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Inherent Risk and Inherent Risk Assessment in Auditing

Describe about the Auditing and Assurance for Assessment Financial Level.

In auditing, inherent risk denotes an error that occurs in financial statements and which does not occur as a result of failure of control but because of other factors .Inherent risks are mostly witnessed in complex transactions as well as those transactions which call for high levels of judgment.  On the other hand inherent risk assessment refers to the process used to evaluate risks that are likely to be encountered in a given project.

There are several factors that necessitate an increase in risk assessment at the financial level. In this case these factors can have significant impact on the business if assessment is not adequately and timely done. They include, overall economic change, this refers to alterations that take place in a given economy and which can either have positive or negative impact on the economy’s vivacity .Any economic change affects business operations and may affect factors such as the level of employment in an industry as well as the cost of borrowing. These can either reduce or increase the spending rates of business entities. Because of this, inherent risk assessment would have been necessary to keep the companies spending in check for the achievement of organizational goals and profit maximization.

Another factor that could have contributed to this is the increase in technological changes .An industry like telecommunications that solely relies on technology is bound to experience tremendous technological changes in the course of time .In this context, the industry had transformed over the years from having a single player to having multiple players .This therefore means that with the emergence of other telecommunication industries competition was bound to rise and this necessitated adoption of new technologies for efficiency purposes. There was therefore the need to assess the risks that were likely to be brought about by these new technologies and the impact of these technologies on the financial position of the given telecommunications as far as adoption and maintenance is concerned.

This could also be necessitated by the actions of different competitors in the industry. In any industry involving different players, an action of one player is bound to affect the other players. This particular industry involved players such as Telstra, Optus and Vodafone all of which had different market shares in the Australian Telecommunication industry .since the three we competing for the same industry any action by either of the company was likely to have an impact on the other two. So if Telstra decided to adopt a new business strategy, Optus and Vodafone were likely to be affected either positively or negatively .It could either lead to increased or reduced earnings for the two depending on the impact of the strategy in the market. Risk assessment was therefore necessary to establish the impact of competitor’s actions on the other company’s financial position.

Factors Necessitating Increase in Risk Assessment at Financial Level

For a company like one Tel which operated in multiple geographical locations such as Australia, UK, France, Netherlands, Hong Kong among others it would have been necessary to conduct risk assessment to identify the performance of the company in different geographical locations and ascertain the strategies that would have been suitable for different geographical areas as well as the overall performance of the company .With this the company could be able to implement strategies that would lead to an improvement in its financial position.

This could have been also necessitated by the complex transactions of account balances. Since the company served large populations extending up to several millions and the subsequent high growth rates. It was likely that it would deal with complex transactions involving so much money. The higher the amount of money being dealt with the more the likelihood of encountering transaction errors which could have had significant impact on the operations of the business .risk assessment as therefore necessary to minimize these errors as much as possible.

Risks in the business context are uncertainties that could bring about financial difficulties to a business. Strategic risk assessment is a systematic and continuous process that businesses use to access risks that the business enterprise is likely to be facing so that they can adopt those strategies that are most suitable for the business enterprise. Risks such as financial risks can be identified during strategic business risk assessment. Market risk is a financial risk that refers to the market changes that take place in the market of operation. With the emergence of new business entities, strategies are bound to change. Consumers might tend to prefer the products of one of the companies at the expense of others. This trend is identifiable during strategic risk assessment .Competitors actions can also be identified at this stage which ensures appropriate actions are taken to counter the same.

Account balance is the total amount of money available at any given time. Each day in the business cycle presents a new account balance which may be more or less than the account balance of the previous day depending on the nature of transactions that have taken place between the two periods. Correct account balance gives a correct image concerning the business. There are several factors that could have led to inherent risk assessment at the account balance level in this case.

Telecommunication industry is one kind of an industry that experiences tremendous transactions on daily basis. These transactions are often unpredictable in nature and are carried out in no particular order. This therefore means that there are days in which transactions could rise and days in which they could reduce. The account balance is therefore made up of several non-routine transactions .This high volume of non-routine transactions is factor that could have led to an increased risk assessment at the account balance level. This could have also happened as a result of the Auditors intention of developing an overall audit plan. Development of an audit plan requires that all factors that have to be put into considerations be as objective as possible. This is meant to ensure that the plan is able to achieve its intended objectives. If this was not put into considerations the auditor was likely to consider the wrong information in the development of plans and hence wrong audit plans would have been developed and considered for decision making, thus significantly affecting the business.

Strategic Risk Assessment for Identification of Financial Risks

Another possible factor that could have necessitated inherent risk assessment at the account balance level is the complex transactions that are involved. Telstra alone serves a population of about ten million and has a growth rate of 5% per annum. With such a high population, there is the likelihood of incorporation of complex transactions in the account balance .Where complex transaction are involved errors are bound to happen .These errors may include omission which occurs when some transactions are not recorded or an error in calculation which portrays a bigger or smaller figure than the actual figure .This is also a possibility where wrong amounts are entered for the various transactions that have taken place. When this happens the balance will give a wrong picture pertaining the business.

When there is an omission or misstatement in the account balance, it means that decision made and which rely on the on the information presented in the account balance will be affected which could have an overall impact on the business. The transactions could portray the business as having made losses, hence the nature of decisions made will be those aimed at rectifying the situation. This would lead to wastage of time and resources that could have been used for other purposes in the organization .Misstatement can also lead change of loss into income and can affect the compensation levels adopted by organizations  With the possibility of these scenarios risk assessment at the account balance level could have been necessitated.

Going concern is a principle used in accounting to show a company’s ability to continue operating normally over time without becoming bankrupt. This therefore means that the company is able to continue making enough money to sustain itself for a period of time that is adequate for it to achieve its goals and objectives.

For purposes of going concern assessment there are several factors in the business that have to be considered. Since going concern is concerned with the ability of a company to sustain itself for the purpose of remaining in the industry considerations should be put on those factors that help in the achievement of this. In this regard negative financial trends should be used for analysis. If a company has been experiencing negative financial trends over a given period of time, chances are that the company will not be able to sustain itself for a long time and may be forced to liquidate because of bankruptcy.

Inherent Risk Assessment at Account Balance Level

Consequently analyzing current financial statements and comparing them with past statements from previous years as well as comparable industrial ratios can also be used for analysis, in case there is a negative trend this also means that the company may not be able to sustain itself in the near future because its ratios would be worsening with time instead of improving as it is the case in normal circumstances.

In my own opinion, the area of going concern should be assessed as high. There are several factors that have informed this decision .For a company to be said to be having a high going concern, all indications should show a positive trend and be those that show that the company can sustain itself for as long as possible.

The first consideration is the fact that its customer base has continued to improve significantly since its inception. The company has continued to attract new customers while at the same time retaining the old customers. Despite the fact that there has been entrance of new competitors into the market it has continued to dominate the market. This can only mean that the company has an established reputation as far as it services are concerned. The success of any business organization depends solely on its ability to attract and retain new customers. This because it is the customers who provide finances for sustaining the with a large pool of customers , the company does not face the risk of liquidating so it’s going concern is high.

Continued loss in business can be a cause of winding up of business operations. This is because with continued losses the business is not able to get adequate funds to sustain its operations which hinders achievement of its goals. The company’s profit making trend has continued to be witnessed regardless of the number of other players in the industry. This means that the company does not face the risk of becoming bankrupt.

The growth rate of the company can also be used as a basis for this argument. The company has witnessed a growth rate of 5% per annum. With such a tremendous growth rate, there are all indications that the company is moving in the right direction as far as its business operations are concerned .this is a signifier of the company’s ability to penetrate into new markets which translates to increased business prospects hence reducing the risk of liquidating.

Innovativeness can also be also be an indicator of high going concern .when a business is innovative ,it means that it will be able to develop new and better ways of doing things. This will enable it to retain its customers and retain new ones. The company has been innovative as far as its products and services are concerned .This is a reason enough to show that the business will remain in operation for a long time.

The company has not shown any significant negative trends but has been able to maintain its liquidity ratios, its current ratio , which shows a company’s ability to settle  its short term obligations with it liquid assets has been maintained. This is also the case with its debts ratio which shows the relationship of its total liabilities to its total assets.

Considering all these factors therefore, there is every reason to believe that the company has a high going concern.


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