The One Tel Company - Case Study Example

Name: Lecturer: Unit name: Date of submission: Auditing and assurance: Case of One Tel Company The determination of risk is one of the core items that an auditor to work on when engaging any given audit assignment. The inherent risk is one of the risks that must be assessed during audit exercise. The assessment of inherent requires the client to ignore the presence of internal controls i.e. secondary review of financial statements. The evaluation of inherent risk revolves around the nature of client’s business since auditor looks on how susceptible the financial statement assumptions are to the material misstatement (Best et al.). The level of assessments of inherent risk depends on the business environment, business strategies and the manner in which financial reporting and account balances are posted. The ultimate aim of most audit assignment is to determine going concern of the company. The ‘going concern’ entails the determination of the company to continue operating in a foreseeable future. The accounting assumption of going concern decision is derived majorly on company ability to sufficiently meet commitments, objectives, and obligation when they fall due. The analysis below determines the factor that contributes to inherent risks facing the One (Fiedler). Tel Company financial reporting and account balance level, and also going concern of the company on either to assess at high, medium or low. Factors that could contribute to increased inherent risk assessment in financial reporting and factors identified during strategic business risk assessment. The important factors when auditing for inherent risk for the One Tel Company entails assessing the risk of material misstatement arising from financial reporting which include; The limited managerial experience in the rapidly growing industry poses a great challenge to the company. The managers are required to demonstrate high ability in managing the day to day operation of the company as well as advising the board on various dynamics in the industry. The experienced managerial team can reduce inherent risk arising from industry dynamics and implement strong internal control system within the company (Best et al.). Therefore, One Tel should ensure that it hires enough experienced managerial team to ensure that the firm remains in business despite rising competition. The failure to develop sound strategies to match industry dynamics can cause the company to be irrelevant. The Kodak Company is one of those companies that lost its market grip due to failure to address strategic risk since it was dominant in film photography market. Therefore, failure to address the issue of a limited number of the experienced managerial team might cost the company despite it being one of the leading and monopoly dominant in telephony industry (Gay and Simnett). One Tel Company needs to address the issue to minimize the impact of strategic risk and plunging into Kodak’s situation. The strength and transparency of corporate governance have a great impact on the success of the company. The corporate governance risk has the disastrous effect on the shareholders of the company. The risk entails the fact that insiders may not act in the best interest of the shareholders of the firm. The employees are entrusted to ensure that the company remains profitable and maximises shareholder wealth. Therefore, when employees pursue personal interest instead of shareholders interest, the company will automatically plunge into loses, and bankruptcy. The Enron Bank is one of the companies that failed due to poor corporate governance that lead to aggressive trading (Gay and Simnett). There are some other firms which have failed due to poor corporate governance. The one Tel Company must ensure that the strength of its corporate governance is checked to reduce the impact of inherent risk arising from poor stewardship. The increase of the composition of the board of governance for One Tel Company will mitigate the risk. The current composition of five non-executive and four executive board members is inadequate. The poor governance increases the strategy execution risk since there his limited control in executing company objectives. The global operation increases the susceptibility to inherent risk due to increased complexity of the operation. The risk arises from the fact that the company is exposed to the risk of currency fluctuations since it carries out business in regions with different currencies such as UK, France, Netherlands and Hong Kong. The transaction and translation risk from foreign companies results to diverse avenues in which misrepresentation of financial reports. Also, the difference in political ideologies has a great impact in exposing the company to inherent risk. The laws and regulation governing the operations of foreign companies in any of the foreign companies are not uniform (Best et al.). The factors include different in regulation governing the use of resources, tax, and custom duty regulations. The telecommunication industry is highly competitive. The industry was deregulated in 1st July 1997 thus increasing the number of players. The industry has more than 35 smaller carrier companies which have given One Tel Company stiff competition (Simnett, Carson and Vanstraelen 1-32). The case study shows that the industry has seen a constant growth but does not correspond to revenue growth due to greater competition, price reduction and lower revenue per company. Also, the company moved from profitability of $9.1million in 1999 to loss of $282.1million in 200. The reduction in profitability has a huge impact on the future of the company since lower margin or loss limits the company ability to meet commitment and obligation as they fall due. These expose the company to high inherent risk since profitability enables the company to expand and remain as a going concern. The difference in the accounting standards increases the chance of the company being faced with inherent risk. The failure to adopt uniform accounting standards might lead to huge material misstatement during the consolidation of financial statements for the parent and subsidiary companies. The material misstatement imparts wrong decision by investors, creditors, and other users since they are the biggest users of financial information (Gay and Simnett). Therefore, uniformity in financial reporting for parent and subsidiaries enables the company to reduce inherent risk exposure during the consolidation of financial reports. Lastly, the operation in different regimes increases inherent risk that arises from different laws and regulations (Gay and Simnett). The violation of the laws and regulation result in high penalty or shutdown by relevant bodies thus loss of investment. Factors that would have contributed to increased inherent risk at the assessment of account balance level. The complexity in posting balances and consolidation of financial statement poses a greater challenge and increases chances of inherent risks. There is a greater chance that the fraudulent employees can take advantage of complexity to for their gain (Best et al.). For example, the aggressive trading in Enron case was as a result of the complexity of financial reporting which gave fraudulent directors a chance to hide malpractices until a point where the company was unable to carry out its operation effectively. Therefore, One Tel Company needs to develop strong and clear accounting system to reduce malpractices. The weak accounting system increases inherent risk facing the company, and thus need to look closely at how account balances are posted (Best et al.). The statement of financial performance recorded a loss which might have resulted from fraudulent accounting practices. The company recorded a loss of $282.1million from the previous profit of $9.1million for the consolidated statement. The global presence of the company increases chances of inherent risk since managing a large number of branches might pose a great challenge. The issue of difference in currencies and accounting standards increases company susceptibility to inherent risk since management can use the avenue to hide malpractices or failed to give clear report due to its complexity (Best et al.). Therefore, confusion in posting and fraudulent nature of employees impacts account balance posted to final books of account. The high volume of transactions received by the parent company can increase chances of inherent risk in the account balance. The company operates in more than six countries thus following up the transactions for all the branches might be hectic for the parent company to critically monitor all entries (Best et al.). The high volume of transactions gives the employees an avenue to hide malpractices such as window dressing without being noticed. Therefore, posing a greater challenge for the company to make enough profits and maximise shareholder wealth. The level of going concern assessment area and factors that guided in arriving at the decision. The going concern assumption auditing process since auditor needs to give out his/her opinion at the end of audit assignment Simnett, Carson and Vanstraelen 1-32). The analysis of the financial and non-financial aspects of the company shows that the going concern should be assessed as medium. The company survival in the highly competitive industry is on a weighing balance, the success or failure depends greatly on strategic direction that the company will take. The medium assessment of the going concern arises from the fact that the company recorded a loss in the statement of financial position. On the other hand, it has positive cash flows, and thus giving a little hope of its survival. The profitability and cash flow provided the primary basis of arriving at the going concern status of the company. The company needs to take into consideration the following factors to improve its going concern; Increase the number of experienced managerial team to increase innovation and develop competitive products. Improve accounting system to eliminate fraudulent employees and confusion in posting account balance. Merge accounting standards by adopting international financial reporting standards to eliminate challenges of consolidation. Employ hedging tools to reduce loss incurred from the fluctuation of currency for example use of swaps and futures. The consideration of the above recommendation will go a long way in ensuring that the company remain competitive and retain its current market segment of 57% compared to other telecommunication companies. Reference: Best, Peter J et al. Auditing And Assurance Services In Australia. Frenchs Forest, N.S.W.: Pearson Education Australia, 2007. Print. Fiedler, Brenton A. Student Guide To Accompany Auditing And Assurance Services In Australia. Frenchs Forest, N.S.W.: Pearson Education Australia, 2005. Print. Gay, Grant E and Roger Simnett. Auditing And Assurance Services In Australia. North Ryde, N.S.W.: McGraw-Hill Education, 2012. Print. Simnett, Roger, Elizabeth Carson, and Ann Vanstraelen. "International Archival Auditing And Assurance Research: Trends, Methodological Issues, And Opportunities". AUDITING: A Journal of Practice & Theory 35.3 (2016): 1-32. Web. Read More