1. List and discuss several factors that would have contributed to an increased inherent risk assessment at the financial report level. Also identify which of these factors may be identified during the strategic business risk assessment.
2. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level.
3. Do you believe that the area of going concern should be assessed as high, medium or low? Identify the factors that are the basis for your decision.
1. A business operates under immense competition and risks. Irrespective of the size and status of the business, inherent risk is always present in the business. The main feature of the inherent risk is that it cannot be mitigated by any measure. Business might have strong internal control system, audit procedure, compliance but all these are ineffective. Inherent risk can be minimized to a considerable extent but the risks cannot be eliminated totally from the system. Hence, inherent risks are always a major blow as it impacts the operation of the company. Moreover, if left uncontrolled then it might lead to serious problem.
The case study of OneTel is used for analysis. OneTel is a pioneer in global telecommunication that has a strong place far and wide. The operations of the company stretch to providing goods and services. The technological development of the company has enabled it to cater to the customers’ needs. Hence, it has immense popularity in Australia. The company enjoyed a favorable position but with the entrant of new players into the market, the market share was divided. Fierce competition spread in the market and the call rates dipped. This was due to the fierce competition in the industry. It was the competitive rate hat dominated the entire industry and hence, became a problem for OneTel because the market share fell. Moreover, the faulty management along with various issue added to the downfall of OneTel. There are many factors that contributed to the assessment of inherent risk in the process of reporting:
As per the financial statements of the company it can be seen that the shares were issued in the open market. The company enhanced the issuance of shares in 2000 that became $1225.6 million as compared to 1999 where it was $355.6 million. Inherent risks are small when the operation soft h business is on a small scale however, when the size and complexity increases it leads to more inherent risk (Kruger, 2009). Dematerialization was used that limited the risks to a considerable extent. However, the transactions were huge and complexity is bound to happen when it comes to issue and allotment, even dematerialization cannot help in this regard. The extent of risk was so grave that little can be done in that regard.
As per the cash flow statement, the license transaction in 2000 is clearly observed. Capitalization, amortization, registration, as well as maintenance need adequate planning. When it comes to intangibles, the role of the management comes to the forefront (Kruger, 2009). As these transactions are prone to mistakes and errors, risk evaluation program is the need of the hour. Moreover, to statements reflects that the company took many loans and advances that ranges from long term to short term thereby signalling the importance of risk evaluation program.
There are various abnormal items that is present in the financial statement of the company. Such items need to be properly managed so that risks could not harm the operations of the company. Moreover, as per the financial statement it can be observe that the losses are reflected at both the consolidated statement. The company has purchased heavy machineries and plant that needs the management decision in terms of finance, purchase, etc. this needs adequate risks aversion planning.
2. The concept of inherent is present in the business and the evaluation depends on the skill and ability of an individual. Control risks, as well as detection risk can be surpassed but the inherent risk will be present at all point of time even after compliance and strong control. It gives a view that the role of the management is vital because the forecast and planning needs to be done (Geoffrey et. al, 2016). The impact of inherent risks varies according to various factors.
The size of the business plays an important role when it comes to the inherent risk because the complexity in a big business is more. When a small business operates it needs less compliance at the accounts level while a bigger business needs a strong accounts system to trace and minimize the risk component. Further, big companies like associates, partnership, joint venture, etc bring additional burden and raise inherent risk (Goodstein, 2011). Hence, it creates undue burden for the management and requires encountering various problem.
Operations that are irregular or abnormal in nature play a major role in increasing the level of inherent risk. It is common that the abnormal activities enhances the level of adjustments and leads to speculations that raise the danger of inherent risk. The transactions that need idea and forecasting of the management are exposed to inherent risk because the result is not known. It can be tag as an activity that is contingent in nature. Moreover, such an act is entirely on the personal capacity of the management and not related to the outside circumstances. Undoubtedly, this is done considering the benefit of the organization but have limitations.
When the related party transactions happen, there is inherent risk. If the management is subjective towards a transaction then it attracts inherent risk. Further when the debt and loans even play a dominant role in inherent risk. The case of OneTel signifies that it borrowed funds and loans with a covenant (Gay & Simnet, 2015). However, it is important to note that intervention of such corporate debt leads to serious problem. The repayment of loan along with the component of interest is not a surprise but in the case of OneTel the company surpassed the risk factors that are an alert level. On the other hand, if the system of audit and risk compliance is strong it leads to proper risk detection. Moreover, a deficiency on the part of the auditor attracts risk. Hence, it is important that skilful auditors must be present that can trace the risk. According to Gay & Simnet (2015) the availability of competent auditor is the need of the hour that helps to keep the risks at bay and prepare the business for any contingencies. Hence, it is of paramount importance that the expertise, knowledge and skills of the auditor are an important criterion that helps in detecting, as well as mitigating the risk.
3. A business runs with the main motive of earning profit and run for a period that is indefinite. Any entity comes into operation with the objective of earning wealth and continuing the operations at a stretch. This does not depend on the owner or the management rather the prime objective is to continue the urn. However, any activity either big or small destroys the function of the business and needs action that can fix the problem. The most important assumption is the going concern concept that states the business will run for an indefinite time irrespective of the members (Roach, 2010). However, even this concept needs adequate attention. The main motive behind this is the fact that the expectation of the stakeholders is linked to the business motive. Stakeholders are always in sight of earning wealth and want the business to proper. If it is compromised then it requires a prior attention. It is the role of the management to look into this matter and ensure that the necessary adjustment done so that the going concern concept is not affected. Controlled decision is the need of the hour and protects the company from adverse situation and particularly danger of liquidation (Roach, 2010). The factors that can be a danger to the going concern concept are as follows: alert on the part of credit assistance, removal of office of key personnel without any replacement, huge debt repayment failed, creditors’ claims pending, strikes and lockouts, losses, reduction of the assets of the company, goodwill deterioration impacts the going concern principle (Parker et. al, 2011). However, the management can avoid such a scenario by the establishment of an interest that is extra ordinary in nature. Certain factors like introduction of new product, trend variation, act of God are not under control of the management. It depends entirely upon the overall condition of the business. Therefore, it is imperative that the management must embark on a policy that will aid the management and helps in undertaking critical situation (Messier & Emby, 2005). This will help the business to prosper even if the situation goes against the business. Hence, it is important that the area of going concern should be ascertained the frame of high, medium or low. This will help in establishing the manner and condition of the business. Accordingly, decision, as well as step can be taken. However, it depends entirely on the part of the management. This strategy is helpful in the manner that it sheds light on the position of the business and can provide a clear cut measure that needs to be adopted for smooth conduct of the business. Going concern is the major principle on which the stability of the business depends (Douglas et. al, 2015). Hence, it is important that the management should keep a tight control over the principles that will help in proper planning and meeting the expectations.
References
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.
Gay, G; Simnet, R 2015, Auditing and Assurance Services, McGraw Hill
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
Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 22 September 2016, https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html
Messier, W & Emby, C 2005, Auditing & Assurance Services: A systematic approach, McGraw-Hill.
Parker, L, Guthrie, J & Linacre, S 2011, The relationship between academic accounting research and professional practice, Accounting, Auditing & Accountability Journal, vol. 24, no. 1, pp. 5-14.
Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.
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