The misstated figures presented in the financial statement give rise to various levels of risk in association from the aspect of financial and non-financial measures for any business organization. It is needed to conduct audit activities as it guide organization for minimizing the risk factors and depicts true and fair financial position and the level of performance within the companies (Wong and Millington 2014). There are still some of the factors identified that cannot be controlled after during audit process. Inherent risk takes place when there is high level of complexity and involves estimation of financial terms and assumptions made at the same time (William Jr, Glover and Prawitt 2016).
For this report, information is extracted from the annual report of One Tel Company that explains facts about the company that they have performed poorly in the year 2000. It is strange that despite of poor performance of the company during the year, their financial position had not affected adversely. Thus, it can be understood that One Tel Company has some inherent risk factors from such disparities in association with the financial statement (Soh and Martinov-Bennie 2015).
It is a known fact that financial reports are the final consequence of all the business activities as well as financial transactions that prevails in the business enterprise. In other words it mainly shows that all the errors or omissions causes by the inherent risks are actually linked with the business activities in some way or other. There are various factors that are accountable for increased inherent risk level (Simnett, Zhou and Hoang 2016). There are numerous risk factors that are identified in the strategic business risk assessment.
It is the operational as well as business planning that is one of the factors where the management recognizes the risk in association with the new business plan by planning for alternative circumstances (Simnett, Carson and Vanstraelen 2016).
It is the market condition that is one of the factors that hugely affects the financial reporting of the company where they access different risks in association with the future changes in the market after conducting proper market research as well as analysis.
There are many errors identified that are perceived to be main factors of the inherent risks (Simnett and Huggins 2015). It is the error that affects the financial statement of entity that comes as risk factors that gets associated with the accounting balance as well as detection of identified inherent risks at the time of risk assessment. After looking at the account of balance that suffer from different inherent risk factors as well as assessing such risk that guides auditors and contributes towards increased risk assessment. Inherent risk is the factor that arises from an account of the business activities, operation, nature of account and environment.
There are various inherent factors that need to be taken into consideration that depends upon the financial reporting activities as it depicts the results from real estimated values. There are many financial transactions that should be treated when the simple calculation is incorporated. Discrepancies will occur if a company wrongly presents the financial data in their accounts from the previous years and inherent to present condition. These are the factors that are noted by the auditor for assessing the inherent risk (Louwers et al. 2013).
Going Concern can be termed as that business that are expected to continue its operations for infinite period and will not liquidate in the upcoming years. It is still noted that many business discontinue its operations within the course of period (Junior, Best and Cotter 2014).
Financial statement users mainly study the financial statements for measuring the capability of any organization on whether will continue their operations in future or not. There are three aspects of the factors that help in measuring the continuity prospect within any business such as liquidity, profitability and solvency.
Liquidity aspects are one of the measures that help in analyzing the liquidity position of any business organization (Eilifsen et al. 2013). This aspect determines whether the company can cover its current liabilities from the available current assets. The aspect represents whether the company has adequate working capital for operating in the normal course of business activities. In case the business does have adequate liquid assets, then the company may lead to liquidity insolvency as well as in a stage where they have to discontinue with the basic operational activities. Below is the calculation of current ratio for One Tel Company that has been represented through use of graphs so that it is analyzed the liquidity aspect of the company (Earley et al. 2016). In the year 1999, current ratio of One Tel Company arrives at 3.49 and 1.67 for the year 2000. There has been decrease in current ratio from the year 1999 to 2000. The ideal current ratio is 2:1 so 1.67 is closer to the ideal ratio that proves One Tel Company has better liquidity position.
Solvency aspects are one of the measures that help in analyzing the solvency position of any business organization. It explains on how the company owns enough assets for paying off all is liabilities and understands the capital structure of the business. There are three types of solvency aspect that include debt to equity ratio, debt ratio and equity ratio.
Profitability aspects are one of the measures that help in analyzing the profitability position of any business organization. It explains on whether the company has performed effectively as well as earned adequate profit. Companies cannot operate properly if they cannot earn adequate profit because of insufficiency of funds. There are three types of profitability that include return on assets, return on capital employed and return on equity.
On analysis all the aspects, it can be stated that current ratio has reduced over the years but still the current ratio is above 1.5 that means that company has enough assets to cover up its current liabilities. In case of solvency ratio, it has improved over the time period because of reduction of total liabilities as well as increase in total assets to total equity.
Profitability ratio is the only matter of concern for the company because in the year 2000, the One Tel Company had incurred huge loss that gave rise to return to be negative. It can be stated that the company has failed to generate enough cash revenue for meeting the operational expenses as noted from the cash flow statement of One Tel Company. It led to shortage of cash funds as well as One Tel Company had continued its operations from the retained earnings as well as additional capital funding from issue of new shares.
From the above analysis, it is concluded that One Tel Company is suffering from net loss as well as shortage of funds. The company has adequate assets for covering liabilities and losses. Thus, One Tel Company can be considered medium going concern.
Earley, C.E., Hooks, K., Joe, J.R., Polinski, P.W., Rezaee, Z., Roush, P.B., Sanderson, K.A. and Wu, Y.J., 2016. The Auditing Standards Committee of the Auditing Section of the American Accounting Association's Response to the International Auditing and Assurance Standard's Board's Invitation to Comment: Enhancing Audit Quality in the Public Interest. Current Issues in Auditing.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: a historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2013. Auditing and assurance services. New York, NY: McGraw-Hill/Irwin.
Rezaee, Z., Abernathy, J., Causholli, M., Michas, P.N., Roush, P.B., Rowe, S. and Velury, U.K., 2015. Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Concept Release on Audit Quality Indicators, No. 2015-005, July 1, 2015: Participating Committee Members. Current Issues in Auditing, 10(1), pp.C11-C27.
Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.
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.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
Wong, R. and Millington, A., 2014. Corporate social disclosures: a user perspective on assurance. Accounting, Auditing & Accountability Journal, 27(5), pp.863-887.
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