Inherent Risks - One Tel Company - Assignment Example

INHERENT RISK Name Course Date Institutui Inherent Risk Question 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 strategic business risk assessment Inherent risk is the tendency of declaring right a misstatement at the financial reporting level or account balance level as a result of fraud or error before considering controls that could be material individual or in mishmash with other misstatements. Inherent risk can fall under three major categories including management competencies, management integrity, and company financial condition. Assessment of this kind of risk is influenced by a number of factors that can either increase or decrease the need for assessment (PWHC, 2008). Financial reporting level also known as financialstatement level involves cross checking of the general financial statements for a company to ensure that they represent a true and fair view of the company. They are likely to contain misstatements. Factors that are likely to contribute to increased inherent risk assessment at this level include: Management competencies, personnel issues, industry issues, nature of company business, and product related issues, single product success, manual intervention, prior period adjustments, and complexity Management characteristics can cause assessment for inherent risks to be high or low. These characteristics can take the form of personnel turnover in areas like finance, operations and accounting, inadequacy in number of employees in a company or inexperienced work force and dominance by one individual or a number of individuals in financial and managerial operations decision making (Austen et al, 2000). In case of One.TelCompany, management limited competencies is a major issue of the management. According to One.Tel management report on its board of directors, one of the factors that could have contributed to an increased inherent risk assessment is the limited managerial experience. The industry experienced high growth rate relative to competency level. The management, comprising of board of directors is responsible for corporate strategies and making the organization’s financial plans. Assessment of significant risks and reviewing company’s reporting mechanisms and management processes require adequate skills and high level of competence that meets industry requirements. This could cause auditors to be more stringent with assessing inherent risk in One.Tel Company. Industrial issues affect the level of inherent risk assessment. According to (Florea and Florea, 2012), rapid change in industrial aspects affects business operations of companies in that particular industry therefore increasing the need for inherent risk assessment by auditors. Industrial issues involve factors within the general industry affecting individual companies that can cause auditors to consider an increased assessment of inherent risk for a company. One of the industrial factors within the industry One.Tel is operating is high growth of the industry relative to growth in managerial competency. This has affected the managerial composition of companies including One-Tel since the available labor resource experiences to do not meet the industry requirements. After the July 1997 deregulation initiative in the telecommunications industry in Australia, previous service providers converted into carriers causing the number to increase to thirty five from the previous two. Some of these carriers are currently creating networking and switching proficiencies of their own from the previous leasing network capacity from Telstra which they relied on. Factors identified during strategic business risk assessment Some of the inherent risk factors that contributed to an increased inherent risk assessment as the financial reporting level can be identified during strategic business risk assessment. Personnel issues can be identified by identified during strategic business risk assessment especially in One.Tel Company where the management is concerned with reviewing and monitoring management processes. One of the management processes is human resource or personnel management processes to ensure that the organization’s work force is well equipped and in a better condition to work effectively. Personnel issues can therefore be identified since it involves frequent reports of the department (ICWA, 2011). Another factor that can be identified during business risk assessment is scope of company business and also industrial issues. Techniques like SWOT analysis and PESTEL are used but the management to analyze the vulnerability of the company. Analysis of company strengths and weaknesses enables the company to know its advantages and inadequacies to compete. SWOT analysis also analyses the opportunities and threats in external environment of the company therefore providing information on industrial issues surrounding the company. Another is product related factors which can be attained through analysis of management accounting information incorporated during strategic business risk assessment. Resource allocation is one of the main decisions that managers must make to ensure efficiency and continuity of the business during strategic business risk assessment. This decision requires that updated information on resource availability such as financial, capital and human resources are provided. It is correct that management accounting provides information to people within the organization and is done to benefit decision makers. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level Account balance level, also known as the assertion level is the level at which the financial statements are assessed to ensure that individual figures are well recorded and okay. Factors like prior period misstatements, susceptibility to theft or fraud and incompliance with accounting standards are likely to contribute to increased assessment of inherent risk at the account balance level. Prior period misstatements could also have contributed to increased inherent risk assessment of One. Tel Company. Insignificant errors made in previous periods might not have been detected because of immateriality therefore not causing any change. However, these errors still exists to the current period financial statements. Auditing does not consider an overstatement in a previous period to be compensated by an understatement in the current year so as to correct the error. Reliable and approved correction procedures must be followed. Financial accounting involves historical data that reflects performance of the company since all the information is needed by users of the accounts. Auditors of One.Tel Company could have detected misstatements in accounts of previous periods. In case auditors of the company realize that there have been misstatements in statements of earlier periods, they will be keen to increase assessment of inherent risk so as to ensure that what happened before has not repeated itself. Professionals in the firm like auditors and the management itself use these accounts to compare performance. According to IFAC (2005), financial accounting must be done to produce financial statements which are assessed by auditors. Accounting standards require that auditors approve of the accounts if they reflect a true financial position or performance of the company. According to McCarthy et al (2012), financial ratio analysis aids in instilling confidence among managers while they manage the business resources. Given the financial reports and statements, related contents of the statement can be evaluated to identify business’ performance. Another factor that may lead to an increased assessment of inherent risk is increased incompliance with accounting standards in the industry. In the absences of a common set of accounting procedures, rules and standard, a company is likely to have increased risk of fraud and misappropriation of financial information. Accounting information can be easily manipulated by persons who have access to it. Using different reporting procedures in preparing financial accounts increase the chances for manipulation of the accounts which might not be detected and will lead to bankruptcy of the organization. For the internationally recognized procedures to be established, main aim of accounting bodies like the IASB was to protect companies by protecting investors’ interests through ensuring transparency in reporting financial information concerning companies. Exposure of the company to possibilities of fraud is likely to affect stakeholder’s trust on company financial operations and therefore withdraw investments. Do you believe that the area of ongoing concern should be assessed as high, medium or low? Identify the factors that are the basis for your decision The area of ongoing concern for One.Tel should be assessed as medium. This means that the company has medium potential that it will still be in existence in the industry after a period of time. This is because of factors like growth and good performance of the telecommunications industry in Australia, consistency in account preparations, compliance with internationally accepted principles and positive cash flows from operating activities and profitability. Some of these aspects indicate better potential while Cash flows from operating activities indicate a low ongoing concern for the company. This therefore narrows to a medium growth potential.The continuity principle provided by the generally accepted accounting principles (GAAP) requires that financial accounting is conducted by companies to ensure that a company’s operations last. Bragg (2011) notes that, companies need to evaluate their financial health and stability of their operations. Other than the top management level, financial calculation and evaluation is important for the overall company and its continuity. Managers need information from the finance unit in the resource allocation process and facilitate the routine operations of the company. The telecommunications industry in Australia has marked high growth since the 1997 deregulation. A highly growing industry is an indication of continuity for the company due to increased demand and markets for company’s products. The $429.4 million revenue in Australia is likely to increase due to growing industry. Australia’s telecommunications industry growth involves digitized advancement making networking sophisticated and modernized to meet global standards. This increases networks in in other countries and places Australia at a higher level in telecommunication worldwide. Being a trader from Australia, One.Tel is likely to attract more customers from all over the world where it has subsidiaries and open new links in other countries that have not been explored hence ensuring continuity of the company. Growth in the industry also means that capitalization is assured to finance further expansion in case One.Tel requires to. Other than its own funds, the industry provides a favorable environment for the company to acquire loans and funds to expand its operations. Financial institutions and government policies are likely to favor telecommunications industry in terms of credit extensions and other financial services so as to boost its growth and generate more revenue. This is because the industry contributes a high percentage to the general government revenue and GDP (Sanjay et al, 2008). Another factor that have led to rating One.Tel as high ongoing concern is conformity with internationally accepted financial standards in preparing and reporting its financial statements. One.Tel has presented its accounts historically from 1999 and as consolidated accounts other than the formats required by the standards. Accounting standards involves set rules and procedures adopted by firms or companies in financial data reporting. These standards majorly apply to financial accounting which is a requirement for each company or business organization by the law. Financial accounting involves provision of financial statements for both external and internal use as required by law. These accounts are used by stakeholders such as employees, stockholders, banks, the government and decision makers.The accounting principles applied in reporting therefore allows uniformity in reporting and for reasons of comparability. According to Weygandt (2010), the law considers financial accounting as a tool for monitoring and measuring performance of agents which is then recounted to interested parties. Understanding the required reporting principles is beneficial to any organization. Another factor is the positivity or negativity of the Negative cash flows from activities and profits as indicated by financial statements is an indication of ongoing discontinuity for One.Tel. This indicates that although other factors indicate positive potential to grow, internal analysis of the company contradict. Negative cash flows show that the company is financing its activities from debts. Cash being use don operating activities is not available to the company. There is also consistency in reporting One.Tel accounts. Accounting procedure used in preparing 1999 accounts is the same one used to prepare accounts of 2000. Consistency in financial information ensures that control and safeguard is instituted other than professionalism in carrying out accounting transactions and recording. In order to compare financial accounts of different periods and between companies, consistency in reporting of the information is vital. It is more important to the company because as an organization, it is easier to track performance and detect areas of weaknesses so as to institute change and analyze the impact of any changes made. Work cited Austen, A. Lizabeth., EilifsenAasmund and Messier, F. William.The relationship of risk assessments and information technology to detected misstatements. 2000. Norwegian Institute of public accounts and research council, Norway. Insurance commission of Western Australia (ICWA).Risk management guidelines. 2011. WA Government, Australia. FloreaRadu and Florea Ramona.The Implications of Inherent Risks’ Assessment in Audit Risk Limitation. 2012. Economic trans disciplinary cognition, Vol. 15. Price Water House Coopers (PWHC). A practical guide to risk assessment: How principles-b ased risk assessment enables organizations to take the right risks. 2008. Price Water House Coopers. Bragg, S. M. (2011). Wiley GAAP 2012: Interpretation and application of generally accepted accounting principles. Hoboken, NJ: John Wiley & Sons. McCarthy, J. H., Shelmon, N. E., & Mattie, J. A. (2012). Financial and Accounting Guide for Not-for-Profit Organizations. Hoboken: John Wiley & Sons. IFAC.(2005). International Public Sector Accounting Standards (IPSASs) and Statistical Bases of Financial Reporting: An Analysis of Differences and Recommendations for Convergence. New York: IFAC Weygandt, J. J. (2010). Accounting principles: Vol. 1. Hoboken, N.J: Wiley. Kaul, Sanjay, Fuaad Ali, SubramaniamJanakiram, and BengtWattenstrom. Business Models for Sustainable Telecoms Growth in Developing Economies.Chichester: John Wiley & Sons, 2008. 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