Auditing For Corporate Failures List: Importance And Factors To Consider

What are Inherent Risks?

Describe about the Auditing for Corporate Failures List.

1. Due to significant amount of transactions and high competition in business, it is prone to many risks. Besides, inherent risk is that risk that is prevalent in a business no matter what type of business it is. Even after employing effective audit procedures and internal control measures, these risks are not discoverable. However, to some extent, these risks can be mitigated but no on a whole. Inherent risks are present in the business and need to be tackle by the business (Goodstein, 2011). Business operates under immense risks and challenges and inherent risks is always a challenge to it.

In relation to the above, OneTel Ltd is being taken into consideration. OneTel is a global telecommunication company that occupies its business throughout the world. It provides a broad variety of goods and services to its customers through its technology and innovation strategies. Therefore, it is regarded a business leader in Australia. In the initial stages, OneTel was regarded as a business leader, however within due course of time, several network providers joined OneTel in the telecommunication sector and gave a strict competition to it. Therefore, when more and more companies got into the telecommunication sector, communication and call rate services became less expensive (Kruger, 2009). In other words, it was the competitive prices that dominated the industry and more competition resulted into more competitive prices of telephonic services, international calling services etc. As a result, the share of market of OneTel began declining with such strict competition. Several factors would have resulted in the evaluation of inherent risks in financial reporting.

It is observable from the company’s financial statements that it has issued shares in the open market. In the year 2000, the shares of the company enhanced to $1225.6 million that is significantly higher than that of $355.6 million in the year 1999. When complex transactions occur and a company makes huge amount of investments, it creates inherent risks in such business. Dematerialization of shares has assisted significantly in minimizing such risks so that it does not hamper the company’s performance. Nevertheless, because the level of transactions is very huge and the process of share issue, share allotment etc is very complex, even the process of dematerialization is not enough. Therefore, an enhanced and effective evaluation of inherent risk is highly needed. When a strong assessment is possible, it leads to a better course of activity because there are ways to combat such issues.

Factors Increasing Inherent Risks

From the cash flow statement of the company, the license transaction purchase in the year 2000 is clearly observable. Amortization, capitalization, license purchase, registration, and account maintenance of these is a very enormous procedure and therefore requires significant planning. Increased interference of management is required for transactions like valuations of the intangibles and their expenses and many more. Since these transactions are exposable more to errors and misstatements, a proper risk mitigation measure and an adequate amount of care adoption must be did. Besides, these transactions are also associated to complexities and therefore, evaluation of inherent risk measures must be adequately present. It can also be observed from the company’s financial statements that it has taken several loans and advances varying from long-term to middle-term to small-term and has pursued borrowings too. As these transactions are also exposable to falsification, proper control and risk evaluation measures must be there. If not for such falsification, these transactions are also prone to various risks and hence, evaluation of inherent risk measure must be prevalent.

Abnormal items forms part of the company’s financial statements. These items require the prevalence of appropriate risk evaluation measures so that risks can be properly mitigated within due course of time. Furthermore, it is observable that there are significant accumulated losses both at the level of consolidated financial statements and entity as a whole. As the maintenance and calculation of these transactions necessitate management interference, the presence of inherent risk evaluation becomes highly relevant. The company had also bought plant and machinery that enhanced the value of the same. Such buying of assets is based upon the decision of the management that is decisions like how to purchase, what to purchase, from whom to purchase, methods to manage finance etc. Hence, this too requires appropriate inherent risk evaluation measures to be in place. Strategic risks refer to those kinds of risks that are very significant for the smooth performance of a business enterprise and therefore necessitate appropriate care and attention in a regular basis so that it can benefit the company in long-term development. These risks are prevalent in the upper most level of management because of ineffective or incorrect decision making in the planning processes. When the management fails to take an appropriate decision or fails to employ effective plans and decisions for the betterment of the company as a whole, it makes way for the existence of strategic risks. Enormous procedures like purchase of licenses, issue of shares, registration, capitalization etc are also identifiable at the level of strategic risk evaluation. The process of risk evaluation is a lengthy but an effective one. In the long-run it leads to minimization of risks and builds the company for the future course of activity. It depends on a top-down strategy that is evaluation of risks takes place from the top (management) level and while going downwards; it is assessable at the individual level of transaction in the name of control risks and inherent risks.

The Importance of Proper Auditing in Mitigating Risks

2. Inherent risks usually rely on the judgement of an individual. Such judgement relates with the risk measurement procedures. Control risks and detection risks can generally be surpassable but inherent risk will prevail even after taking due care and internal control measures. It highly necessitates a good judgement of the management about what will be required in the upcoming period (Cook, 2001). Moreover, the effect of inherent risk relies on many factors and they are the following:

The nature of a business is an irrelevant factor because inherent risk will prevail no matter what nature of the business is. Every business operates under uncertainty and one such danger is the inherent risk. Therefore, the most relevant and obvious factor that accords to an enhanced inherent risk is the presence of a vast company network. Such presence of vast company network like associates, holdings, partnerships, proprietorships, joint ventures etc play a major role in according to an enhancement in the inherent risks (Heeler, 2009). In other words, if the network of company is huge, there will be huge number of companies that will in turn create significant probabilities of risks. Therefore, as and when the complexities associated with vast company network rises, management has to encounter different problems and it loses the ability to avoid inherent risks in the business.

Non-routine operations, transactions, and abnormal circumstances play a significant role in enhancing the inherent risks of a business. Such abnormal activities necessitate adjustments and speculations that summon inherent risks. Any kinds of transaction that comprises ideas and anticipates of the management are vulnerable to inherent risks. This is because the decision of management moulds by feelings and personal opinions instead of outside influences (Heeler, 2009). The measurement and management of the events or transactions significantly necessitate ideologies and anticipates of the management that cannot often prove beneficial for the company. In short, there is always the factor of risk.

Inherent risks can also increase by the prevalence of related party transactions in a business. This can be due to the management’s subjectivity towards a transaction. Therefore, related party transactions can also play a role in enhancing the inherent risks of company (Geoffrey et. al, 2016). Violations of significant debt covenants also play a key role in enhancing the inherent risks within an organization. This is evident in the given case of OneTel Ltd that has pursued heavy loans and all of these loans come with a covenant. Besides, it is notable that intervening of such corporate debt covenants can result in serious outcomes. Loan repayment together with its interest and complying with other covenants is not an absurdly surprising task (Kruger, 2009). As a result, the company had incurred huge losses because management override risk factors are always prevalent. In other words, if the management attempts to over play, it may become incapable in detecting and mitigating the risks. If the audit team is very strong, then the risks cannot hamper the business as they become weaker. Moreover, it is also observable that inherent risks arise because of the inabilities of the audit personnel itself. It is the role of an auditor to trace the problem and mitigate the risk. However, a failure on the part of an auditor will put the business under immense risks. It is therefore, imperative that the business should have auditors who are competent in nature so that any adverse situation tackled with ease and flexibility (Geoffrey et. al, 2016). Hence, an audit team that is very incompetent in nature can also facilitate in the creation of inherent risks in an organization. Therefore, proper qualification, knowledge, and expertise are another attribute towards detection and mitigation of risks in an organization.

3. It is a matter of fact that a business is started so as to earn huge profits and run for an indefinite period. Therefore, any kind of activity, whether big or small that seriously hampers the above motive of a business, requires sudden and strict actions against it. Even the investors and stakeholders highly expect that the business does not commit such an activity that is detrimental to their interests (Kaplan, 2011). Even the most significant assumption of accounting provides that a business must run for an indefinite period in an efficient way and any event, decision, or transaction that objects this possibility needs an immediate portrayal (Fernando, 2009).

The main reason behind the above-mentioned statement is that the expectations of the stakeholders are also associated with the motives of a business and if it is compromised, then such activities must be highly taken care of. The auditors and directors of the company are also bound to provide at an earliest possible way any type of matter in the audit procedures that can or does affect the company in their assessment of going concern concept. Controlled decisions are very significant in safeguarding a company from immediate or uncertain financial crisis. The factors that can create a reversal to the assumption of going concern are as followed. Signs of credit assistance withdrawal, loss or withdrawal of key managerial personnel without replacement, failure of debt repayment, inability to fulfill creditor’s covenants, regular loss, diminishing of company’s assets, and incapability to tackle competition. All these factors play a crucial role in resulting into significant finance losses, damage to goodwill, and thereby affecting the assumption of going concern concept in the company. Nevertheless, the management can still be able to avoid such a situation by laying an extraordinary interest so that prevention of errors can effectively take place. There are factors that are both outside the management’s control and within the management’s control. Factors like introduction of new products into the market, immediate variations in trend, natural calamities etc are beyond the control of management (Douglas et. al, 2015). Hence, there is an urgent requirement for an adequate policy of framework so that it can assist in depicting the management the seriousness of the matter and when can it be decoded. The risk management system of the business must be established in a manner that will enable to undertake the challenges. This will safeguard the business and provide with strong stability. Therefore, the signs of low, medium, and high are necessary in order to ascertain how simple or worse the situation is and how immediate a step is employable is an efficient strategy or ideology of many of the companies. Therefore, a lot depends on the business strategy and planning. This strategy can play a key role in assisting in understanding the aggregate circumstances of an organization, thereby leading towards an effective and appropriate measure.

References

Cook, T 2001, Collapse of Australia’s fourth largest telco adds to growing list of corporate failures viewed 19 September 2016,  https://www.wsws.org/en/articles/2001/06/onte-j08.html

Douglas M.B, Todd, D.F &  Hermanson, D.R 2015, ‘The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors’ Risk’,  Judgments Accounting Horizons, vol. 29, no. 3, pp. 695-718.

Fernando, A C 2009, Corporate Governance Policies and Principles, Prentice Hall.

Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016,  ‘Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors’,  Accounting Horizons, vol.  30, no. 1, pp. 143-156. 

Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley

Heeler, D 2009,  Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Kaplan, R.S., 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp.  367–383.

Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 20 September 2016, https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html