Risk Factors at Level of Financial Reporting
The title of the report is Evaluation of Risk fact ors at Different Level which itself shows that the report has been prepared to analyze and assess the risks factors present in One Tel. Company. The structure of report has been started with Synopsis containing the main aims of the report. Then introduction has been given describe showing the structure and method of preparation of report. The next section of report describe the inherent risk present at the level of financial reporting with are main concerned for the management as these are the limitations on the part of the management of the company. The next section describes the inherent risk factors in the financial data of company that been shown from different account balances. The next part of the report assesses the impact of risk factors on the going concern assumption which impact the continuity of the company. The report has ended with proper recommendations. The references have been taken from secondary data available on reliable sources.
Financial reporting means presentation of the financial reports to the stakeholders of the company. Inherent risks are the inherent limitations which are ahead of management control and management is unable to act appropriate corrective actions. When the inherent risks are present at this level of reporting then the stakeholders get the indication of the danger in the company. The following are the risk factors at level of financial reporting present in One Tel Company:-
- Complex Nature of Business – The entity is operating in Telecommunication industry in Australia which is growing at the faster pace than expected by the company. The change from landline wire phone to mobile phone and other technologies can be counted in number of days. The nature of the business is changing at faster pace and the management of the company has to create the reputation and reliability in the market or in the minds of the customers to attain the advantages from this nature of faster growth. The company in given case is not able to cope up in creation of reputation and this is the reason of inherent risk in the reporting level (Cohen, Krishnamoorthy and Wright, 2007)
- Management knowledge and its composition – The management is very important for the effective working of the company and its knowledge and experience plays a vital role in the working path of the organization. In the given case, it has informed that management experience and knowledge is limited in scope only. The board of director’s does not have experience for dealing with fast changing business environment. Also the composition of the board of directors is not proper as the company has more non executive directors in comparison of executive directors showing fewer people are available for doing business activities and taking decisions. This fact creates the inherent limitations which are ahead of management control (Leong, 2009).
- Risk on Customer Base – Customers plays a significant role in the success of the company and they are called God who makes the company or who destroys the company. In the given case, the One Tel Company, the customers are majorly from Australia only and it has been considered as major fact that more than 50% of the revenue of the company comes from the customers in Australia. The company is not the major player in the market of telecommunication in Australia leading to the risk of revenue which is inherent in the reporting level because of the presence of the major competitor in the industry (Knechel, 2007).
- Lacking in New Technologies and Ideas – In the modern times of development of high technologies, it is necessary to have new ideas and new innovations to be incorporated in the company time to time to accommodate the competitions in any industry. The company is dealing in telecommunications and major part for supply is the carrier which the company is not producing itself although hiring the same on leas from its competitor. This practice enhances the costs of the company in comparison to competitors as revenue from the product will depend on market forces. The high cost and low revenue in comparison to the competitor creates the situation of risk in the company on inherent basis.
The above factors also create the business strategic risk for the company as well as for person doing reporting on the financial statements of the company. This indicates there is change in strategies of the company is required at utmost importance.
Account balances reflect the balance which has been reported in the presentation of the financial statement as a particular line item. For identifying the inherent risk factors, each lien item has been analyzed properly and in detail so that assessment of the risk factors along with the corrections can be done in the due time frame to reduce the affect of the same. The following are the factors at account balances which creates the situation of inherent risk in the company under consideration:-
- Inventory Balances –Inventory are major component in any business showing the goods in which business deals. In the given case of one Tel Company, the inventory represent the phone and other articles which are used in network and communication set ups. The inventory balances has been increased twice from the last period and the balance is $ 5.1 million in current period. This showing the operating cycle of the company has been increased from last year and the company taking time in converting inventory into funds. This can lead to creation of inventory which is of no use in the given industry as after the introduction of mobile phone inventory over land line phone making the land line inventory obsolete creating the inherent risk in the company (Miller, Cipriano and Ramsay, 2012)
- Impairment and Amortization- Impairment and Depreciation cost shows the loss of the company in the assets value in relation to its effective life. The company has high cost of impairment and depreciation in current year which is around there times from the past year and amounts to $ 35.3 million. The company on the other hand is acquiring high assets both tangible and intangible showing that the assets of the company has very less useful life creating high impairment and high depreciation in the current year and in coming year. This is creating the risk on the part of the company which cannot be controlled as the company is working in very volatile industry.
- Extra Ordinary Item loss – Extra ordinary item loss is the amount of expense which are increasing the costs of the company from abnormal practice and not likely to happen in normal due course of the business. In the case of One Tel. Company, the company is incurring high abnormal which has major affect the current profitability resulting in high loss. The company is in the telecommunication industry where these abnormal losses have chances of likely occurrence and if in future it continues in the same pace then it has high impact and creating high inherent risk.
- Excess increase in Share capital– Share capital is the amount that has been invested in the company by its owners in the form of shares. The One Tel Company is issuing new shares on yearly basis and in the current year the shares has issued in high amounts to acquire new technologies. But the company technologies and returns are getting low day by day as industry in which company operating is at declining stage creating high inherent risk on the company in the form of not providing the desired returns to its shareholders (Shariff and Chan, 2008).
Going concern assumption is the main fundamental assumption defined as per Corporation Act, 2001 and Conceptual framework on the basis of financial statements are being prepared by the management of the company showing that the company will run in near future and there no chances that the company will look for liquidation.teh followings factor which can assessed to see the impact that are creating on the going concern assumption of One Tel Company:-
- Dependence of the Company on Australian Customer – The major revenue of the company is dependent on the customer based in Australia. They consist of 64% revenue of the company and the company is the only key player in the Australian. It holds very less market share which is less than 1% of the total market and 99% market is holds by three major customers only. It is the situation of the monopoly where if any step has been taken by the competitor then the company under study hampered significantly and there may be chance of the closure of the business (Ryu and Roh, 2007)
- Significant Loss in the current year– The company has incurred the pretty high loss in the current year amounting which has reduced the shareholders funds and creating the accumulated losses of $ 282.10 million in current year. The situation of earning significant losses seems to continue from the inherent limitation of the nature of the business. The continuing in losses increases the accumulated losses in future which in turn reduce the share capital in the company making difficult situation for fulfilling the promise of providing returns to its shareholders and creating danger to its going concern assumption (Blay and Geiger, 2013).
The above factors along with inherent risk factor creating the situation of danger to the continuity of the company in the long run and as result the company can go into winding up proceedings.
The report has provided the different areas in the company including its organizational structure and at different level of the management where the inherent risks are present along the effect of the inherent risks. Also, major factors which spoil the going concern assumption in relation to continued existence of the company have been identified along with the effect on profitability of the same factors.
It is recommended from the report, the management of the company is require to take necessary corrective actions in order to finish the inherent limitations in order to mitigate the inherent risk and to reduce the impact of risk on the going concern assumption of the company for smooth and efficient working in near future and for new growth perspective. The management of the company should perform cautiously in order to survive the company and should gather such people on the board who have good knowledge and experience of telecommunication industry.
Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisions Contemporary Accounting Research, 30(2), pp.579-606.
Cohen, J.R., Krishnamoorthy, G. and Wright, A.M., 2007 “The impact of roles of the board on auditors' risk assessments and program planning decisions. Auditing: A Journal of Practice & Theory, 26(1), pp.91-112.
Knechel, W.R., 2007. The business risk audit: Origins, obstacles and opportunities Accounting, Organizations and Society, 32(4), pp.383-408.
Leong, C.T., 2009, “Inherent risk assessment—a new concept to evaluate risk in preliminary design stage- Process Safety and Environmental Protection, 87(6), pp.371-376
Miller, T.C., Cipriano, M. and Ramsay, R.J., 2012 Do auditors assess inherent risk as if there are no controls? Managerial Auditing Journal, 27(5), pp.448-461
Ryu, T.G. and Roh, C.Y., 2007, the auditor's going-concern opinion decision- International Journal of Business and Economics, 6(2), p.89
Shariff, A.M. and Chan, T.L., 2008, Inherent Risk Assessment- In the 2008 Spring National Meeting
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