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Factors Contributing to Increased Inherent Risk Assessment at the Financial Report Level

Discuss About the Preliminary Going Concern Assessment?

This assignment has been executed on the topic “Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern Assessment” in which discussion will be made regarding the factors which have resulted in the rise in the Inherent Risk Assessment at Financial Report Level and the different inherent risk factors. Risk assessment is an important aspect which directly creates the impact on the performance of the business. A case study of One.Tel has been provided which was founded in Sydney, Australia in the year 1995. One.Tel is a global telecommunications company which is providing different services including low-cost international and national calls, prepaid and post-paid calling cards with GSM mobile phone services and internet services.

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.

There are several factors which have contributed towards the rise in the inherent risk assessment at the financial level for One.Tel. These factors are mentioned below:

  • The absence of managerial skills: due to the lack of effective managerial skills, development process of the structure of the company has got affected along with the competitiveness of the company. This has increased the chances of material misstatement of the financial statements of One.Tel (Benson, et. al., 2016).
  • Low operational profits: there is a rise in the debtors of One.Tel by 203 % in the consolidated results and in respective of this, there has been a very slow rise in the sales of the year 1998-1999. One.Tel is ineffective in enhancing the turnover and increases the profits in spite of having a large customer base (Cruz, et. al., 2015). Table 1 has attached below which shows the figures for the analysis of the key performance indicators.
 

Parent Entity

Consolidated

Key Performance Indicators

2000
$M

1999
$M

Change
$M

% Change

2000
$M

1999
$M

Change
$M

% Change

Receivables - Current Assets

104.0

58.9

45.1

77%

218.4

72.0

146.4

203%

Sales Revenue

359.1

269.2

89.9

33%

653.4

326.0

327.4

100%

Operating profit/(loss) after income tax

(78.2)

7.9

   

(291.1)

7.0

   

Net Margin to Sales Ratio (%)

-21.8%

2.9%

   

-44.6%

2.1%

   

Total Operating Cash flows

(40.5)

(0.9)

(39.6)

 

(168.9)

(28.9)

(140.0)

 

Cash at the end of the year

164.2

170.8

(6.6)

 

335.7

172.6

163.1

 

Debtor Days (Days)

106

80

122

81

  • Lack of effective customer policies: it has been analysed from the above-attached tables that credit policies of the company are not effective which has been depicted from the higher receivables of One.Tel. Trade receivables in the consolidated and parent entity have increased twice in comparison to the revenue (Dash & Mahakud, 2012).
  • Hostile pricing policies adopted by the company in the competitive business environment: One.Tel had adopted a low priced strategy for pricing its products due to which it has developed large customer base but this has affected the revenue of the company due to the slow rise in the revenue (James, et. al., 2014).
  • Lack of effective reporting in financial statements: the company must ensure that the financial statements must be presented in a fair and true manner. It has been identified that the financial statements of the company may be presented in an unfair manner. The worsening liquidity has raised a concern on the financial statements of the company (Kepper, et. al., 2014). There has been a rise in the intangibles of the company and scrutiny must be done of that.
  • The deficit of operational funds: From the analysis of the cash flows of the company, it can be analysed that company has suffered cash losses from its operating activities. The cash losses have increased from $28.9 Million to $168.9 Million.
  • Credit policies for customers: increasing receivables shows that company has not collected cash from the debtors which have created the impact on the liquidity of the company (Kokolakis, et. al., 2010).
  • Setting low prices for the products: One.Tel has set low prices which have affected the profitability of the company.
  • Lack of effective company structure: lack of effective managerial skills has affected the structure of the company (Labbi, 2014).

There are different inherent risk factors which have resulted in the increase in the inherent risk assessment at the account balance level. These inherent risk factors must be dealt in an effective manner so as to ensure that the performance of the business is not getting affected due to these risk factors. Identification of these inherent risk factors must be done in an effective manner so as to eliminate the impact of these risks on the business and on its profitability and growth. One.Tel has adopted a low pricing strategy according to which it has set the prices of its products low. This has affected the profitability of the business at large. Prices of the products must be kept after proper analysis of the costs and profit margin of the company (Moss, et. al., 2010). This will ensure that the profits of the business are not getting affected. Another factor which has acted as an inherent risk factor is the lack of effective managerial skills which are responsible for the ineffective structure of the company. One.Tel has started its operation in 1995 and due to this short span of time; it doesn't have effective managerial skills for the management of the operations of the company. One.Tel has adopted poor credit policy due to which inherent risks have increased. One.Tel has also suffered cash losses from its operating activities. There has been the rise in the sales of the company but this sales growth has not contributed towards the increase in the profitability of the company.  It has also faced ineffectiveness in the preparation or reporting of the financial statements of the company (Martin, et. al., 2013).

Inherent Risk Factors Contributing to Increased Inherent Risk Assessment at the Account Balance Level

All these inherent risk factors have increased the risk of the company. There is a need to adopt effective credit policy which will help in enhancing the satisfaction level of the customers. Effective pricing policy must be adopted so as to ensure that One.Tel is generating high profits as well as maintaining the large customer base. Managerial skills must be developed for the purpose of ensuring that the company is performing well and structure of the company is maintained. For gaining the competitive advantage there is a need to enhance the managerial skills and enhancing the profitability of the business. Pricing policy must be adopted in an effective manner for the Land-based phone lines, Internet services and Mobile telephony services.

A company must maintain its accounts in a fair manner so as to present a true and fair picture of the company. After analysis of the financial performance of One.Tel, it can be stated that the assessment of the area of going concern must be done at the high level. The reasons or the factors responsible for this decision are mentioned below:

  • The company has generated cash losses from its operating activities which show that the intangibles of the company have increased at large which creates suspicion. One.Tel has purchased plant and equipment which have affected the liquidity position of the company at large (Nwogugu, 2012).
  • The decrease in profits and increase in cost: Sales of the company have increased but this has not contributed at large to the profits or revenues of One.Tel due to the low prices of the products. This has resulted in the rise in the cost of the company. It is tough to analyse whether the company can earn high profits and recover losses after the rise in the sales (Ruhnke & Schmidt, 2014).
  • The liquidity of the company is depleting as there is a rise in the receivables of the company which shows that company is not capable of recovering the cash from its debtors. Management of One.Tel must take steps for resolving this issue and till that issue is not resolved assessment must be done at high priority (Telfer, et. al., 2010).

Conclusion

From the execution of this assignment, it can be concluded that risk associated with the business must be analysed so as to enhance the performance of the business. This assignment has discussed different factors which are responsible for the increase in the inherent risk and these factors include lack of effective customer policies,   hostile pricing policies adopted by the company in the competitive business environment, lack of effective reporting in financial statements and deficit of operational funds. The discussion has been made regarding the factors which are responsible for the manner in which assessment needs to be done of the area of going concern.

References

Benson, O., Gibson, S., Boden, Z., & Owen, G., 2016, “Exhausted without trust and inherent worth: A model of the suicide process based on experiential accounts”, Social Science & Medicine, 163, 126.

Cruz, M., Peters, G., & Shevchenko, P., 2015, "Fundamental aspects of operational risk and insurance analytics a handbook of operational risk (Wiley Handbooks in Financial Engineering and Econometrics)", Hoboken: Wiley.

Dash, S. R. & Mahakud., J., 2012, “Investor sentiment, risk factors and stock return: Evidence from Indian non-financial companies”, Journal of Indian Business Research, 4(3), 194-218.

James, L., Kelly, P., & Beckman, V., 2014, “Injury Risk Management Plan for Volleyball Athletes”, Sports Medicine, 44(9), 1185-1195.

Kepper, A., Eijnden, R., Monshouwer, K., & Vollebergh, W., 2014, “Understanding the elevated risk of substance use by adolescents in special education and residential youth care: The role of individual, family and peer factors”, European Child & Adolescent Psychiatry, 23(6), 461-472.

Kokolakis, Artemi, Smith, Carolynn L., & Evans, Christopher S., 2010, “Aerial alarm calling by male fowl (Gallus gallus) reveals subtle new mechanisms of risk management”, Animal Behaviour, 79(6), 1373.

Labbi, A., 2014, “Handbook of Integrated Risk Management for E-Business Measuring, Modeling, and Managing Risk”, Boca Raton: J. Ross Publishing, Incorporated.

Martin, P., Wagenmakers, E., Tremblay, P., Ramsay, R., Kralovec, K., Fartacek, C. & Fartacek, R., 2013, “Suicide Risk and Sexual Orientation: A Critical Review”, Archives of Sexual Behavior, 42(5), 715-727.

Moss, Edmonds, Hibbard, Manning, Rose, Van Vuuren & Wilbanks., 2010, “The next generation of scenarios for climate change research and assessment”, Nature, 463(7282), 747-56.

Nwogugu, M., 2012, “Risk in the Global Real Estate Market International Risk Regulation, Mechanism Design, Foreclosures, Title Systems and REITs (Wiley Finance)”, New York: Wiley.

Ruhnke, K., & Schmidt, M., 2014, “Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments”, 33(4), 247-269.

Telfer, S., Lambin, X., Birtles, R., Beldomenico, P., Burthe, S., Paterson, S. & Begon, M., 2010, “Species Interactions in a Parasite Community Drive Infection Risk in a Wildlife Population”, Science, 330(6001), 243-246.

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