Describe about the Auditing for Misstatements in Financial Statement.
Misstatements in financial statement depend on different types of risk, which are related with the financial and non-financial aspects of the company. By implementing a good audit process, a company gets a benefit to reduce their risk and present a true and fair view of the financial status of the company. However, it has been found that there are various factors, which a company cannot control, by auditing process. Inherent risks are those risk which are caused by some uncontrollable factors like errors or misrepresentation in their financial disclosure, and so on. These types of risk arise due to high level of complexity in financial data and by involving financial estimation of the company (Moroney et al. 2014).
After analyzing the financial data of the company One Tel it has been found that the company has performed very badly in the year 2000. However, these performances have not affected the company’s financial position. After analyzing the company’s balance sheet and profit statement, it has been found that instead of performing badly in the year 2000 the company has maintained its financial record better than previous years. Therefore, in this condition it is better to conclude that some inherent risks are associated with the company’s financial disclosure.
The financial statement gives the idea about the company’s market position. Hence, it is very important to manage the financial statement properly. These statements present the scenario of different types of inherent risk, which are associated in the company. Many factors are responsible for the rise in the level of inherent risk in the business (Bratten et al.2013).
However, it is difficult to forecast market condition due to political and economical factors of the market. It is impossible for the company to cover all the aspects while preparing market plans. In general, it is important to include all the aspects while preparing market plans because these aspects are associated with the business directly or indirectly. If the company fails to include any aspect in the preparation of its marketing plan than the company will not be able to prepare effective market plan. Though it is not possible for a person or an auditor to handle and control the efficiency of the plans, the above-mentioned factors result the increase in the inherent risk of the company in its financial statement (Beasley et al. 2012).
Furthermore, the management must improve the skills of the worker before issuing any new policies in the management. To overcome with this situation a company must provide proper training to its employees to improve their skills and efficiency so that they can provide efficient service to the company (Carson et al. 2014).
During the assessment of business strategic risk the company includes different types of risk. The management can control the level of risk with the help of these analyses, which are related to the factors of the company. One of the important factors, which a company must consider, is the operational planning. The company can easily identify different types of risk related to the new business and can find appropriate strategy for its alternative (Carey et al. 2013).
Inherent risk of the company arises due to the activities of the management related to its operation and working environment. The main factors of the inherent risk are the characteristic of management and the past errors of the company. These errors affect the financial statement of the company because the inherent risk will help the company to identify the accounting balance so that they can take proper steps to detect the risk. The company’s financial position hampers a lot from different types of inherent risk. The detection of these risks will help the auditors in the assessment of risk (Cohen et al. 2014).
The accounts balance of the company are to be determined as non-routine in nature. However, few of these adjustments do not exist in business. Many complex transactions made the financial balances of the company. It is the duty of the auditor to analyze the risks, which are involved in the auditing based on the factors of inherent risk.
The financial reporting of the company will present the results of the company, which varies from the real projection because some of the financial transactions can be handling individually instead of providing complex calculation. It helps the company in rectifying the misstatement in their financial statement. The company, which does not have a fixed financial situation than in this situation the company, should meet certain parameters, so that they can handle the data which provides incentive, which misleads a company, by providing wrong financial information. For example, If a company has provided any misleading financial statement or any wrong accounting disclosures of the past years than the company will be unable to present the same data in the same pattern.
The outcome of inherent risk is that it affects the potential outcome and the operation of the organization. While analyzing the inherent risk the auditor must include the factors related to the subjectivity of the financial data of the company. Other important factors are the integrity and competence of the management of the company. The auditors review its report after analyzing the transactions related to the internal members of the company or the external members of the company (Ferguson et al. 2014).
Going concern means the organizations, which can continue its business operation for unlimited period without any future liquidity. According to statutory guidelines, the unlisted business entities are termed as going concern. However, many entities discontinue its business during the course (Hay et al. 2016). The financial users will observe various financial statements to get the market potential of the company in the near future.
There are three different factors, which a company must include while measuring the prospect of the organization. These are liquidity, solvency and profitability (Carson et al. 2012).
The solvency ratio highlights the overall financial position of the company. In other words, it provides the company’s financial position i.e. whether the company is in position to clear its liabilities. It also helps in analyzing the capital position of the company. There are three ratios, which a company uses to measure its solvency of the organization. These are equity ratio, debt ratio and debt to equity ratio.
The current ratio of One Tel for the year 1999 and 2000 are as follows:
Calculation of current ratio for the year 2000
Total Current asset for the year 2000 = 628.1
Total Current liability for the year 2000 =375.2
Current ratio = current assets/ current liabilities
=628.1/375.2
=1.67
Calculation of current ratio for the year 1999
Total Current asset for the year 1999 =296.2
Total Current liability for the year 1999 =84.9
Current ratio=current assets/current liabilities
=296.2/84.9
=3.49
The three different types of solvency ratio of the company One Tel for the year 1999 and 2000 are as below:
Calculation of debt ratio of the company for the year 2000
Total assets for the year 2000 =1435.5
Total liabilities for the year 2000 =490.7
Debt ratio= total liabilities/total assets
=490.7/1435.5
=0.34
Calculation of debt ratio of the company for the year 1999
Total assets for the year 1999 =526
Total liabilities for the year 1999 =163
Debt ratio=total liabilities/total assets
=163/526
=0.31
Calculation of equity ratio of the company for the year 2000
Total equity for the year 2000 =944.8
Total assets for the year 2000 =1435.5
Equity ratio=total equity/total assets
=944.8/1435.5
=0.66
Calculation of equity ratio of the company for the year 1999
Total equity for the year 1999 =363
Total assets for the year 1999 =526
Equity ratio=total equity/total assets
=363/526
=0.69
Calculation of debt-equity ratio of the company for the year 2000
Total debt for the year 2000 =490.7
Total equity for the year 2000 =944.8
Debt- equity ratio= total debt/total equity
=490.7/944.8
=0.52
Calculation of debt-equity ratio of the company for the year 1999
Total debt for the year 1999 =163
Total equity for the year 1999 =363
Debt- equity ratio=total debt/total equity
=163/363
=0.45
The profitability ratio gives the idea of company’s profit and loss. The company operates mainly to earn profit. It provides the detail whether the company has performed efficiently or not, whether the company incurred sufficient profit or not. It is important for a company to incur sufficient amount of profit during the year so that it can run its business smoothly in the future. If the company does not earn sufficient profit then it will be difficult for the company to run its business. Some of the common ratios, which a company uses to ascertain its profitability during the year, are return on assets, return on capital employed, return on equity, and so on.
The only matter of concern in this report is the profitability ratio of the company. In the year 2000, the company has met with a heavy loss, due to which all the positive return of the company change into negative return. After analyzing the cash flow statement of the company, it can be concluded that the company has failed to generate enough cash to meet its operational expenses. Due to which the cash funds of the company becomes short and the company has to continue its operation by using its retained earnings and additional capital funding so that they can issue new shares in the market.
After analyzing the whole case this report concludes that though the company is suffering from net loss and shortage of funds, it has sufficient assets to meet its liabilities. Therefore, One.Tel can be considered as a medium going concern.
References:-
Beasley, M., Elder, R. and Arens, A., 2012. Auditing and assurance services.
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
Carey, P., Knechel, W.R. and Tanewski, G., 2013. Costs and Benefits of Mandatory Auditing of Forâ€Âprofit Private and Notâ€Âforâ€Âprofit Companies in Australia. Australian Accounting Review, 23(1), pp.43-53.
Carson, E., Redmayne, N.B. and Liao, L., 2014. Audit Market Structure and Competition in Australia. Australian Accounting Review, 24(4), pp.298-312.
Cohen, J.R., Krishnamoorthy, G. and Wright, A., 2014. Enterprise risk management and the financial reporting process: the experiences of audit committee members, CFOs, and external auditors. CFOs, and External Auditors (May 30, 2014)
Ferguson, C., Pinnuck, M. and Skinner, D.J., 2014. The evolution of audit market structure and the emergence of the Big 4: Evidence from Australia.Chicago Booth Research Paper, (14-13).
Hay, D., Stewart, J. and Botica Redmayne, N., 2016. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis.Available at SSRN 2838066.
Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013. Introduction to management accounting. Pearson Higher Ed
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Lye, J., Dunn, L., Kenny, J., Lehmann, J., Kron, T., Oliver, C., Butler, D., Alves, A., Johnston, P., Franich, R. and Williams, I., 2014. Remote auditing of radiotherapy facilities using optically stimulated luminescence dosimeters.Medical physics, 41(3), p.032102.
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