The Concept of Audit Risk - One Tel Company - Case Study Example

Auditing Assignment by student Code + Course Professor University City, State Date Auditing Assignment One.Tel Company One.Tel is a multinational organization that was launched in Australia in the year 1995. As it is with most of the multinational companies in the telecommunication industry, One.Tel is seen as a global leader in the telecommunication industry, because it provides a broad range of telecommunication services to their customers in Australia and the rest of the international market. Some of the services being offered by One.Tel include local and international calls at low cost, post-paid and prepaid calling cards, internet protocol calls, internet services and GSM cell phone capabilities. With the aim of exploiting the international market to achieve its corporate strategic objective, One.Tel Limited has engaged in customer-centered campaigns that ensure customers have access to quality and innovative telecom services at reduced prices. Take a look at the generated revenue in every international market that One.Tel operates in; the company was able to generate relatively more revenue than other international markets. From the increased revenues generated from the Australian market, it may seem that the Australian market has a better business enabling environment. Nevertheless, the Australian market present excessive competition from the large and small telecommunication companies present in the Australian market. It is worth noting that after the deregulation of the Australian telecommunication industry, there have been an increased number of telecommunication companies which offer varying services regarding type and quality. Additionally, the increased number of service providers due to the deregulation of the industry is not parallel to the growth of revenue because of the elevated levels of market completion, reduced revenue per organization and reduced service prices. The management of One.Tel limited is another important aspect worth considering. The company is made up of nine members of the Board. Among the nine members, there are five nonexecutives and four executives. Furthermore, with the increased dynamics of the telecommunication industry, there has been a need for experienced individuals in the managerial position. Accordingly, the board has several duties. These include approving company’s strategies and financial plans; detect and respond to risk that may arise within the organization; evaluate and monitor the process of management and mechanism of reporting; financial performance, and appointment of senior management staff. The Concept of Audit Risk: One.Tel Limited Like any other organization, the auditing of One.Tel may be subjected to risk associated with receiving an audit perspective that is founded on financial reports that contain a material misstatement. To minimize this kind of risk, it is important for the auditor to plan and execute then audit with this risk in mind. Per se, the knowledge of audit risk is essential to the entire process of auditing. With the improved quality of services provided by One.Tel, there are many transactions that the company does within a single financial year. Theoretically, the auditor is required to verify these transactions comprehensively, which is cash and time-consuming. Therefore, a more practical methodology needs to be adopted. As such, auditors utilize the risk-based approach (Kneche & Salterio, 2016). The risk-based approach is significant to One.Tel and the auditor too as it makes sure that the audit process, is expertly executed and the audit procedures used are efficient. The audit risk is made up of two main components, including risk of detection and material misstatement. These two elements are closely related because for the risk to be minimized; the auditor needs to manage the risk of detection, and identify and assess the risk relating to material misstatement. Material misstatement risk is important because it is influenced by the internal control and activities of One.Tel. This means that the auditor is not in a position to influence the type of risk. This risk comprises of inherent and control risk. In this regard, inherent risk is the vulnerability of the account balance to misstatement on the inherent and environmental attributes independent of internal control structure (Kneche & Salterio, 2016). On the other hand, control risk is used to define the risk associated with the inability to promptly detect or prevent material misstatement on the internal control policies and procedures. The assessment of inherent and control risk is usually executed separately or combined. However, the auditor is required to to assess the inherent risk at both the financial report and accounting balance level (Arens, Elder, & Mark, 2012). Influential Factors at the Financial Report Level Characteristic of the Telecom Industry Before 1997, the telecommunication industry had only two service providers. However, as the deregulation of the industry occurred the number of service providers increased to include smaller and multinational companies. Due to this increased, the revenue of organizations within the Australian market has been affected greatly because of the reduced telecommunication services’ prices and escalated market competition. In addition to this, Telstra, which was a monopoly before deregulation, dominates the telecommunication industry despite the fact that its market share has dropped. The increased competitive environment may make the management to misstate the financial report so as to have a competitive advantage. This increases the inherent risk and may also be established through strategic business risk management. Characteristics of the Company The telecom industry is one which is bombarded from time to time with new technological advancement. With the rapid changes in technology, One.Tel limited may be at risk which is associated obsolescence of inventory. This means that some of the assets that the company may be using may be outdated thus being undervalued. As such, this increased the inherent risk. Furthermore, this factor can be detected when carrying out the strategic business risk evaluation. Managerial Integrity The Board of Directors and the appointed senior managers of One.Tel makes up the most crucial position of the company as they are involved in decision making and another task that influences the performance of the business in the Australian market. Due to the curial part that the management plays, there integrity is important in the evaluation of the inherent risk. For instance, if the management limits the access of the auditor to company’s information and people, this is an indicator of questionable integrity. As such, the auditor assesses this as an inherent risk. Management’s Knowledge, Experience, and Dynamics The telecommunication industry in Australia has been growing which may depict that the level of knowledge and experience needed for the management is relatively high. This is important as it provides the company with a competitive advantage. Furthermore, with knowledgeable and experienced management the company is in a position to prepare proper financial reports on time. In addition to this, the dynamics in the managerial position within One.Tel needs to be assessed. This is because frequent changes in the managerial position may depict the resignation of honest individuals who are not ready to perpetuate fraud in the company (Gay & Simnett, 2017). To evaluate the dynamics, an auditor may make use of the employment t record of senior management team and members of the Board. Per se, if One.Tel portrays the lack of experience and knowledge and frequent changes; the auditor may increase the inherent risk. This factor is crucial to the business and can be established in the process of strategic business risk assessment. Unusual Pressure One of the significant natures of the management that is worth considering when assessing the inherent risk is the kind of pressure the management has. Unusual pressure presents discomfort and unrest among the management. With the ability to make key financial decisions, the management may find itself misstating financial reports in a suitable manner. Examples of the unusual pressure include cash flow concerns, poor liquidity and operational results, and concerns over compensation schemes which are attached to share earnings and pricing. Per se, this factor increases the inherent risk. Dominance In any company, the members of the Board of Director are the most dominant. This is because they make decisions regarding the company and presents the interest of various stakeholders in the company. However, there are cases where the company may have few personalities dominating the company. The few personalities are influential and have personal interests in the company. In this case, the auditor may decide to assess this as an inherent risk thus increasing it. Financial Status of the Company In the assessment of the inherent risk, the auditor needs to consider the availability of finance in One.Tel. This is important because the financial status of the company is an indicator of the ability of the company to settle debts and run comfortably (Bentley-Goode, Newton & Thompson, 2017). In this regards, when a company is not is a position to settle short-term cash payments and bank loans, it may result to the misstatement of financial report as the last means of staying in business. Engagement Level The engagement level refers to the number of times an auditor has been in contact with a particular firm. If the auditing is executed by an auditor, who has handled One.Tel’s auditing for severally, the auditor will acquires valuable experience and knowledge concerning the interaction with the firm. Per se, the auditor may result in reducing the inherent risk. Nonetheless, if it is the initial audit the auditor increases the inherent risk because he or she is less confident with the firm. Influential Factors at the Account Balance Level Non-routine Transactions Non-routine transactions are those transactions which are rarely carried out by an organization. For instance, One.Tel Limited may be engaged in non-routine transactions such as assets write-offs, massive property acquisition, and activating a new product. Since these are not the usual transaction done, it requires one to have the sufficient expertise so as to record them properly (Ruhnke & Schmidt, 2014). Per se, this raises concerns on the auditor’s side and increases inherent risk. Associated Parties Associated parties transactions are those transactions which take between parties that are related. In this case One.Tel limited in Australia is a subsidiary company, and it may make transactions with the parent company thus qualifying it as an associated-party transaction. These transactions bring forth an inherent risk because they have no transparency as the transactions do not take place between independent entities and at arm’s length. Population’s Constitution The nature of the accounting items making up the total accounting population dictates the likelihood of material misstatement. For this reason, if the likelihood of misstatement is higher based on this factor, the auditor plans for a comprehensive investigation and testing. This is achieved by placing a high inherent risk for accounting items that are likely questionable. Some of the accounting items which may be regarded as questionable include inventories which have low turnover, cash disbursements, associates transactions and trade receivables with overdue accounts (Bentley-Goode, Newton & Thompson, 2017). Results of Previously Conducted Audits The level of inherent risk may be dictated by the result of preceding audits. For instance, if the previous audits established material misstatement in financial statements, the auditor may increase the inherent risk because he or she needs to examine whether One.Tel did a follow up of and made necessary changes to its system. As such, this factor increases the inherent risk assessed by the auditor. Judgement-Based Transactions One.Tel is a multinational telecommunication company, and like most of the multinational firms, it carries out different and many kinds of transactions. Accordingly, there are transactions which require the judgment of the management in the estimation and recording of the transaction. Some of these transactions include investment recorded at fair value, uncollectible trade receivables allowances, and the write-off for obsolete inventory (Ruhnke & Schmidt, 2014). Thus, if these transactions are evident within One.Tel, the inherent risk may be assessed as high. Going Concern The going concern principle is crucial to accounting as it is utilized to approximate the ability of an organization to continue its operation indefinitely subject to the available resource. Per se, based on the available information the going concern for One.Tel Limited is low. The evaluation of the going concern is founded on the fact that the long run assets are recorded on the balance sheet. This is so because it indicates that the assets are to be sold at a future date (Arens, Elder, & Mark, 2012). Bibliography Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall. Bentley-Goode, K.A., Newton, N.J. and Thompson, A.M., 2017. Business Strategy, Internal Control Over Financial Reporting, and Audit Reporting Quality. Auditing: A Journal of Practice and Theory. Gay, G. E., & Simnett, R., 2017. Auditing and assurance services in Australia. London: Mcgraw-hill. Ruhnke, K., & Schmidt, M., 2014. Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments. Auditing, 33, 4, 247-270. Read More