Ethical And Quality Control Requirements: Factors Contributing To Inherent Risk Assessment

Evaluation of several factors that can contribute towards inherent risk assessment

Discuss about the Ethical and Quality Control Requirements.

As rightly mentioned by Soh and Martinov-Bennie (2015), the inherent risks indicates the risks on account of diverse error as well as omission in a particular financial pronouncement that can arise for a factor except control. The analysis of the present case study on the operation of One Tel reveals the fact that the inherent risk associated to One. Tel is essentially the risks stemming from intricate transactions as well as circumstances that have the need of the superior judgement relating to the financial estimation.

As rightly put forward by Simnett, Zhou and Hoang (2016), The different factors that can contribute towards increase in inherent risk assessment include the character of the business of the respective clients, results of prior audits, preliminary and recurring engagement, allied parties, non-scheduled dealings, judgement obligatory to record diverse transaction and comprehension of transactions. Apart from this, the other facets associated to the occurrence of inherent risks comprise of different facets related to fraudulent practices in the processes of financial reporting as well as misappropriation of assets Simnett, Carson and Vanstraelen (2016). However, as mentioned in the case study, keeping record of different dealings or else financial transactions of business of the corporation One Tel in dissimilar nations namely, “Australia, UK, and France, Netherlands, Hong Kong and Other” turn out to be complex. Besides this, a number of competitors in the current telecommunication business of Australia shape the nature as well as characteristics of the industry. However, this increases the overall inherent risk associated  to the operations of the corporation, since there is stiff competition, affordable price and consequently lower level of revenue for each business unit (Heenetigala, De Silva Lokuwaduge and Armstrong 2015).

The features that can be detected during the considered business risk appraisal takes account of deliberate detection risk, audit risk, inherent risk in addition to control risk. However, the recognition of the recognized risk comprises of dimension of risk owing to material misstatement over and above the reasonable amount. Again, the satisfactory audit risk points out towards enumeration of readiness of the assessors to admit the material misstatements subsequent to achievement of the audit actions and unqualified judgment regarding the financial announcements. Again, the administration of the business can assume different thoughtfulness for the purpose of plan of the supply network, particular IT infrastructure, and issues associated to execution, precision of forecasting, presentation of suppliers as well as talents (Hay, Stewart and Botica Redmayne 2016). Yet again, the feature as well as nature and characteristics of the particular business that can be essentially documented for the business risk estimation. the process of estimation of the risk of the business consists of natural tragedy, terrorisms, and at the same time corruption, political unsteadiness, volatility of the price along with variation of respective currency (Hardidge et al. 2013). As mentioned in the case study on” Tesco plc as well as its competitors As hereby mentioned in the present case study, the overall operating profit as well as the retained profits of the integrated firm is mainly (282.1). The dividend per share reflects negative declare of affairs negative. These reflect a risk in the recital of the company. Again, as per the consolidated balance sheet statement, it can be hereby ascertained that the total liabilities of the business has increased comparison the preceding year 1999. Besides the cash flow declaration for the business, for the period of the year 2000. Represent that cash slump from both functioning as well as investing actions. Consequently, the assessors need to the value the cash flows to facilitate to evaluate the strategic business risks of the business.

Recognition of the factors acknowledged during the business risk assessment

From the case study on One Tel Phone Company, it can be noticed that there are various factors causing increased inherent risks at high level of accounting. This means that management decisions majorly lads to errors in form of discussing regarding the fiscal policies. Maintaining accounting equilibrium on various policies considers as one of the major factors that need proper attention by the management (Ge, Simnett and Zhou 2016). One Tel Phone Company management requires ways for recognizing the various types of inherent risks for making the risk assessment patterns. Balancing of accounts becomes difficult or impossible if there is improper identification of various inherent risks of any business firm.  This further requires extreme high volume transactions for making the final adjustments for balancing the accounting aspects in the upcoming financial year. This acts as daily routine for One Tel Phone Company in carrying out its business operations in desired way (Carson, E., Fargher and Zhang 2016). There occur various complex calculations presented in the financial reporting of every business organization that need proper recognition by the auditors in the audit process.

Auditors working in particular business organization are responsible in conducting proper assessment regarding identification of intrinsic risks within the system in the near future. Various inherent risks of One Tel Phone Company can be easily identified by auditors from the financial reporting of business organization (Bédard et al. 2015). In case of One Tel Phone Company, it has been analysed that the telecommunication company possess unstable financial condition and commits severe mistakes at each financial steps that particularly leads to inherent risks. Inherent risks needs to be identified by both external and internal auditors for proper accounting balance level.

It is important to understand the fact that management of various firms conducts prejudice practices for bringing balance of accounting transactions keeping in mind the involvement of complexity of actions. It is responsibility of the auditor for giving values to each of the management decisions in aligning with respective prejudices and respective risk assessment at the same time. Auditors are equally responsible to closely understand the mind-set of CFO and financial analysts working for any business organization. They need to recognize the several unusual transactions taking part in an accounting level of financial reporting in any business organization (Carson, E., Fargher and Zhang 2016). Any fraudulent activities need to be recognized by auditors while conducting meeting with CFO as well as financial analyst of any business organization. There are wide-variety of factors governing towards increased inherent risk assessment at given account balance level.

Factors contributing to an increased inherent risk assessment at account balance level

When a particular business organization continues its operations and is not expected in liquidating, then it is considered as going concern theory. This theory will be applicable to all the business organization involving One Tel Phone Company. It is important for predicting the financial status of any business firm as determining whether firm is categorized into small going concern, medium going concern or any large going concern. This question requires complete understanding and fact regarding whether One Tel Phone Company is a going concern or not (Carson, E., Fargher and Zhang 2016). These aspects can be judged with the help of calculating financial ratio. This particular ratio enhances complete understanding on liquidity, profitability or solvency aspects in desired form.

Particulars	1999	2000
Current Assets	296.2	628.1
Current liabilities	84.9	375.2
Debt	78.1	115.5
Equity	363	944.8
Net Income	11.3	-264.4
Earnings before interest and taxes	25.2	-230.4
Total Assets	363	944.8
Current Ratio	3.48881	1.674041
Debt-equity ratio	0.215152	0.122248
Return on equity	0.031129	-0.27985
Return on capital employed	0.090615	-0.40449

Graph 1: Current ratio of One Tel for the financial years 1999-2000

(Source: Created by Author)

Current ratio is one of the liquidity ratios that help in gaining understanding of the ability of business organization in meeting the short-term obligations in the most appropriate way. The above graph clearly depicts the current ratio of One Tel Phone Company for the given year under study (1999 and 2000). There was decrease in current ratio from 1999 to 2000. Ideal current ratio is 2:1. One Tel Phone Company liquidity status is poor and it faces cash-related problems in their daily operational aspects (Hardidge et al. 2013).

Graph 2: Debt equity ratio of One Tel for the financial years 1999-2000

(Source: Created by Author)

Debt to equity ratio is one of the solvency ratios that help in understanding the ability of the business firm in meeting the long-term obligations in desired way. Ideal debt to equity ratio should be less. Higher debt to equity ratio reveals that particular business organization suffers high risk in their operations. The above graph depicts that One Tel Phone Company has positive sign and exposed to less risk (Carson, E., Fargher and Zhang 2016).

Graph 3: Return on equity ratio of One Tel for the financial years 1999-2000

(Source: Created by Author)

Graph 4: Return on capital employed ratio of One Tel for the financial years 1999-2000

(Source: Created by Author)

Return on equity and return on capital employed are two of the profitability ratios help in determining the profitability position of One Tel Company (Hardidge et al. 2013). The above graph depicts that One Tel Phone Company has negative profit for the year 2000 and steady profit for the year 1999.

Therefore, it is concluded by saying that One Tel Phone Company is medium going concern as it suffers from profitability as well as liquidity problems.

Reference List

Bédard, J., Coram, P., Espahbodi, R. and Mock, T.J., 2015. Does Academic Research Provide Sufficient Evidence in Support of Changes to the Audit Reporting Model?. Available at SSRN 2631676.

Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research. Australian Accounting Review, 26(3), pp.226-242.

Ge, Q., Simnett, R. and Zhou, S., 2016. Ethical and Quality Control Requirements When Undertaking Assurance Engagements. Available at SSRN 2837397.

Hardidge, D., Abeysekera, I., Chew, T.G., De Santi, R., Egan, T., Ghandar, A., Jakubicki, P., Lee, A., Luckins, J., Ridley, C. and Shying, M., 2013. A guide to understanding auditing and assurance: listed companies.

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.

Heenetigala, K., De Silva Lokuwaduge, C.S. and Armstrong, A.F., 2015, December. Independent Assurance of Sustainability Reports of Mining Sector Companies in Australia. In 12th International Conference on Business Management (ICBM).

Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and Assurance Research: Trends, Methodological Issues and Opportunities. Auditing: A Journal of Practice and Theory.

Simnett, R., Zhou, S. and Hoang, H., 2016. Assurance and Other Credibility Enhancing Mechanisms for Integrated Reporting. In Integrated Reporting (pp. 269-286). Palgrave Macmillan UK.

Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting.Managerial Auditing Journal, 30(1), pp.80-111.