Auditing Assurance Services And Techniques: Factors That Contribute To Increased Inherent Risk Assessment

Factors That Contributed To an Increased Inherent Risk Assessment at The Financial Report Level

Discuss about the Auditing Assurance Services and Techniques.

When carrying out of an audit, the auditor generally classifies audit risk into three parts. These three errors include the inherent risk, detection risk, and the control risk.  An inherent risk can be defined as the possibility of incorrect or misleading information in accounting statements. An example includes a situation where the accountants use a larger than normal amount of judgment and approximation. Also, the risk can surface where the accountant uses of a complex financial instrument in the interpretation or preparation of financial reports. (DeLoach 2013, p. 56-60)

From the One Tel Case, the management has a duty to ensure compliance in aspects as required by the IAS. Literally, it can be observed that the company prepares and reports its financial reports as provided by the IFRS. Since the company operates in various countries, there is an element of complexity in the reporting. The chances of having a high level of audit risks are so inevitable. Because of the complexity in financial reporting for the parent and subsidiary, the auditor will consider assessing the risks levels for the assignment. In particular, the inherent risks, control risks, and detection risks will be assessed and assigned a specific percentage. The higher percentage in any of the mentioned three will require the auditor to apply other skills he/she possess in establishing an appropriate approach to be applied during the audit. Also, the identification of the audit risk level is important to the auditor in considering whether to accept or reject an assignment. (Chan et al. 2008)

All organizations are legally required to prepare their financial reports. The report is essentially required by various parties. The parties include the government, the banks, the shareholders, the creditors of the company and the prospective investors. For instance, the government requires the report in verifying the information filed by the company in the tax systems. And the shareholders will use the report in determining the viability of the investment. The investors majorly rely on the financial ratios in ascertaining the return on the investment. To enhance transparency, the auditor is obligated with perusing various documents to check key aspects of conformity, disclosure, assertions and others in the prepared reports. (Karen 2012, p. 56-63)

The paper has started by outlining and discussing possible factors that contributed to an increased inherent risk assessment at the financial report level. Further, the paper has discussed on the factors that can be identified during strategic business risk assessment. In addition, the paper has discussed several inherent risks factors that would have contributed to increased inherent risk assessment at the account balance levels. And finally, the paper has assessed the level of going concern by giving factors supporting the basis of the decision about One Tel company. (Armour 2010, p. 65)

Inherent Risk Factors That Would Have Contributed To an Increased Inherent Risk Assessment at The Account Balance

As earlier defined, an inherent risk refers to the susceptibility of an assertion about a transaction, account balance or disclosure to be misstated.  Generally, the auditor determines the likelihood of the misstatement before establishing the effectiveness of the client’s internal control systems. Areas that are exposed to high rates of misstatement are given greater consideration. For instance, the auditor uses a different approach in examining cash balances as compared to asset and inventory entries. The reason for the difference in the used approaches in assessing the inherent risks levels is attributed to the rate of exposure to the financial misstatement. (Fülbier et al. 2015)

On the case of One Tel Company, the factors that contributed to an increased inherent risk assessment at the financial report level includes the following: discrepancies of the accounting records, unusual relationships between the auditor and the management, lack of management competence, high earnings growth expectations, disagreement over financial reporting, auditors resignation, unusual transactions, transactions which most of the revenue or expense is recognized at inception of transaction, financial results that seem too good to be true, insistence of the chief executive officer to be present at all meetings and complex business arrangements that serve little practical purpose to the organization. (Kinney 2009, p. 83-90)

To start with, the discrepancies of the accounting records, signals an element of misstatement of the reports. Such instance creates an attention to the auditor and may intensify the approaches to use during the audit. If the most of the items are affected by the discrepancies, the auditor will have no otherwise but question the fairness, truthfulness and the completeness of the statements. The unusual relationships between the management and the auditor are aspects that compromise the independence of the audit. In fact, the auditor is not required to associate, or accept gifts from the management. Also, he/she is not supposed to have a family, blood or business relationship with the client. These are metrics that are perceived to interfere with the audit opinion. If such relationships exist between the parties, the level of inherent risk on the financial reports will increase. (Karla et al. 2011)

The management is required to be competent enough in ensuring true, fair and accurate results are prepared. Lack of management competence increases the assessment of inherent risks in the financial reports by the auditor. Therefore, the auditor basically examines the competence level of the management in assessing the internal controls that will finally give a leeway in designing the audit approach. Also, a disagreement over the financial reporting by the prior auditor signifies the high levels of inherent risks in the financial statements. Based on this, the chances of having high levels of inherent risks in the next financial reports are very high. Therefore, the current auditor will assign a high inherent risk assessment level on financial misstatement before performing the audit. (Lam 2009, p. 65-67)

In cases where the auditor finds most aspect compromising the auditor’s issuance of an appropriate opinion, resignation becomes the only appropriate alternative. For instance, if the previous auditor resigned from office, the current auditor will assign a high level of inherent risks on the financial reports misstatements. Also, the unusual transactions with outsiders signal an aspect of fraudulent. These are transactions that may involve large sums of money and possesses attributes of insufficient disclosure. In such a scenario, the auditor is alerted to give an appropriate assessment on the financial reports. (Krasnov 2013, p. 37-43)

Another aspect earlier stated include financial results that seem too good to be true. These are transactions that are perfect in all areas until to lure the auditor in reducing the level of risk assessment. The truth of the matter will be that the auditor examination will unearth cases of misstatement. Finally, the chief executive officers’ insistence to be present at all meetings can be perceived as an aim to cover a fraudulent activity. The auditor studies the management behaviour in establishing risk assessment levels.(Lindow et al. 2009)

Perhaps, the explored factors have been used in the assessment of inherent risk levels. Also, some of these factors can be used during the strategic business risk assessment. The assessment compares the organization capability in relation to its close competitors. For this case, the factors used include the management competence, the earnings growth expectations, transactions for which most of the revenue or expense are recognized at the inception of the transaction, complex arrangements that serve little practical purpose, and more. These factors are classified under strategic assessment because of their ability to address management and operational concerns. (Needles et al. 2013)

Basically, the account balances are affected by the calculation, recording, and the adjustment performed on the accounts. Some of the factors that contribute to increased assessment on the account balances include the following. To start with, the incomplete accounts. Here is where the accounts likely require adjustments. Once the auditor notices this shortcoming on the account balances, the need for intensifying the assessment of inherent risks heightens. Also, the complexity of the underlying transactions alerts the auditor. If discovered that the recorded transactions are so complex to require a third eye for understanding, then the need of increasing the risk assessment levels increases. And the vice versa is true. (Lowers 2013, p. 115-130)

In addition, the auditor also checks on the account balances if the recordings were originally reached or reached through judgment. If the judgment was involved in determining the account balances, then there are high chances of increasing the risk assessment levels. In some occasion, the auditor may just decide to increase the risk assessment the susceptibility of the assets to loss or misappropriation is very high. Further, the result of the previous audit greatly impacts on the current risk assessment. If the results from the previous audits indicate that many errors were made in recording the accounts receivable and payables, then probably the likelihood of it repeating in the current years is inevitable. Once the auditor realizes it from the previous audit report, then he/she has no otherwise than increasing the risk assessment on the account balances. (Needles et al. 2013)

Another evaluation method includes checking the history of the company on inventory pricing. If the company has a history of inventory pricing errors, then the chances of increasing the risk assessment increases and vice versa. The same applies to the company that has a history of inventory cut-off problems. In discovering that the company endlessly suffers such problems, the inherent risk assessment levels increases. Other self-explanatory factors include the management estimates for the provision for doubtful debts have not been accurate over the past, transactions not subject to ordinary processing, the occurrence of unusual and complex transactions at or near the year end, and more. (Bodine et al. 2014)

Although the company recorded a net loss during the fiscal year ended 2000 but this is insufficient to make us term the going concern as high or low. It is quite obvious that the going concern for the company is medium. In addition, the company’s asset base increased during this period, giving a clear indication that the business will effectively continue to operate in the future. Other key factors that likely to affect the decision on the going concern of the company include the size and the complexity of the organization, the nature, and condition of the business, the degree to which the organization is affected by external factors, the information available regarding bankruptcy and staffing issues and the degree of uncertainty. (Lowers 2013, p. 115-130)

To sum up, the going concern of the One Tel Company is still stable. Despite the intensified competition on the market, the company can still pick dominate more market areas. And the success will primarily depend on the ability of the management in establishing effective operational and marketing strategies. But for now, it is quite clear that the company will still remain under operation for the unspecified period of time. (Cernius 2012, p. 76-85)

References

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Bodine, S.W.,A.Pugliese, and P.L. Walker. (2014). A Road Map to Risk Management: Accountancy, 10(5), 525-538.

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Cernius G. (2012). The New Role of The Going Concern Concept In Corporate Finance Management. Perspectives of Innovations, Economics and Business, 12(3), 76–85.

DeLoach, J. W. (2013). Enterprise-Wide Risk Management: Strategies for Linking Risk and Opportunity, Financial Time Prentice Hall, 3(19), 56-60

Fülbier RU, Klein M. (2015). Balancing Past and Present: The impact of accounting internationalization on German accounting regulations. Accounting History, 20(87), 342-74.

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Karen K.W. Li. (2012). School of Accountancy: The Chinese University of Hong Kong. Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, 28(6), 56-63

Karla M. Johnston, Audrey A. Gramlin, (2011). Auditing: A risk based approach to conducting a quality Audit. South Western. Cengage learning, 7(21), 25-52

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Kinney, W.R. (2009). Research Opportunities in Internal Control Quality Assurance and Auditing: Practice and Theory, Supplement, 20(2), 83-90.

Krasnov V.D. (2013). Analysis Of The Factors That Cause Doubt In Going Concern, And Their Impact On The Financial Position Of The Organization. International Accounting, 43(33), 37–43.

Lam, J. (2009). Enterprise-Wide Risk: Management and the Role of the Chief Risk Officer, Erisk.com, 6(10), 65-67

Lindow, P., and J. Race. (2009). Beyond Traditional Audit Techniques: Accountancy, 65(7), 28-33.

Lowers, Timothy J. (2013). Auditing and Assurance Services: New York. McGraw, 24(2), 115-130

Needles, Belverd E.,Powers., & Miriam (2013). Principles of Financial Accounting Series: London. Cengage Learning, 23(4), 86-92