HA3032 Auditing And Assurance

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HA3032 Auditing And Assurance

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HA3032 Auditing And Assurance

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Course Code: HA3032
University: Holmes Institute

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Country: Australia

Questions:
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 the strategic business risk assessment.
2. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level.  
3. Do you believe that the area of going concern should be assessed as high, medium or low? Identify the factors that are the basis for your decision.
Answers:

Answer to 1
Due to extreme competition, businesses are vulnerable to many kinds of risks and inherent risk is one such risk that generates due to business existence as a whole. Effective audit processes and other internal control actions even fail to safeguard the generation of such risk. Besides, these measures can assist in mitigating the impact of such risk to a minimal extent and not completely.
OneTel being a telecommunication company offered its services to customers all around the world as its operations were majorly dependent upon technology and innovation. This highlights the fact that the company had attained the leadership position in the telecommunication segment. However, with the entrance of more companies in this area, the position of the company was majorly affected because such competitors aimed to attain more customers in the market and for such purpose; they started offering services at low rates that made way for the emergence of competitive prices in the telecommunication segment (Kaplan, 2011). Thus, with the ruling of competitive prices in the industry, prices of calls and other communication services became cheaper. Furthermore, this resulted in the decline of the market share of OneTel because it could not retain every customer due to extreme competition (Geoffrey et. al, 2016). Nonetheless, factors that resulted in the generation of inherent risk at the financial reporting stage of the company are:
Based on the company’s financials, it can be viewed that its shares had been issued in a free market. Besides, from $355.6 million in the year 1999, its issued shares enhanced to $1225.6 million until the year 2000. Due to the prevalence of huge investments, the likelihood of occurrence of inherent risks becomes more enhanced. Besides, even though the process of dematerialization has played a part in reducing the complexities of transactions by making them in online form through the opening of Demat accounts, yet there are transactions that are extremely complex and may give a path to inherent risks to incur (Cook, 2001). Therefore, for such purpose, the prevalence of an increased assessment of inherent risk is very required.
Based on the statement of the cash flow of the company, it can be viewed that it had purchased a license transaction in the year 2000. Capitalization, maintenance, registration, and purchase of license are an immense procedure that necessitates massive financial planning and other procedures. Therefore, prior assessment of inherent risks is of urgent necessity in such cases. Besides, the valuation of intangible assets and their charges are some of the calculations that require intervention from the management so that enhanced operations can be carried out (Monem, 2009). In simple words, since such transactions are extremely exposed to various risks and misstatements, there must be an implemented quantum of due diligence or care that can assist in mitigating the impact of such problems. Besides, since these transactions are complicated in nature that necessitates intervention from the management, the assessment of inherent risk also becomes extremely vital (Douglas et. al, 2011). In addition, it can also be viewed from the company’s financials that it had procured many advances and loans that are exposed to mistakes and misstatements as well. Hence, there are still possibilities of frauds that can arise to an indefinite level if proper inherent risk assessment measures are not implemented. Nevertheless, if not for frauds, the related risks with such transactions also necessitate many measures associated with the assessment of inherent risks.
It can also be viewed that there are several abnormal items present in the company’s financials that necessitate enhanced risk assessment processes in order to mitigate their impacts. In addition, it can also be seen that there are massive accumulated losses in the company’s financial statement both at the level of consolidated statement and entity as a whole. Moreover, such immense accumulated losses is a complicated transaction that also requires intervention from the management and that makes the prevalence of effective inherent risk assessment processes to be in place (Matthew, 2015). Moreover, the company had also purchased plant and machinery that in turn had enhanced their value in the company’s financial statements. Such purchasing of assets necessitates effective decision making on the part of the management wherein they have the authority to decide matters relating to the successful purchase of assets. Thus, such decisions on the part of the management also require proper inherent risk assessment processes to be in proper place. In relation to strategic risks, these necessitate management intervention as well and are vital for the successful operation of a business (Monem, 2009). These risks prevail at the uppermost level of the management associated with incorrect or inappropriate decision-making. In other words, management may make an ineffective decision that can result in the prevalence of such risks (Wood, 2011). Therefore, the planning risks like the purchase of licenses, etc are recognized at the level of assessment of strategic risk itself.
Answer to 2
Judgment is the most important criteria in relation to inherent risks because control risks and detection risks can be mitigated but management intervention is necessary for relation to inherent risks. Besides, these risks prevail in the business system even in the existence of effective audit processes and internal control measures. However, the influence of such risks relies upon many factors.

The first factor that plays a key role in enhancing the prevalence of inherent risks is the existence of a vast company network in the business environment. Such company networks altogether result in an enhancement of inherent risks. Besides, broader the network, more the number of companies, higher is the possibilities for risks. Moreover, the management complexities enhance when their abilities to mitigate the impacts of inherent risks decline.
The second factor that plays a role in increasing inherent risks is the existence of related party transactions in a business. This is because the management may have an emotional connection with a particular transaction, and that can increase the possibility of inherent risks. In addition, breach of significant debt covenants is also another factor that can result in an enhanced inherent risk. Moreover, in relation to OneTel, it can be viewed that the company had attained various advances and borrowings that come with covenants. Breach of such debt covenants can result in serious outcomes that may not be good for the company (Cook, 2001). Besides, repayment of such debt covenants is not an easy task and because the company had procured more losses, it would not hold good for the company. Further, there is always a risk of management override that may fail to mitigate the impacts of risks in the transaction or business as a whole. Hence, audit team must be capable enough to outperform the negative impacts of such risks. However, it must also be noted that inherent risks had risen in OneTel because of the incapability of the audit team in the company (Geoffrey et. al, 2016). Therefore, proper knowledge of audit team, training, and education is another requirement that can mitigate the impacts of risks.
Non-routine activities, abnormal transactions etc plays a role in contributing towards an enhanced inherent risk. Such transactions necessitate adjustments and speculations that allow inherent risks to arise. Furthermore, transactions that are related to ideas or estimates of the management are also vulnerable to inherent risks due to the subjectivity of the case (Kruger, 2009). Such transactions that require management ideas or estimates may not be efficient for the business and as a result, possibilities for risks are greater.

Answer to 3
Businesses are initiated with a thought in mind to make it run for an indefinite amount of time so that profits can be obtained every year. Therefore, any affair that can harm such thought must be taken care of. Besides, the investors and other users of a company also expect it to run for an indefinite period so that they can attain profits from the same as well. Therefore, it is crucial for the auditors of the company to examine and look for opportunities in audit processes that can affect the going concern assumption (Manoharan, 2011). The immediate economic crisis is undoubtedly beyond control but controlled and effective decisions can be implemented to avoid such instances. Furthermore, factors that may cause a hitch in the assessment of going concern concept are many. For instance, incapability to tackle strict competition, failure of debt repayment, subsequent losses every year, destruction of assets of the company, etc can result in loss of the company’s goodwill, resources, and ultimately affect its going concern assumption.
Therefore, in order to get rid of such a scenario, it is the responsibility of the management to exert an effective step or corrective action in order to minimize the possibilities of errors. Moreover, some factors are controllable by the management while some may not be controlled. For instance, natural disasters, immediate failure of the market, immediate alteration in the trend, etc are some of the factors that can affect the going concern assumption but at the same time, cannot be controlled by the management (Vause, 2009). Hence, there must be a framework that can assist in highlighting the importance of the scenario and depicting how such scenario can be avoided. Nonetheless, an indicator of high, low, or medium can assist in managing the scenario effectively by allowing implementation of corrective actions whenever needed.
References
Cook, T 2001, Collapse of Australia’s fourth largest telco adds to growing list of corporate failures viewed 23  May 2017,  https://www.wsws.org/en/articles/2001/06/onte-j08.html
Douglas M.B, Todd, D.F &  Hermanson, D.R 2015, ‘The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors’ Risk’, Judgments Accounting Horizons, vol. 29, no. 3, pp. 695-718.
Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016,  ‘Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors’,  Accounting Horizons, vol.  30, no. 1, pp. 143-156. 
Kaplan, R.S., 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp.  367–383.
Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 23  May 2017, https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html
Matthew S. E 2015, ‘ Does Internal Audit Function Quality Deter Management Misconduct?’, The Accounting Review, vol. 90, no. 2, pp. 495-527
Monem, R 2009, The Life and Death of OneTel, Griffith University.
Manoharan, T.N., 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.
Vause, B 2009, Guide to Analysing Companies, Bloomberg Press
Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision,’ The Accounting Review, vol. 86. No. 6.

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