Risk Assessment of One Tel Company †Free Samples for Students

Question: Discuss about the Risk Assessment of One Tel Company. Answer: Intrdouction The title of this report is the risk assessment of One Tel Company. As the title suggest the report has identified the various factors that have contributed towards the risk level in the financial statements at the higher level. Each and every business in itself carries the risk. No business can run without the assumption of having the risk in it. Risk may consist of any form. It may be related to the purchases made by the company in the sense that after receiving the payment the supplier may not send the goods or may be related to the sales made by the company in the way that the customer may delay the payment or worst situation of not having the payment and so on. In this way the risk is faced by every kind of business. The first aim of the report is assess and identify the factors that contribute to the high inherent risk at both the level financial reporting and the account balance. The second aim is to identify the area which shows that the going concern is at high, low or medi um risk range. With these considerations the report has been prepared with main three sections. In the first section the factors have been detailed which has increased the inherent risk at the financial reporting level and in the second section the factors have been detailed which has increased the inherent risk at the account balance level. In third section, factors affecting the going concern have been detailed. Thereafter the report has been ended up with the conclusion of overall findings and recommendation thereon. Inherent Risk At Financial Reporting Level From the beginning of this world, history has witnessed many circumstances which depicts that the each and every business faces risk. The historical event that supports the above fact is of Lehman Brothers. The company has invested more in the real sector, being aware of the fact that the sector will be dropped down, due to which the 160 years old company is forcefully required to file the bankruptcy application. Thus, risk is the integral part of the every kind of business and it shall be taken into consideration by the business men. At the same time the auditor of the company is also required to consider the risk in business in order plan his audit accordingly and perform the audit function in an efficient manner (Karen, 2014). Three forms of risks have been laid down by the accounting and the auditing standards depending upon the nature, size and the type of business within which the company is operating. These are inherent risks, control risks and detections (ASA 315, 2014). In the given case study of One Tel. Company, the discussion has been done for only the inherent risks. Inherent risks is defined as the chance of having the omission or deletion of any material fact from the financial statements of the company due to the reasons which are totally out of the hands of the company i.e. due to uncontrollable reasons. In other words the inherent risk denotes that the probability of having the misstatements which is material due to uncontrollable factors. It signifies that the inherent risk will be present where there are factors which are out of control and not there where is the lack of control in the system of the company. The auditor of the company shall evaluate this risk with the application of his du e professional care and professional skills (Nosberger, 2015). This type of risk mainly incur due to the fact that there have been some inherent limitations which is the part of the business of the company and cannot be controlled by any means. In the given case, following are the factors that have contributed at the financial reporting level with the increased inherent risk assessment: Lack of Integrity of Management The management of the company shall have integrity and shall gain respect in the market within which the company is operating. In case the managements integrity within the market gets down then the reputation of the company in the market will also get depleted (Leong, 2009). The lack of integrity of the management is confirmed when the auditor right to contact other people on the market is restricted to perform integrity check. Thus, the lack of integrity increases the level of inherent risk at the level of financial reporting made by the auditor. Management Experience Management experience plays very important role in the effective functioning of the company. If the team of the management is not experienced then the company will soon be in the situation of the failure (Cohen, Krishnamoorthy and Wright, 2007). In the given case the company has the management team which does not have the enough experience and have itself admitted that the management team has the limited knowledge and experience (Wielligh, 2015). The lack of knowledge and the experience will lead to improper preparation of the financial report. Also the management of the company is in the process of hiring the new directors which will again show that there is the high rate of retrenchment in the top positions as the good and honest team will always resist in doing wrong and thus will be regarded as the high risky area by the auditor (Monroe and Woodliff, 2013). Thus, along with the above factors the auditor will also consider the factors like pressure on management regarding poor cash flows, loss and nature of the business of the company and factors which affecting the industry in which the company is operating for assessing the inherent risk at the financial reporting level (Knechel, 2007). Inherent Risk Ataccount Balance Level The inherent risk also presents in the account balance level as to how the account balances may be manipulated by the company and here the factors are discussed which depicts that there may be inherent factors which may contribute to the higher inherent risk. Inventory Level- The inventory plays the very important role in judging the liquidity of the company from the face of the balance sheet of the company. Maintaining the higher level of inventory depicts that the company is having liquidity problem and the company is not able to sell the product within the time of the operating cycle. In case the company maintains the lower level of inventory then there will again the risk of having the loss of customers. Thus, there are the high chances of inventory to loss or misappropriation. (Miller, Cipriano and Ramsay, 2012). Unusual Transaction The unusual transaction has happened in the case of the share capital of the company. The share capital of the company has been considerably increased from 355.60 million dollars in the year of 1999 to 1225.60 million dollar in the year of 2000. The increase has been mainly welcomed by the company through the issue of shares of the company rather than the increase in profit of the company. Thus, it can be said that the company is not able to generate the profits of the company and rather have funded the operations of the company through the issues of the shares of the company and collecting the amount from the shareholders of the company (Shariff and Chan, 2008). The considerable increase so made have alarmed the situation of the auditor as to plan the audit accordingly keeping in consideration the inherent risk of having the other unusual transactions too in the financial statements like increase in extra ordinary items, increase in the depreciation, etc. Assessment Of Going Concern The principle of going concern has been given by the generally accepted accounting principles and the company has to do the accounting and have to prepare the financial statements in accordance with the assumption of the going concern. The assumption states that the company will work in future and the financial statements will be prepared in that manner only (Blay and Geiger, 2013). Following are the factors that have contributed to the high risk affecting going concern as interpreted from the financial statements of the company: Consecutive Loss Making for last two years The Company has been incurring the losses for the last two years. In the year of 1999, the company has incurred the loss of 68.70 million dollar and 282.10 million dollar in the year of 2000. Thereby the Net Profit ratio has been considerably decreased. The table details the calculation: Year Net Profit / (Net Loss) Sales (Assumed) Net Profit Ratio / (Net Loss Ratio) 1999 (68.70) 1000 (6.80) 2000 (282.10) 3000 (9.50) Poor Cash Flows The Companys cash flow statement depicts that more cash has been paid to the customers and employees of the company and corresponding less cash has been received from the customers. The amount paid equals to 684.80 million dollar and the amount received equals to 510.90 million dollar. It shows that in the upcoming years the company will soon face the liquidation problem. Also at the end of the year, company has shown the net decrease in cash and cash equivalent of 6.6 million dollars. Further the company has made heavy investment in the Property Plant and Equipment amounting to 613.10 million dollar but the assets so increased have not made the company either to generate the cash flows or to generate the profits. Apart from the above factors there are factors too which shows that the areas of going concern are assessed at high level like sudden increase in the increasing rate of Accounts Payable as compared to accounts receivable, effective working of competitors, etc. Particulars 1999 2000 Change (%) Accounts Payable 73.0 277.20 279.73 Accounts Receivable 72.0 218.40 203.33 Conclusion and Recommendation The company One Tel is in the telecom industry and has been growing since then. The company has not considered the type of risks that is present in the business. Therefore, the factors have been identified which have contributed towards the inherent risk at the financial reporting and account balance level. In both the levels, it has been found that there is the high level of inherent risk which the auditor shall consider while planning the audit. The company has also the high risk for going concern assumption. It is recommended for the company to adopt the procedures and incorporate the system in such manner that the risk may be mitigated. References ASA 315, (2014), Auditing Standard ASA 315, available on https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_315.pdf accessed on 24/05/2017. Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisionsContemporary Accounting Research,30(2), pp.579-606. Cohen, J.R., Krishnamoorthy, G. and Wright, A.M., 2007 The impact of roles of the board on auditors' risk assessments and program planning decisions.Auditing: A Journal of Practice Theory,26(1), pp.91-112. Knechel, W.R., 2007. The business risk audit: Origins, obstacles and opportunitiesAccounting, Organizations and Society,32(4), pp.383-408. Karen KW, (2014), Risk in Auditing The Inherent Risk available on https://www.hkiaat.org/images/uploads/articles/PBEPIII_inherent_risk.pdf accessed on 24/05/2017. Leong, C.T., 2009, Inherent risk assessmenta new concept to evaluate risk in preliminary design stage-Process Safety and Environmental Protection,87(6), pp.371-376 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 Monroe,G. and Woodliff, D. R. (2013), TheImportanceOfInherentRiskFactors: Auditors Perceptions. Australian Accounting Review, 3: 3446 Nosberger T, (2015), Why do we need Audits and Auditors, available on https://www.unifr.ch/ses/pdf/cours/Audit_methodology_FS_10.pdf accessed on 24/05/2017. Ryu, T.G. and Roh, C.Y., 2007, the auditor's going-concern opinion decision-International Journal of Business and Economics,6(2), p.89 Shariff, A.M. and Chan, T.L., 2008, Inherent Risk Assessment- Inthe 2008 Spring National Meeting Wielligh SPJ, (2015), High Inherent Risk Elements in financial statements of Listed South African Long Term Insurers, available on https://journals.co.za/docserver/fulltext/meditari/12/1/meditari_v12_n1_a11.pdf?expires=1495604697id=idaccname=guestchecksum=53A2B132B5C10DF197A7DE8BCEB79E30 accessed on 24/05/2017.