Auditing and Assurance for Misguiding Information

Question:

Answer:

The financial reports of One.Tel depict several conflicting facts. The balance sheet of the company indicates that the company has significantly improved its financial position in the year 2000. However, the income statement for the year 2000 shows a huge loss (Abraham and Shrives 2014).

Inherent Risk Assessment at Financial Report Level:-

Such conflicting outcomes of the different financial reports clearly suggest that apart from various controlled risk factors, the company has been affected by various inherent risk factors also. The several inherent risk factors, which might be involved with the business activities of One.Tel, are listed below:

• Effectiveness of marketing plans
• Improper auditing of previous years’ financial reports
• Non-operating transactions
• Business associates
• Fraudulent annual reporting
• Issues related to Human Resource Management (Bratten et al. 2013)

Identifiable Inherent Risk Factors during Strategic Risk Assessment:-

The main inherent risk factor of the company is surely the potentiality of marketing plans and customer services. Due to high competition, telecom companies always provide new plans and better customer services to retain the existing customers and attract the potential customers. If One.Tel had failed to retain his customers through better customer service and innovative marketing plans, then it might incur financial loss. Market research and comparison of competitors’ marketing plans can help the auditor to indentify and assess such risk factors (Sadgrove 2016).

The inappropriate auditing of previous years’ reports can also be considered as inherent risk factors. If the financial reports of the previous years were not audited properly, then the current year’s financial statements will surely interpret improper outcomes. This risk factor can be identified by re-auditing the previous years’ reports thoroughly (Miller et al. 2012).

Economy of the nation is one of such risk factors. Change of inflation rate, new monetary & fiscal policies, change of foreign exchange rates etc. can greatly affect the accounting activities of the business.

Telecom industry is highly competitive market. Most of the companies introduce their marketing plans to beat the competitors’ plans. In such case, if anyone of the competitors launches any lucrative plan suddenly, then the management has to counter it with a strategic plan. Risk, associated with such strategic marketing plans, can affect the account balance level.

In the highly competitive industry, the demand of reliable and quality suppliers are also used to be in high demand. Sometimes, they capitalize the high demand by increasing the supply rates. Such sudden increase of supply expenses affects the accounts balance greatly (Baxter et al. 2013).

Apart from the discussed risk factors, there are many other inherent risk factors at accounts balance level, such as, change of government policies, introduction of advanced technology, change of accounting software, shifting of higher-level management, lack of employee training and development programs, change in management policies etc. (Cohen et al. 2014).

The financial statements of One.Tel depict that the company has incur huge loss in the current year. For the two consecutive years, it has been suffering from negative operating cash flows. To cover the shortage of cash funds, it has issued more share capital and taken loans from the market also. Though, it has relied more on equity financing than debt financing, increase in the number of shareholders has some negative impact also. It will reduce the amount of earning per share and dividend per share, which may reduce the demand of the company’s shares in the stock market. Thus, in long run, the company may face problems to obtain finance trough equity (Harrison and Wicks 2013). Due to huge loss, the retained earnings of the company have also gone into negative. It indicates that currently, the company does not have any sufficient internal reserve to cope with any type of contingencies or further loss.

However, from the amounts of current assets and current liabilities, it can be stated that the current ratio of the company is ($628.1m/$375.2) 1.67. The debt ratio of the company is ($490.7m/$1435.5) 0.34 at present. Both the liquidity ratio and solvency ratio are well maintained and under control. It reflects that for the next one or two years, the company has enough strength to cover its liabilities out of its assets.

Hence, on the basis of the financial statement, One.Tel can be regarded as medium level going concern.

Reference:-

Abraham, S. and Shrives, P.J., 2014. Improving the relevance of risk factor disclosure in corporate annual reports. The British accounting review, 46(1), pp.91-107

Baxter, R., Bedard, J.C., Hoitash, R. and Yezegel, A., 2013. Enterprise risk management program quality: Determinants, value relevance, and the financial crisis. Contemporary Accounting Research, 30(4), pp.1264-1295

Bratten, B., Gaynor, L.M., McDaniel, L., Montague, N.R. and Sierra, G.E., 2013. The audit of fair values and other estimates: The effects of underlying environmental, task, and auditor-specific factors. Auditing: A Journal of Practice & Theory, 32(sp1), pp.7-44

Carson, E., Fargher, N.L., Geiger, M.A., Lennox, C.S., Raghunandan, K. and Willekens, M., 2012. Audit reporting for going-concern uncertainty: A research synthesis. Auditing: A Journal of Practice & Theory, 32(sp1), pp.353-384

Cohen, J.R., Krishnamoorthy, G. and Wright, A., 2014. Enterprise risk management and the financial reporting process: the experiences of audit committee members, CFOs, and external auditors. CFOs, and External Auditors (May 30, 2014)

Harrison, J.S. and Wicks, A.C., 2013. Stakeholder theory, value, and firm performance. Business ethics quarterly, 23(01), pp.97-124

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

Sadgrove, K., 2016. The complete guide to business risk management. Routledge

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