International Business and Audit Risks - Case Study Example

Audit Risk College Introduction Audit Risk refers to the risk that external or internal auditors may unintentionally fail to appropriately change their opinion on materially misstated financial statements (Porter, Hatherly, & Simon, 2008). This can be divided to three main components of the risk. Inherent risk on the other hand is the probability of misstating materials prior to taking into consideration the client company’s internal controls (Gul, 2007). This is mainly affected by the client’s natures or its environment. Inherent risk tends to increase the audit’s overall risk in the end. This should be a big factor for the auditor to consider before deciding whether or not to accept the audit offer. When one wants to assess this kind of risk, the transactions have to be segregated into three groups; Routine, estimation and non-routine (Pickett, 2006). Control risk is the risk that a material misstatement may happen in an assertion and not be detected early enough by the company’s internal control mechanisms (Russell, 2013). This will depend mainly on the effectiveness of the client’s internal controls. Detection risk is the risk that the auditors may not be able to figure out a material misstatement which exists in an assertion .This will depend on the audit procedures’ effectiveness and how the said auditors apply these procedures. This risk only surfaces when an audit is being done. It will be non-existent if there is no audit being performed. This risk is never assessed by auditors but they only apply specific procedures to try and minimize it as much as possible. SECTION A Audit Risks for Mobile Streams PLC According to its financial statement, Mobile Stream PLC is a very large multinational corporation. It has interests in Argentina, Brazil, Mexico, Colombia, North America and the Asia Pacific. Majority of its business and income is derived from conducting business in Latin America. Auditors of large Multi-National corporations tend to face very different kinds of audit risks when compared with their domestic counterparts. Some of these audit risks will stem from; International political risks, foreign currency exchange risks and controls in different jurisdictions, International Economic risks as well as far greater complexity in their operations. 3.0 Foreign Accounts Audit Risk At the beginning of the financial statement, the company states that a majority of its income is based in Argentina which had just enacted legislation aimed at restricting repatriations of currency out of the country. The percentage of the income is huge standing at about 73% of the company’s total stated revenue. This is a significant risk for the auditor who is based in the U.K since the firm’s hands will be tired and will not be able to perform substantive audits on the same. Relying on information solely given by the client exposes the auditor to an increased level of risk than when the auditor obtains the information by conducting his own tried and tested procedures. The financial statement states that the total amount of cash held in Argentina stands at £2.8million which is a colossal amount by any standards. The reliability of the information cannot be independently verified which is the purpose of the audit. This is a huge risk factor for Mobile stream PLC auditors since a large percentage of the company’s income comes from Argentina where the company’s core business is but its operating headquarters is in the United Kingdom. The company’s total revenue has a huge chuck that is generated overseas .Actually 99% of its revenue is from overseas operations. The appointed auditor is bound to be exposed to greater risk owing to this. International Business Risk An auditor will face a very unique risk when the audit takes on an international dimension. This way of doing business may lead to completely new challenges or compound the existing risks for the auditor in question. These risks come about due to taxation risks, linguistic risks and also variations in the different countries’ generally applicable accounting principles. He will also encounter legal and regulatory risks. The presence of international business could be the factor that has led to high cost of administrative cost which stands at £4.6million in 2013 which is represents an almost 40% jump in costs when compared to the same costs in 2013 which stood at £3.2million. Mobile stream PLC conducts businesses in a wide variety of legal, economic and taxation jurisdictions from Latin America, North America and the Asia pacific. The tax payable that is attributed to foreign operations stands at about £1.917million in 2013 a rise from the 2012 figure of £1.355million.This will present a challenge and risk to any auditor and the chances of overlooking or failing to detect anomalies shoot up considerably. The regulatory and legal framework can be very different when compared say between the United Kingdom and Argentina where the bulk of the business is. The auditor may be more familiar and conduct an impressive audit on the U.K basis but encounter a detection risk when dealing with the Argentina side of the company. This cannot entirely be his fault but the auditor will have to be well prepared to reduce this audit risk which we will look at towards the end of the essay. The Company’s German operations had a tax audit performed that covered the period between 2006 and 2010 and the resulting findings made the Tax and Revenue Office of Hanover-North to claim a payment totaling to £200,000.However the company blocked a provision of £120,000 since the company did not believe it was liable at the time and the issue is still being resolved with the Germany taxation advisors. This unfamiliarity with the different legal jurisdictions and cultures may lead to serious unforeseen repercussions to the client or the auditor which may include law suits from the clients investors and shareholders for misinformation whether intended on unintended. This may taint the auditor’s reputation and image to other prospective clients. The main areas of legal awareness for the auditor should have to deal with freedom of contract, the enforcement of property rights, laws touching on insolvency, the treatment of creditors, laws touching on corruption and finally how the legal system handles issues to do with data privacy. An auditor with Mobile stream plc has to be particularly conversant with the property rights legal framework in the various countries in which it operates since according to its statement, the company has contracts with numerous Mobile Network Operators (MNOs) in the different countries in which it operates. And through these mobile Network Operators, the company provides content the majority of which is supplied from various licensed rights holders. The auditor has to be conversant with these laws so as to determine whether there is the rightly stated income that was derived from providing these contents that are owned by third parties, factoring in the share of agreed earnings between the content provider and the distributor of the content. Business Complexity Mobile Stream PLC has grown into a large multinational corporation. This means that the company will inevitably have a complex business structure. This is because it has to partner with various other players in the mobile internet industry such as application developers and mobile phone companies in the respective jurisdictions. The more complex the business is the higher the chances of there being a detection risk on the part of the auditor. This is because the auditor may have so much to information to go through to ascertain its credibility that he may overlook certain critical information. Mobile stream plc has very complex transactions owing to its business size and diversity. It even states that there are constant changes being experienced in the mobile entertainment content segment of its business. This constant evolving of this segment in the way that is distributed to the consumer will provide a significant risk to the auditor. He has to familiarize himself over a relatively short period of time if newly hired by the client company on these new business models that the company employs to achieve its targets in this critical segment of the market. The company statement indicates that ‘Management continues to review changes in the market, explore new business models and form new relationships with content partners’. This statement will serve to indicate the higher probability of there being an inherent risk on the part of the auditor since the complexity of the financial transactions will be constantly changing over the period of the financial period making it imperative for the internal audit mechanisms in place to be stringent in detecting any financial irregularities to so as to reduce the risk exposure on the external auditor. Foreign Exchange Risks The global foreign exchange market is the world’s biggest financial sector. It transacts trillions of dollars as well as other major currencies each day. In the modern world, information travels much more quickly than it did half a century ago. The foreign exchange market feeds on information to determine various exchange rates of the various global currencies depending on the strengths of the various economies. This exposes the multinational corporations to significant risks in their day to day transactions and accounting procedures which must factor in these exchanges or projected exchanges for long term contracts or business deals. Mobile Stream Plc is exposed significantly to this hard to predict risk due to the fact that it has an almost global footprint. Ninety nine percent of its revenue comes from the Asia pacific, North America and Latin America. These are very diverse regions with very different economic systems that affect currency exchanges. This conducting of businesses in different currencies has seen the exchange differences in translating the foreign operations jump from a 2012 figure of £92,000 to £385,000 in 2013 which is a jump of almost 319% which is immense by any standards. This means that any auditor must factor in the various exchange rates that came into play in the course of the financial year so as to accurately determine whether the transactions were correctly reflected in the financial statements and that they were in the company’s best interest so as to rule out fraud. This risk is further compounded by the currency controls that were enacted in Argentina which is a major source of revenue, 73% actually, to Mobile stream plc. Section B Minimizing International Business Audit Risks International business risks will include operating in a completely unfamiliar legal and regulatory environment. An auditor has to ensure that he minimizes these risks to make sure that the audit gets the best possible result. For a company like Mobile stream plc, the auditors have to familiarize themselves with the various legal and regulatory requirements in the various jurisdictions that it has business interests. This is important so as to make sure that the appropriate procedures are followed and obeyed to avoid unnecessary law suits both for the client and the auditing firm due to the approving of inappropriate financial information in the statement provided by the company. In order to minimize inherent audit risk for a multinational corporation like Mobile stream plc. The new auditor has to make sure they assess the company’s working and business environment so as to better understand its business activities and models. This will ensure that the auditor agrees to audit the company at the back of good understanding of the company’s business environment which will minimize the audit risk greatly. The auditor can opt to study the company’s business activities for a period of time .This can be done by having a member of the auditing team attend follow the company’s business procedure on a daily basis so as to better understand the company and pinpoint the inherent loopholes that can provide opportunity for fraudulent activities. In the case of Mobile Stream Plc, the auditor has to get to know the various subsidiaries and partners that the company partners with so as to deliver its services and products to its customers in the various countries that it is operational. This is because the company engages in complex business partnerships in order to deliver its goods and services to its targeted clientele. This will help the auditor be in a much better position to audit the company with minimal audit risks. Reference List PORTER, B., HATHERLY, D. J., & SIMON, J. (2008). Principles of external auditing. Chichester, England, John Wiley. (2010). A students guide to auditing. [S.l.], Kaplan. GUL, F. A. (2007). Hong Kong auditing: economic theory and practice. Hong Kong, City University of Hong Kong Press. GRAY, I. (2007). The audit process: principles, practice and cases. London, Thomson Learning. PICKETT, K. H. S. (2006). Audit Planning a Risk-Based Approach. Hoboken, John Wiley & Sons. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=252646userid=^u. RUSSELL, J. P. (2013). The ASQ auditing handbook: principles, implementation, and use. Milwaukee, Wis, ASQ Quality Press. PUNCEL, LUIS. (2007). Audit Procedures 2008. Cch Inc. Read More