Auditing And Assurance For Lead Business Enhancement

Factors Leading to Enhancing Inherent Risk

Describe about the Auditing and Assurance for Lead Business Enhancement.

1. There are multiple factors that lead to the enhancement of the inherent risk at the financial report level in the given case. One of these factors is lack of integrity on part of the management which potentially could lead to interference with regards to limiting the access of auditor to information that is significant.  Also, due to involvement of management in auditor appointment, it is likely that auditor’s independence would be compromised due to the inherent conflict of interest faced during the audit process. Additionally, the accounts accuracy and completeness may also suffer a compromise due to interference from management (Purdy, 2010).  Also, there are high chances with regards to manipulation of financial statements at the behest of the management for meeting the shareholders expectations.

Another factor that adds to this inherent risk is the lack of experience and enough knowledge on the part of the management. In such an environment, there are potentially higher risk with regards to occurrence of fraud and misrepresentation in financial statements. Also as the management competencies are lacking, there is potential fear of higher employee turnover which may lead to loss of vital talent and thus enhance inherent risk and enhance the fraud incidence (Elder et al., 2011).  The case information indicates that the One Tel directors did not have enough experience in the industry of operation of the company which led to increased inherent risk at the financial level.

Yet another factor which add to inherent risk is the high management involvement which potentially increases the misrepresentation risk associated with statements representing the financial position of the company which may stem from the fact that the incentives of the management are linked with profitability i.e. EPS. This trend if continued for long could potentially lead to various adverse events such as rise in insolvency risks and liquidity constraints. The given case study clearly indicates that for the company i.e. One Tel, the decision making authority was only with a handful of individuals which was detrimental to the long term interests of the company and lead to heightened misrepresentation risk in context of financial results (Covello et al., 2012).

Besides, a player trying to enter a competitive market tends to experience inherent risk in relation to revenue generation capacity especially in wake of stiff competition from rivals (Tuncel and Alpan, 2010).  For One Tel, this is a significant source of inherent risk as the market has strong competitors that are already established (Telstra and Vodafone). Thus, it is a formidable challenger for the company to penetrate the market in an industry which is such competitive. Additionally, the spread of the business to multiple locations also adds to the overall complexity with regards to the financial statements. In such scenario, it is vital to appoint external expert who specialises in such matters which the management may not support and hence thus attempts are made to cope up with this issue internally only which enhances the misrepresentation risk in context of financial results  (Junior et al., 2014).  The information in the case suggest that being a new player the company is experiencing issues and hence this leads to enhancement of the overall inherent risk which tend to be driven by the underlying economic conditions and structure of the market (Griffiths, 2012).

Primary Risk Factors Related to Misrepresentation and Account Balance

The managers who tend to be directly involved in financial statement preparation experience high degree of pressure from higher echelons of management with regards to time constraints. In case of One Tel also, this is an issue since adequate time is not extended to managers with regards to financial statements preparation which would lead to rise in inherent risk as mistakes may occur due to time paucity. Also, the management may cause financial statements manipulation driven by the expectations of shareholders and incentive maximisation.  Besides, at times the EPS deviation from correct value could also be negative as it facilitates the buying of shares by the top executives which then could be used for gain maximisation (Merna and Al-Thani, 2011). 

Besides, the misrepresentation in financial statements is also influenced by the underlying economic conditions. Also, in wake of the complex computations that are required in relation to the financial transactions, hence there is interpretation risk related to financial statements.  Also, the telecommunication industry is such that technology keeps on evolving and hence inventory obsolescence risk is fairly high for the company and can result in substantial losses (Knechel et al., 2012).  Hence, this also increases the inherent risk as this acts as a potential reason for the company’s management to false represent the financial results in order to hide the losses caused on this account.

A strategic business risk assessment should be performed so as to identify a majority of the risks that have been highlighted above. In this regard, the business risk due to the management acting in unethical manner could be identified which in turn would jeopardise the auditor independence (resulting in quid pro quo relation) and also the internal controls are ineffective. Besides, the concentration of power and its potential negative implications for the business could also be identified. Further, the risk associated with technology obsolescence with regards to inventory would also be identified in strategic business risk assessment as this is a common concern in such industries (Louwers et al., 2013).

2. The primary risk factor at the inherent level related to account balance is related to misrepresentation by the auditor which could potentially result from the application of unsuitable audit practices that result in high misrepresentation risk for the various account balances (Arens et al., 2010).   Since the management yields too much power and is excessively involved in various business decisions,  One Tel exhibits high risk in this regard due to potentially compromised independence of the auditor thus leading to higher incidence of misrepresentation on the financial statements with the intention if serving the management’s vested interests.

Going Concern Assumption for One Tel

It is quite possible that account balances may be misrepresented as the management tries to conceal the various losses caused and also enhance the profitability of the company which enhances the overall inherent risk.  Based on the case information, while the company is trying to make a mark in the market, it is offering low prices to customers do as to attract them but in the process making huge losses which are a drag on the overall company’s profitability and thus under such scenario, there is a high likelihood of the account balances being misrepresented so as to provide an improved situation of the company to the shareholders (Hayes et al., 2014).

Further, with regards to making records and representation of the accounts receivable, there is high inherent risk at the level of account balance. This is quite possible for indicating to the shareholders that indeed the company is earning revenues and over due course of time these would be reflected as cash. Thus, it is highly likely that the accounts receivables balance may be overstated so as to display the revenue generation capacity of the company in a competitive market (Alali and Yeh, 2012).  This adds to a significant risk with regards to the overall business risk.

Also, high value of accounts receivables as recorded in the financial position leads to the issue of large overdue which enhances the inherent risk. This problem is clearly reflected for the given company also as it faces high amount of overdue on the back of receivables. In case of One Tel, this risk is particularly enhanced due to power and influence yielded by the management as a result of which both the internal as well as external controls for the company are ineffective and do not safeguard the shareholder’s interest  (Florea and Florea, 2012).

Further, there could be inherent risk for the company caused to incorrect valuation of the account balance related to inventory. In case of One Tel, this risk is insignificant as it used by the management to hide the sizable losses caused due to new customer acquisition. Also, the processing of transaction in an unconventional manner also adds to the inherent risk. This unconventional manner adopted at the company is carried out with the intention of concealing the ineffectiveness of new processing system put in place and also due to paucity of understanding of the same by the company’s managers (Griffiths, 2012).  The stock valuation may be incorrect and caused due to errors with regard to the lapses in the recording of sales incurred and purchases undertaken. This risk is significant due to the industry in which the company operates where technological obsolescence is a critical issues and hence enhances the overall inherent risk related with account balance (Bratten et al., 2013).  The above issues are also evident in case of One Tel.

3- In accordance with the going concern assumption, the activities of the business are expected to continue with no material risks with regards to shutting down of the business in the foreseeable future. By taking into consideration, the underlying financial position, the going concern may be expressed as low, medium and high  (Knechel et al., 2012).  However, to comment on the exact level of the going concern, an in-depth review of the operations and financial results is desired.

The analysis of the operational performance of the firm provide a fair  assessment that may be caused to the company if the dealer start backing out and thereby the effect of this on the going concern needs to be analysed. In this regard, it is requisite that the host of legal considerations or outstanding liabilities must be considered as these may have implications for the going concern level of the firm. In case of One Tel, two additional factors are the rate at which the state of art technology is adopted on a continuous basis along with the marketing strategies used. While the former would define the service quality, the latter would define the number of customers acquired and hence cumulatively have a sizable impact on going concern level  (Vona, 2012).

The analysis of financial statements would provide vital information with regards to the going concern by calculating the mismatch between the current assets and current liabilities. Also, the underlying leverage assumed by the firm while taking into consideration the loan repayment capacity would be a factor to be considered. In the event, that the company has high amount of outstanding debt, the overall insolvency risk tends to get enhanced thus lowering the level of going concern (Merna and Al-Thani, 2011). In the given case, while taking into consideration the above factors and the information about the same obtained from One Tel case study, there is no doubt that the level of going concern for the company is low.

References:

Alali, F.A. and Yeh, C.L. (2012) Cloud computing: Overview and risk analysis. Journal of Information Systems, 26(2), pp.13-33.

Arens, A., Best, P., Shailer, G., Fiedler, B., Elder, R., & Beasley, M. (2010) Auditing, assurance services and ethics in Australia: an integrated approach. Pearson Education Australia.

Bratten, B., Gaynor, L.M., McDaniel, L., Montague, N.R. and Sierra, G.E. (2013) The audit of fair values and other estimates: The effects of underlying environmental, task, and auditor-specific factors. Auditing: A Journal of Practice & Theory, 32(sp1), pp.7-44.

Covello, V. T., Flamm, W. G., Rodricks, J. V., & Tardiff, R. G. (Eds.). (2012) The analysis of actual versus perceived risks (Vol. 1). Germany: Springer Science & Business Media.

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Hayes, R., Wallage, P., & Gortemaker, H. (2014) Principles of auditing: an introduction to international standards on auditing. UK: Pearson Higher Ed.

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Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2013) Auditing and assurance services. USA: McGraw-Hill.

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Vona, L. W. (2012) Fraud risk assessment: Building a fraud audit program. USA: John Wiley & Sons.