Auditing Essay: Factors Contributing To Increased Inherent Risk.

Listing and discussing several factors that contributes to increased inherent risk at financial report level

Discuss about the Auditing and Assurance for Methodological Issues.

In this particular question, it is required to identify inherent risk from the financial report of One Tel Phone Company. Misstated figures are mentioned in the financial reports and there occur some of the potential risks revealing financial as well as non-financial aspects of One Tel Phone Company (Soh & Martinov-Bennie, 2015). It is essential to conduct proper audit process as it will help One Tel Phone Company in minimizing the risk factors. It will further enable or exhibit true as well as fair financial position for viewing at the performance of One Tel Phone Company. Therefore, it has been noted that some factors cannot be controlled even by conducting audit function by the auditors.

In this particular case, risks of any error or omission presented in the financial statement of One Tel Phone Company caused by some of the uncontrollable factors such as inherent risk. These risks rise because of high level of complexity mentioned in the financial statement of One Tel Phone Company as well as financial estimation on some assumptions (Simnett et al., 2016).

One Tel Phone Company was collapsed in the year 2001 and performed poor from couple of financial years. Even though, One Tel Phone Company has performed poor it has not affected financial position of the current case study company. Balance sheet of One Tel Phone Company indicates the financial position for the year 2000 considered better from previous years. It involves financial disparity of actions viewed from the financial statements of One Tel Phone Company. It is further suggested that there are some of the potential inherent risks revealed in the financial statement of One Tel Phone Company (Simnett et al., 2016).

From the financial statement of One Tel Phone Company, it has been noticed that final outcome of business activities provides financial transactions for a particular organization. It showcases various errors or any omissions that are caused from inherent risks in association with potential course of action (Redmayne, 2013). It can be suggested that there are various factors that is responsible for viewing at the increased risk level in the most appropriate way.

One of major factor involves marketing plan effectiveness that contributes to inherent risk. Income statement and cash flow statement of One Tel Phone Company reflects upon fact regarding the company as it fails in generating income amount from required operating activities. This occurs because of the inefficient marketing plan by One Tel Phone Company in the given financial years. Proper marketing plan helps in attracting customers and leads to increased incomes or profits for One Tel Phone Company (Moroney et al., 2014). It widely depends upon the accuracy of behavioural pattern as well as market prediction for One Tel Phone Company. Management need to conduct proper research plan for understanding the needs as well as expectations of customers in proper way. Predicting market condition is very difficult as well as complex in nature involving external environment aspects such as political, social and economic attributes. It is impossible in covering all the mentioned aspects. At the same time, ideal marketing plan requires to covers all the aspects in relation with nature of business as well as products (Messier, 2016). Missing any of the above-mentioned aspects will lead to inefficiency of marketing plan that needs urgent attention. Auditors finds it difficult in controlling the effectiveness of marketing plan as there are various factors leading to increased inherent risk as mentioned in the financial statement of One Tel Phone Company.

Identifying factors during the strategic risk assessment

Another factor involves frequent change in consumer’s tastes as well as preference considered as one of the inherent risks. It widely affects the financial statement of One Tel Phone Company. In case of telecom industry, customers are habituated in changing the service providers frequently as they get any of the lucrative schemes and offers. Proper marketing as well as advertising campaigns will help telecom companies in attracting many customers in offering innovative plan that proves beneficial to them (Junior et al., 2014). With the rapid change in consumer preferences, telecom industry find it difficult in facing the challenges and it affects the sale of the company for given financial period.

In this particular case study on One Tel Phone Company, it has been identified various risk factors leading towards strategic business risk assessment. It helps in using risk assessment process as well as sensitivity analysis that can easily cause risk levels in association with factors.

• Operational and business planning- One of the important factors includes operational as well as business planning actions for future analysis. Management are required or identify various risks in association with new business plans in case of alternative circumstances (Hardidge et al., 2013).
• Market Condition- Other factor affecting the financial reporting of One Tel Phone Company is the market condition. One Tel Phone Company can easily access various risks in association with future changes in present market by conducting proper research analysis.
• Economic condition of the nation- Other factors that increases risk levels is the economic condition of the nation. Associated risks along with national and global economy emphasizes on observing changes in the economic factors as well as economic data on periodic basis (Gramling et al., 2012).
• Excessive government policies- One of the major factors faced by One Tel Phone Company is the change in government policies on frequent manner. It helps in analysing the changes from the government structure as well as declarations from future course of action.

This particular question requires discussion on the inherent risks depending upon the business entities, nature of account as well as environment and operations at the same time. There are number of history errors as well as management characteristics as perceived from the major factors of inherent risks as far as possible. Many errors have been identified that affects the financial statements of One Tel Phone Company that possess high risk in association with accounting balance and deducted inherent risk facts. Identification of these risk factors helps auditors in making decisions as well as contributing towards increased risk assessment in the most appropriate way (Bédard et al., 2015).

There are several identifiable factors that need proper attention from the account balance for high volume transactions in financial activities of One Tel Phone Company. It requires making some adjustments for several account balances that do not actually exist in the ordinary course of business process. There is wide-variety of complex transactions used for account balances. It is the responsibility of the auditor in assessing the risks involved in auditing of various account balances by including the inherent risk factors.

Several inherent risk factors have to be identified based upon the financial reporting depicting the true projection of One Tel Phone Company. There occur several financial transactions that require treatment for making the complex calculations as misstated in the financial statement of One Tel Phone Company. One Tel Phone Company is not in a stable financial position and intends in meeting required covenants that has greater incentives for viewing at the misstated financial information in an inherent terms. In case any company has wrong presented any financial data or information, there occur discrepancies in accounts from the previous years in similar form. There are various factors that need consideration by the auditors for inherent risk assessment.

Discussing inherent risk factors contributing to increased inherent risk assessment

It is important to understand the fact that inherent risks are shown in the financial statement of One Tel Phone Company. This aspect widely affects potential outcomes as well as operational attributes of business. At the time of assessing risk by auditor, it requires to take into consideration on the factor regarding judgment as well as subjectivity of potential course of action. There are various factors that need consideration depending upon integrity as well as competence of management. Auditors make the assessment based on business transactions for significant party or any outsiders. It requires understanding of company in regard with estimates of by the financial analysts for growth earnings. CFO of any business organization is liable in engaging in fraudulent concerned securities. He was found engaged in scheme and intends in backdating with stock option grants. Fraudulent activities are mainly found from the management integrity action. It involves inaccuracy from the financial reporting as portrayed for failure of the accountant for maintaining accurate accounting record from the given financial information.

This particular question requires in identifying factors affecting areas of going concern issues. Going concern is connected to business organization those are expected in continuing with business operations for given period. It will not liquidate in the upcoming financial years. Listed business organization is considered as going concern as per the statutory guidelines. Most of the companies even discontinue in the business operations for specified period.

Users of financial statements help in analysing the various aspects of financial statements for measuring the capacity of an organization for smooth functioning of business organization. It involves three vital aspects of the business organization that needs to be analysed for viewing at the continuity of operational aspects (Marques et al., 2013).

Graph: Current Ratio of One Tel Phone Company

(Source: Created by Author)

The above graph depicts the current ratio of One Tel Phone company for the financial year 1999 to 2000. As far as liquidity aspects of One Tel Phone Company are concerned, it describes the liquidity asset position. It aims at ascertainment of situation whereby One Tel Phone Company can cover its current liabilities with available current assets. This mainly depicts that company needs sufficient working capital for operating in the normal course of action. In case the company does not adequate liquid assets, it mainly leads towards liquidity insolvency as well as discontinue in the basic operational aspects. Current ratio is one of the most important liquidity ratios in understanding the liquidity position of any business organization (Hardy, 2014).

Identification of factors based upon areas of going concern

Graph: Solvency ratio of One Tel Phone Company

(Source: Created by Author)

The above graph indicates the solvency ratio calculation for One Tel Phone Company for the year 1999 to 2000. This particular aspect helps in measuring the financial strength of One Tel Phone Company. It aims at describing the fact whether company has the ability in owning enough assets in paying off its liabilities on timely manner. It helps in having clear understanding on the capital structure of One Tel Phone Company (Marques et al., 2013). There are three types of solvency ratios such as debt ratio, equity ratio and debt to equity ratio.

Graph: Profitability Ratios of One Tel Phone Company

Source: Created by Author

The above graph depicts the profitability ratios of One Tel Phone Company for the year 1999 to 2000. It helps in narrating the financial performance of the selected company based upon profit or loss. Every business organization aims at generating profits in their business operations. This particular ratio helps in describing the fact whether a particular company can work effectively as well as has ability in generating adequate profits in the upcoming financial years (Soh & Martinov-Bennie, 2015). There are three major types of profitability ratios such as return on capital employed, return on equity as well as return on assets.

From the financial statement of One Tel Phone Company, it has been noticed that current ratio had reduced from previous years. Current ratio is more than 1.5 that reveals that One Tel Phone Company has enough current assets in covering its current liabilities. In case of solvency ratio, One Tel Phone Company have improved for specified time because of the reduced total liabilities as well as increased total assets to total equity at the same time.

In case of profitability ratio, it is a major concern noticed in the given year under study. In the year 2000, One Tel Phone Company incurs huge loss and this leads to returns as negative figures. From the case flow statement, it has been noticed that One Tel Phone Company failed in generating enough cash revenues for meeting required operational expenses (Soh & Martinov-Bennie, 2015). It leads to shortage of cash funds as well as continues in operating from retained earnings. It relates with additional capital funding by issue of new shares. At the end, it is concluded that One Tel Phone Company suffering from net loss as well as shortage of funds. One Tel Phone Company can be treated as medium going concern.

Reference List

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

Gramling, A., Johnstone, K. M., Jubb, C., & Rittenberg, L. E. (2012).Auditing and Assurance: A Business Risk Approach. Cengage Learning Australia.

Hardidge, D., Abeysekera, I., Chew, T. G., De Santi, R., Egan, T., Ghandar, A., ... & Shying, M. (2013). A guide to understanding auditing and assurance: listed companies.

Hardy, C. A. (2014). The messy matters of continuous assurance: Findings from exploratory research in Australia. Journal of Information Systems,28(2), 357-377.

Junior, R. M., Best, P. J., & Cotter, J. (2014). Sustainability reporting and assurance: a historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), 1-11.

Messier Jr, W. (2016). Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.

Moroney, R., Campbell, F., Hamilton, J., & Warren, V. (2014). Auditing: A Practical Approach. Wiley Global Education.

Redmayne, N. B. (2013). Auditing and Assurance Services and Ethics in Australia: An Integrated Approach. Journal of Accounting & Organizational Change.

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

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