Discuss about the Business Strategy Financial Reporting Irregularities.
The various non-financial and financial aspects lead to the risk of misstating the financial reports of the company. The audit process sought to reduce such risks but there are some factors, which are beyond the control of the auditing process. The factors, which cannot be controlled, and leading to the error in the financial reporting is the inherent risks.
In the year of 2000, the performance of the One Tel Company is quite poor as depicted from its financial statements. However, it was depicted by the balance sheet that the financial position of the company was better in the previous year. Due to this disparity in the financial reporting of the company, the company has inherent risk factors associated with it. The inherent risk factor responsible for increasing the risk assessment at the financial reporting level is as follows:
One of the factors is the staffs and labor of the companies where the workforce comprised of and this is because the productivity of the company relies in the efficiency of the workforce. Due to the lack of expertise, the fresh employees may not be able to produce the optimum output as required by the company. However, the existing employees may also fail to perform desirably and the reason may be the newly introduced policy of the companies which is not liked by the employees. There might be the lack of motivation and the employees may not be motivated to work in the peak season or in pressure. If the management is not involved in motivating the employees, their productivity would fall. The employees need to be properly trained if the company switches to the technologically advanced system (Bame-Aldredet al. 2012).
The cash flow and the income statement of the company reflects that the cash flow from the basic operating activities are negative that is the One Tel company has failed in generating the sufficient cash flow as depicted form the negative amount. The reason may be attributed to the inefficient marketing plan of the company. The marketing plan might not be designed so that would generate the profits for the company. The prediction of the future market and the behavior analysis form the basis of the marketing plan and in order for the marketing plan to be accurate the behavior analysis needs to be accurate (Bentleyet al. 2013). If the management does not properly analyze the natures of the consumers, then it would fail to attract the customers as the plan would not be effective. The nature of the products and business are vital aspect to form the sound marketing plan. The auditor would not be able to control the effectiveness of the marketing plan and this factor would contribute to the increased risk assessment at the level of financial reporting (Bratten et al. 2012).
Another risk factor would be the changes preferences pattern of the consumers which would have impact on the financial reporting and this is very much relevant in the telecom industry. The consumers in the telecom industry have a tendency to change their network service providers in lure of various schemes. The telecom companies using their advertising and marketing campaigns attract the customers by offering schemes but they are faced with the challenge of retaining the customers (Sadgrove 2016). The fast change in the consumer’s preferences affects the sales of telecom companies and hence the financial outcome differs year to year.
There are various factors that affect the assessment of the inherent risks such as the nature of the business of the clients, any transaction that are non routine nature, results generated by the previous audits. The inherent risks are inherent to the activities of entity, its operation and environment in which it conducts its business and nature of accounts. Detection of such risks would enhance the risk assessment (Messier 2016). The various factors contributing to the increased risks assessment can be listed down below:
The real projections of the financial statements are sometimes different from the actual value depicted. The reason behind this is that some of the financial transactions are misstated when it is treated using simple calculation, though it requires complex calculations. The companies intends to misstate the financial information if it is not in a stable financial situation as in the case of One Tel company where there was mainly outflow of cash rather than inflow. If the company has previously presented the information having discrepancies then it is likely to do so in the future as well (Kunz et al. 2014).
Another factor might be the competence and integrity of the management and any preliminary interview that is held, this forms the basis for risk assessment by the auditors, and this factor would affect the subjectivity and judgment of the financial statements. The history of the meeting analysts and the expectancy regarding the future earning of the company also forms the basis of the auditing factor. The failure of the management on the part of accountant and their inability to maintain the proper accounting records leads to the increased risk assessment.
Other factor is the transactions that are of high volume and are maintained in the account of balance is regarded to be of non routine and this is one of the factors which needs to be considered as they are not a part of the ordinary business course. The auditors consider these inherent risk factors when they assess the risks involved in the financial reporting or accounts of balance (Knechel et al. 2012).
The internal control over financial reporting is the factors that need to be identified during the business risk management. This calls for evaluating the designs of the internal control system relevant to the auditing procedures. The components of the internal control of the financial reporting environment and the monitoring of the control system, communication and information and the activities involved in controlling process. The procedures of recording, initiating, processing, authorizing the transactions are to be accounted for.These factor are essential to be considered because the judgment in estimating the accounts is affected which would manipulate the financial statements (Johnstoneet al, 2013). The nature of the company is very relevant factor when it comes to the strategic assessment of business risks as the management personnel and the structure of organization, nature of the investment made by the company is relevant factors in assessing the risks. This factor consists of many sub factors that needs to be considered such as the complexity and size of the operating business, the services and products and its key suppliers.
The businesses that expect its operation to continue for an infinite period of time and would not liquidate in the near future are regarded as the going concern organization. Under the statutory guideline, the business entities are regarded going concerns which are enlisted as companies. However, during the course of period many companies stills discontinue their operation.
Therefore, the capability of the organization to continue their operation in the future would be measured by analyzing the financial statements of the organizations. In order to measure the continuity aspect of the organization, there are aspects that need to be analyzed that is the solvency, liquidity and profitability aspects (Haimes 2015).
The overall financial health of the company is measured by using the solvency aspects and it shows the capital structure of the company and shows whether the company has enough assets to clear off its liabilities. The ratios, which depict the solvency aspect of the company, are equity ratio, debt to equity ratio and the debt ratio. The ratios for One Tel Company for the year 1999 and 2000 are depicted as follows:
The liquidity position of the company is described using the liquidity aspects and this helps in finding out that the assets of the company are sufficient to cover up all its liabilities. If the company does not possess adequate liquid assets, then the company might go into liquidity and it might become difficult for the company to continue its operational activities. The ratio shows that whether the company has sufficient working capital needed by the business to carry out its operations (Guénin-Paraciniet al. 2014). One of the most widely used tools to measure the liquidity position of the company is the current ratio. The current ratio for the year 1999 and 2000 of One Tel Company is shown below:
The financial profit of the company in terms of loss and profit is measured using the profitability ratio. The main objective of the company is to earn profit through its operation and the profitability aspect of the company shows that the company has earned adequate profits and has generated sufficient amounts of profits. Due to the unavailability of the funds, the company may find it difficult to operate in the future. The ratios depicting the profitability aspects of the company are return on equity, return on assets, and the return on capital employed (Griffiths 2012). The graph depicting these ratios for One Tel Company is shown in the following graphs:
The graphs show that the current ratio for One Tel Company has reduced over the years. The current ratio of the company is above 1.5 and this means that the company has sufficient assets to pay off all its short-term obligations. Due to the increase in the value of total equity and total assets, the solvency ratio of the company has reduced over the years. The reason is also attributable to the reduction in the value of total liabilities.
The company has incurred huge loss in the year of 2000. It is also clearly depicted from the statement of cash flow that the operational expenses of the company could not be met as the company has failed to generate sufficient cash flow. The negative figures clearly shows the shortage of funds in the company. However, the operation of the company has been continued form the capital funding that is by issuing the new shares and by reinvesting the profits earned in the previous year (Dictionary 2014). There is a shortage of the cash revenue generated. Therefore, the conclusion can be made on the basis of above analysis that though there is a shortage of funds in the company and the company is suffering from huge loss, the losses and the liabilities of the company is met using the assets that are adequate. The One Tel Company can therefore be regarded as the medium going concern.
References:
Bame-Aldred, C.W., Brandon, D.M., Messier Jr, W.F., Rittenberg, L.E. and Stefaniak, C.M., 2012. A summary of research on external auditor reliance on the internal audit function. Auditing: A Journal of Practice & Theory, 32(sp1), pp.251-286.
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
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