Risks to the Integrity of Management
Discuss about the Report for Integrity of Management of Global Company.
1. The following g led to increased inherent risk assessment at the financial report level;
Lack of integrity by management. The managers of One Tel lacked integrity to manage the company. The company was set to be a global company with a customer focus that mangers did not achieve. This led to the company inability to expand its operations in a competitive environment (Butt, 2011). The managers were unable to strategize how to improve the company’s reputation to maintain constant growth. This inherent risk factor can also be identified in the process of strategic business risk assessment of the One Tel Company. This is because the strategic business risk assessment would assess the effectiveness and efficiency of the management to make rational decisions for the company performance and keeping financial records.
Nature of the business. The nature of the telecommunication business was sophisticated .The industry required a lot of innovation to remain relevant. The industry is also characterized with a lot changes in product package. Therefore causing changes that required fast adoptions in order for a company to remain relevant and perform financially. This inherent risk as a result of the nature of telecommunication business could have led to financial statements misstated. This risk of accounting for unordinary accounts balances can alter financial reports.
Increased competitors. Since the deregulation of the telecommunication industry in Australia, new companies entered the market. Before then, there were only two carriers. After 1997, the number of companies offering carrier services increased to 35. These new small companies relied on lease network from Telstra, this lowered their operating cost and they were able to offer telecommunication services at a reduced price. This factor reduced the One Tel competitive edge of offering services at a reduced price. The telecommunication industry became competitive suddenly and required change of strategies that the management One Tel did not do.
Inadequate Experience and Knowledge of the Management. The managers’ experience and knowledge in running the One Tel business was inadequate which led to increased inherent risk in the financial report. The managers’ ability to manage the changing markets to remain competitive failed. They lacked knowledge and past experience to understand the market and offer appropriate alternative that would have reduced the inherent risk in the company. This inherent factor could also be identified in the process of assessing strategic business risks in the company. Since the strategic business risk assessment outlines the qualification of the management to achieve the organizations predetermined goals.
Inherent Risk Factors at the Account Balance Level
High Management pressure. The One Tel Company management is under pressure to perform by establishing the company’s brand throughout the world. The management is also under pressure to offer quality services at reduced prices to develop the business. The management faces demotion from being executive members. There is pressure to reduce the number of Board of directors. This led to increased pressure to performance that increase inherent risk in the financial report level
2. The following inherent risk factors contributed to increased inherent risk assessment at the account balance level of One Tel business;
Holding a lot of cash
One Tel business recorded that it held a lot of cash in the business. The amount held by the business in cash for the year 2000 doubled that of year 1999. This factor increased inherent risk in the business by increasing chances of fraud and misappropriation of the account balances.
Allowing a lot of credit sale
The company allowed a lot of credit sells. The amount that the company was expecting as receivable were very high. This amount increased the inherent risk since not all debt is guaranteed to payment. The company required to manage this amount to keep track of the sells so that inventory is matched income to the business. This inherent risk factor increase the inherent risk assessment at the account balances as accountants will have to match sales with revenues that is not guaranteed of payments. Some customers default leading to bad debts experienced by the company.
Complexity of the transactions
The inherent risk associated with the complexity of the telecommunication would have contributed to increased inherent risk in account balance. The corporation which is a global company offering several telecommunication product has complex transactions that could have led to risk of omission or misstatement of an account (Butera, 2016). Also, inherent risk as a result of complex transactions can lead to recording of balances in the wrong account which could have led to inherent risk in the account of balances.
Required Adjustments
The process of accounting in the One Tel business requires periodic account adjustments. For instance, the assets required adjustments. These adjustments could be provisions, allowance for depreciations, accumulated depreciations etc. If the valuation of the accounts balances are not properly calculated they could alter amounts recorded after adjusting to the accounts. The inherent risk factor of adjusting accounts to reflect the current value could have increased the inherent risk in account balance levels.
Going Concern Assessment
Judgment of account balances
The inherent risk of accountants in One Tel Company required making judgment on the account balances could have led to increased inherent risk in the account balances due to different judgment abilities. Judgment of account balances by accountants could have led to understatement or overstatement of balance.
Where there was existence of unordinary transaction in the business and had to be recorded in the company’s account. For instance, recording for abnormal items could have led to omission or misstatements in the account balances in the company accounts (Marchetti, 2012). Therefore, the inherent risk of recording account balances that were not ordinary could have increased the inherent risk assessments in the account balances.
Existence of Susceptible assets
The One Tel held assets that were susceptible to loss. These assets are vulnerable and their balances could have been easily lost or misappropriated. The existence of susceptible assets that had inherent risk factor that could have increased the inherent risk assessment of the account balances.
3. Current Ratio= current Assets/total liabilities 628.1/375 =1.67
Debt ratio= total debts/total assets 490.7/ 1435.5= 0.3
I believe that the area of going concern of One Tel should be assessed as medium for the financial year ending 2000. The following are reasons for my opinion;
The company can settle it short term obligations. The Company has a current ratio of 1.67. This ratio shows that the company can pay it short term debts with the liquid assets available in the firm. The company is in a position to settle obligations as they fall due. Therefore the company is able to maintain going concern in the short term since it cannot get insolvent.
The company can settle it long term debt. By use of debt financial leverage ratio, the One Tel has the ability to use it total assets to settle long term debts. Therefore, the company doesn’t face threats for liquidation as a failure to pay its debts (Collings, 2011).
Increasing costs. The Company is experiencing increasing operating costs. The expenses of running the company increase in 2000 by more than 100% from that of 1999. This indicates that the company ability to operate is becoming costly which is not a good variable of going concern.
Negative trend in cash inflow. The company experienced a negative cash inflow for the year 2000. The earning of the company is negative. The company also did not have profits for the year. This negative trend shows that the company situation is ending on the worst direction. Therefore, the negative trend indicates threat to the going concern of the One Tel.
Business structures. The business has lost it market dominance. After the deregulation of the markets, the company has no guarantee customers as before. The company has a threatened going concern with loss of market share.
Entry of competitors. The industry has new entrants offering the same products. In the recent years, the company has started facing competition from small companies that are leasing infrastructures from established companies, thereby able to offer services at reduced prices. One Tel has had a customer focus associated with quality service at a reduced price. This strategy has been taken by the new companies entering the market. For instance, when the company started, they were only two in the industry, but now there are 35 companies serving producing products for the same market. This factor indicates that the going concern of One Tel is threatened and will depend on the new strategies formulated by the managers
From the factors discussed above, I believe that the going concern of One Tel should be assessed as medium because of the possibility of both alternatives happening. The Company has to formulate new strategy and embark on aggressive performance if it has to continue to be a going concern. On the other side, if the company doesn’t change it operations to improve profits and increase market share, it will be pushed out of the market and cease to be a going concern.
References
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Pcaobus.org. (2016). AU 341 The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. [online] Available at: https://pcaobus.org/Standards/Auditing/Pages/AU341.aspx [Accessed 21 Sep. 2016].
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