Discuss about the Competitive Procurement of Auditing Services.
The scope of occurring misstatement in case of monetary reports mainly depends on the different types of risks and their levels especially that are related to the non-financial and financial factors of a firm. Therefore, it can be said that accurate process of auditing can help a firm to reduce all the aspects that are related to risks and also to demonstrate the fair and true financial situation and presentation of the business entity (Messier Jr, 2016). However, there are some aspects that the process of auditing cannot control in a proper way.
In term of auditing, the risks regarding any omission or error in the fiscal declaration that occurred due to unmanageable features are considered as intrinsic risks (Porter, Simon & Hatherly, 2014). These risks generally occur due to high complication in the fiscal declaration and incorporation of financial assumptions.
It can be said as per the fiscal declaration of the firm One Tel that in year 2000, the business had executed poorly. Nevertheless, the poor execution of the firm did not affect the monetary condition of the business largely. Moreover, the particular firm’s balance sheet represents the monetary position of the business in the year 2000 was comparatively superior to prior year. This disparity in the fiscal declarations represents that some intrinsic risk aspects are related to the monetary statements.
The fiscal reports imply the final results of all activities of a business along with fiscal transactions of the firm. Thus, this represents all omissions along with errors that occurred due to different intrinsic risks that are related to the activities of business (Hayes, Wallage & Gortemaker, 2014). It has been found that are various aspects that are accountable for raising the level of intrinsic risks.
The marketing plan is considered as an intrinsic risk and the statement of cash flow along with profit and loss statement of the firm One Tel represent that the particular firm has failed in generating enough income amount from operating actions that are considered as basic. Intrinsic risks might also occur due to inefficient planning of marketing (DeFond & Zhang, 2014). Generally, these plans are structured to attract huge consumers and also to raise the firm’s profit. On the basis of nature of customer and prediction of future condition of market, marketing plans are structured. Thus, it can be said that effectiveness depends on the correctness of behavioral analysis and prediction of market condition. However, if the business fails to scrutinize the consumers’ nature accurately, then this might not be effective of prepare an efficient marketing plan. In addition to these, the prediction of the market condition is considered as complicated and it includes different aspects of political, social and economic condition. It is impossible to cover all the factors during preparation of marketing plan but in order to prepare an efficient plan, it is mandatory to cover those factors that are closely associated with the product nature and business venture (Furnham & Gunter, 2015). Nevertheless, if any mandatory aspect is avoided, then the particular plan is not counted as efficient one. An auditor is not liable for controlling the effectiveness of the marketing plan, thus, the aspects raise the level of intrinsic risks significantly in the fiscal reports.
On the other hand, change in the behavioral nature of the clients is also considered as an intrinsic risk that might influence the fiscal declarations. In telecom sector, clients generally change their service providers of network frequently in order to attain profitable offers and schemes. Thus, advertisements campaign and attractive strategies of marketing should be implemented in order to attract more clients by the telecom firms by providing unique offers. However, they face huge disputes regarding retaining the clients for long period of time. As the changes of the behavior and nature of customers in case of telecom industry is very fast, this influences the sales of the firm and alters fiscal results of various monetary time periods (Eilifsen et al., 2013).
Moreover, the employees and workers of a firm might also generate intrinsic risks at the level of fiscal reporting. This level of risk is comparatively higher than total numbers of inexperienced and new staffs of a firm. The level of productivity of a firm is relied on the efficient level of the staffs. This level generally depends on the training, dedication and experience of the staffs. It is a common factor that the new employees might not perform high quality of outputs at desired level due to inexperience (Nigrini, 2012). On the other hand, the old or experienced staffs might also fail due to different causes. Thus, the firm should implement new policy regarding employment that might develop negative influence on the staffs. Additionally, staffs require motivation in order to perform well as per the desire of the management. Furthermore, if the firm implements new system or technologies, the skills of the staffs should also be improved by the management. Thus, the employees should provide accurate training program for updating their knowledge and skills in order to serve better service.
It has been found that different risk factors have been identified during the assessment of the risks of the business. The different kinds of procedures of risk assessment along with sensitivity analysis, the management of the firm can obtain the various levels of risks that are related to the aspects.
It can be said that the other planning of business along with operational planning is considered as one of such aspects. Therefore, the management identifies different risks that are related to the new plans of venture by scrutinizing the plan in detail for other situations (Knapp, 2012).
Moreover, the market condition is also considered as another aspect that influences the fiscal reporting of the firm. The firm is able to assess different risks that are related to changes in the future market through the help of accurate analysis and market research.
In addition to this, the economic situation of the country also raises the level of risks. The risk is related to global or domestic economy, the change in the cost-effective factors and to analyze the different data of economy periodically.
The particular firm might also suffer from changes in the policies of government. Thus, by scrutinizing the changes in the structure of the government along with its declarations from the end of the administration, the firm can achieve the risk features that are related to new policies of the government.
Generally, the intrinsic risks occur on the account of activities of the entities, account nature, operational activities and its environment. The features of the management department of a firm and the history of the mistakes are considered as the major factors of the intrinsic risks (Causholli et al., 2013). The errors that influences the fiscal declaration of the business i.e. the risk factors that are related to the accounting equilibrium and the identification of intrinsic risks help in assessing risks. The balance accounts undergo sufferings from different intrinsic risks factors and by assessing these risks it can help the firm’s auditors and also adds to the raised assessment of risks.
The aspects which are counted for balancing accounts are regarded as high volume transactions, which are non-routine in character. It has been found that certain adjustments are made in balances of accounts that are extinct in common routine procedure of the organization. The complicated transactions are made in the accounts of steadiness. Thus, the auditors should assess the involved risks in the process of auditing the balanced account by taking the aspects of intrinsic risks into consideration.
It has been found that certain intrinsic risks should be assessed on the basis of the aspects that are related to fiscal reporting as this depicts the outcomes from original protuberance. There are certain fiscal transactions or monetary transactions that are required to be delighted with the complicated calculation and also when the simple calculations are implemented, then it is considered as misstated. The particular firm that is in an unstable monetary condition intends to assemble the agreements which have wider inducement in order to misstate the monetary condition and thus it takes place inherently (Chen, Srinidhi & Su, 2014). However, if an organization represents its monetary data and information wrongly or had made any inconsistencies in the accounts of the prior year, then it is inherited likely to the current situation in the similar form. These specified aspects are mainly counted in order to assess the intrinsic risks by the auditor of the firm.
The intrinsic risks in the monetary declaration influence the probable results and the operations of the particular venture. During the time period, when the auditors of a firm assess the intrinsic risks, then the aspects that affect the decision and the prejudice of the fiscal declarations are taken into considerations (Rahman, 2014). The particular factors that are counted are the capability and truthfulness of the administration and the beginning interview, which occurred with the management department of the firm. On the basis of the assessment, the auditors of the firm find out if there are any transactions which are considered as unusual with an important outsider or party. Based on the company’s history, the estimates regarding meeting of the analysts are considered. For instance, the CFO of a firm was considered liable to engage in fraud-concerning securities. The CFO was engaged in a plan that considered backdating “stock option grants”. The fraudulent was regarding management integrity. The inappropriateness of fiscal reporting was credited to failure of accountant of the firm for maintaining a proper record regarding accounting.
The going concern theory implies that an organization expects to run the operations of its business for indefinite time period and will also not liquidate in near future. An organization that is considered as a company is regarded as the part of the particular theory under statutory guidance.
The monetary declaration users generally scrutinize the various statements for measuring the capability of the firm to continue its operations. There are three factors which are scrutinized for measuring spontaneous prospect of the firm; these are solvency, profitability and liquidity.
Liquidity of firm helps in determining that the firm is able to cover all its present liabilities or not. It also depicts that the firm has enough working capital for operating the activities of business (Rahman, 2014). However, if the firm does not has enough liquid assets then this might pilot to liquidity insolvency and this might result into discontinuation of activities. The current ratios of the firm One Tel for the year 1999 and 2000 are as follows:
Figure 1: Current Ratio
(Source: Created by Author)
The solvency ratio helps in measuring financial situation of the fir. This also helps in understanding the capital structure of the firm. The solvency of the firm has been measured through Equity ratio, debt ratio and Debt to Equity ratio and this has been calculated for the firm One Tel for the year 1999 and 2000:
Figure 2: Solvency Ratio
(Source: Created by Author)
The profitability ratio indicates the percentage of profit earned by a firm in a particular period of time. This implies that whether the firm has presented efficiently or not and whether it has earned enormous amount of profit or not in a specified period (Cannon & Bedard, 2015). For understanding the profitability condition of the firm One Tel for the years 1999 and 2000, Return on equity, return on capital employed and return on assets have been calculated as follows:
Figure 3: Profitability Ratio
(Source: Created by Author)
The above graphs indicate that current ratio of One Tel reduced with the passage of time, though it is more than 1.5 i.e. the industry standard. On the other hand, solvency ratios have increased due to decrease in total liabilities and rise in total equality and assets.
However, profitability ratio is a concerned matter as in the year 2000 the firm incurred a huge loss that resulted the return into negative. The cash flow statement implies that One Tel failed to develop adequate cash revenue for meeting the expenses of business operations. Thus, it resulted into shortfall of cash funds and the firm continued its business from additional capital funding and retained earnings by issuance of new stocks.
Therefore, it can be concluded that One Tel suffers from shortfall in funds and net loss but it has enormous assets that easily covers the firm’s losses. Thus, the firm can be counted as a medium going concern.
References
Cannon, N. H., & Bedard, J. C. (2015). Auditing challenging fair value measurements: Evidence from the field. Available at SSRN 2220445.
Causholli, M., Knechel, W. R., Lin, H., & Sappington, D. E. (2013). Competitive procurement of auditing services with limited information.European Accounting Review, 22(3), 573-605.
Chen, C. J., Srinidhi, B., & Su, X. (2014). Effect of auditing: Evidence from variability of stock returns and trading volume. China Journal of Accounting Research, 7(4), 223-245.
DeFond, M., & Zhang, J. (2014). A review of archival auditing research.Journal of Accounting and Economics, 58(2), 275-326.
Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.
Furnham, A., & Gunter, B. (2015). Corporate Assessment (Routledge Revivals): Auditing a Company’s Personality. Routledge.
Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
Knapp, M. C. (2012). Contemporary auditing. Nelson Education.
Messier Jr, W. (2016). Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.
Nigrini, M. (2012). Benford’s Law: Applications for forensic accounting, auditing, and fraud detection (Vol. 586). John Wiley & Sons.
Porter, B., Simon, J., & Hatherly, D. (2014). Principles of external auditing. John Wiley & Sons.
Rahman, J. M. (2014). Accounting and Auditing as Mechanism of Corporate Governance: Review of Literature. Available at SSRN 2543473.
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