effectively in order to make sure that the company will survive in the near future.
- The extra ordinary activities in the organization which had led to heavy losses to the company should be removed in order to increase the scope for long term life as the heavy losses gives an impression that company will not survive for longer period. (Stephen Jeffrey’s, 1993)
References:
- Gary S. Monroe, Juliana K.L. Ng, David Woodliff, 2008, “The Importance of Inherent Risk Factors: Auditors’ Perceptions”, Australian Accounting Review, 3 Issue 6, pp. 34-46
- Gregory Shailer, Margo Wade, Roger Willett, Kim Len Yap, 1998, “Inherent risk and indicative factors: senior auditors’ perceptions”, Managerial Auditing Journal, Vol. 13 Issue: 8, pp.455-464
- Arens, A.A., Loebbecke, J.K., Best, P.J. and Shailer, G.E.P., 1990, Auditing in Australia: An Integrated Approach, rev. 2nd ed., Prentice?Hall of Australia, Sydney
- Colbert, J.L., 1988, “Inherent risk: an investigation of auditors’ judgements”, Accounting, Organizations and Society, Vol. 13 No. 2, pp. 111?
- Richard Cascarino, “Internal Auditing: An Integrated Approach”, Published by Juta and Company Ltd., 2007
- Lula Puncel, “Audit Procedures 2008”, Published by CCH,2007
- Auditing & Assurance Standards Board (AASB), Australian Accounting Research Foundation (AARF), “AUS 402: Risk Assessments and Internal Controls”; Issued by AARF, 2002
- Institute of Internal Auditors, “IIA Position Paper: The Role of Internal Auditing in Enterprise wide Risk Management”, Issued January 2009.
- Auditing and Assurance Standards Board (AASB), “Going Concern Issues in Financial Reporting: A guide for companies and directors”; Published by Australian Institute of Company Directors (AICD), 2009
- Catherine Aird, “A Going Concern”; New York: St. Martin’s Press, 1993
- Stephen Jeffrey’s, “A going Concern”; Nick Hern Books, 1993
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