BFA303 Auditing : Accounting and Financial Level

Introduction

Organization is accompanied by several factors which are implemented in value chain activities of organization to accomplish set objectives and goals. In this report, various factors will be considered to measure the inherent risk at the balance accounting and financial level.  This report is divided into three specific parts. In the first part, all the factors that would contribute to an increased inherent risk assessment at financial report level. After that, other factors which be considered that would contribute to inherent risk at the accountant balance level.  In the end, the area of going concern of One telecommunication would be assessed as high medium and low (Hopkin, 2017).

Answer to the question no. 1

Answer to question no-1

One telecommunication is multinational telecommunication company. There are various factors that would contribute to an increased inherent risk assessment at financial report level will be considered.

Inherent risk

This is one factor which would be considered by auditor while determining the risk level along with control risk. This risk arises due to the material misstatement consisted of financial statements and audit area. Nonetheless, assessing risk in the business trend to be more critical process than other components of audit. There are several factors that would contribute to an increased inherent risk assessment at financial report level will be considered (Abraham and Shrives, 2014)

Nature of clients business

This factor reflects the operational activities of business. One telecommunication is multinational telecommunication company which has been providing telecommunication services around the globe. Therefore, in order to cope up with ramified changes in technology, One telecommunication has to make consistent changes in its technologies and process system due to obsolesces of its technologies used in its value chain activities. The inherent risk in the One telecommunication would be obsolesces of its technologies used in its process system.

Result of previous audit

After analyzing the financial statement and audit report of One telecommunication it is considered that account and balance of company is audited by same auditors since last three years. Therefore, it would help him to gain substantial experience in auditing the financial statement of company. For instance, if auditor audits the financial statement of company then he would set higher inherent risk in its financial statement and if he has been auditing the financial statement of company then it would set low level of inherent risk (Ruhnke and Schmidt, 2014).

Initial vs. repeat engagement

It is simple for the auditor of One telecommunication to decide the inherent risk on the basis of previous audit. If auditor has found high inherent risk in its previous audit then in the present audit it could also set high inherent risk, provided that, there is no improvement and justification given while auditing the financial statement of One telecommunication by the company (Messier and Austen,  2010).

Related parties

One telecommunication has various related party transactions such as entering into joint ventures, subsidiary company and holding company. There would be higher inherent risk if One telecommunication has complex reporting frameworks due to the recording of comprehensive income in the financial statement and different disclaimer of auditors of sub units of organization (Cannon and Bedard, 2016).

Non- routine transaction

These are transactions which do not occur on normal basis such as business loss, natural disaster, and strategic business alliance. Therefore, there are chances that auditors of one Telecommunication could make mistakes and errors in recording of these transactions due to lack of experiences. In this case, auditor would set high inherent risk if One telecommunication has these types of transactions in its business functioning (Bratten, et al, 2013).

Judgment requirement

One telecommunication may face problems while recording its assets in the financial statement. For instance, accountant of One telecommunication booked all the assets in financial statement at the book value. On the other hand, auditors has given disclaimer that One telecommunication has not been reflecting true and fair view of its assets and should implement impairment test by following AASB 136. In this case, it will be logical for the auditor to set high inherent risk in reporting of its financial statement on the basis of act done by accountant.

 Make up of accounts

It is considered that One telecommunication has complex business activities. Therefore, there may be chances of mistakes and errors in recording of books of accounts and details of company. It would be logical for the auditors to set high inherent risk for the company at the financial statement reporting level.

International and domestic reporting

One telecommunication needs to follow international reporting frameworks in order to establish harmonization in its reporting frameworks. One telecommunication has high inherent risk in its international reporting frameworks due to the complex international reporting frameworks.

Profit Smoothing

One telecommunication has drastic changes in its earning since last four years. In 1999 it had earnings of $ 25.2 million which got decreased to loss of 230.4 in 2000. This much of changes in its profit earning capacity provide logical high inherent risk in the manipulation of its earning capacity (Maletta, 2013).

Strategic risk assessment

This assessment is implemented to evaluate all the long term and strategic risk in the business functioning of One telecommunication. It is procedure which is implemented to evaluate all the risk in long term strategic planning of One telecommunication. This company could mitigate these all inherent risk in its several factors such as judgment requirement, non routine transactions by implementing strategic risk assessment. Furthermore, inherent risk arises from wrong entry posting and different viewpoints of auditors in financial statement. Strategic business risk assessment could identify these several inherent risk affecting factors such as judgment requirement, wrong entry posting, nature of business and complexity in accounting and reporting frameworks.

Answer to the question no. - 2

In this part of report several risk factors have been indentified which contribute to an inherent risk at account balance level of One telecommunication. These sorts of risk assessment at account balance would estimates nature of business, fair value assets, and complexity in booking entries for the business.

These are the several risk factors have been indentified which contribute to an inherent risk at account balance level of One telecommunication given as below.

Different viewpoints of accountant and auditors

It is considered that accountant of company has followed behavior of free will while recording of business transactions in the books of accountant of company. In this case, it is logical for the auditors to set high inherent risk in recording of entries at account balance level. For instance, If accountant of company has booked all of its assets at book value and as per the auditor disclaimer these assets should be booked at market value after implementing impairment test as per the AASB 136.  Therefore, in this case, auditors of One telecommunication would set high inherent risk while auditing the financial statement at account balance level (Griffith, 2015).

Recording of Goodwill

It may be possible for the accountant to book the value of its assets wrongly in the books of accounts of company. For instance, if goodwill of One telecommunication has been recorded by accountant is home grown then it may reflect high inherent risk while booking entries at accountant balance. As per the IFRS rules and regulations One telecommunication could also showcase goodwill amount only when it has acquired it from outside.

Complex accounting issues

It is evaluated that One telecommunication has complex business functioning and has several business units. There could be chances that accountant of different business units may follow different accounting concepts and theories as per the behavior of free will. It will increase the complexity of accounts and financial recording of business practice.  

Profit smoothing

It is analyzed that One telecommunication may have different accounting profit while recording its consolidated income in its annual financial statement. This financial risk could be mitigated by One telecommunication by following IFRS rules and regulations in each of its business units in their separate books of accounts. Therefore, One telecommunication may reduce its inherent risk in its accounting profit by following IFRS rules and making proper level of disclosure in its books of accounts.  Nonetheless, auditors of One telecommunication would set high inherent risk in its accounting profit due to the drastic changes in its profit earning capacity in last four years. Ideally, these drastic changes are noticed when company want to reduce its tax payment by manipulating its accounting profit (Krishnan and Wang, 2014).

Answer to question no.3

One telecommunication is an international company which has several subsidiaries and business units on domestic and international level. It is evaluated that One telecommunication has been following international financial reporting standards while reporting its financial statements. However, due to high complexity in its business and sluggish market conditions One telecommunication may face high inherent risk in its going concern capacity (Amin, Krishnan, and Yang, 2014).

Going concern concept

This concept reflects that company will run its business for long run and would not go in liquidation. One telecommunication has been running its business on going concern concept and has a vision to run its business for long run. In addition to this, directors of One telecommunication have also given their declaration that company is not going to wind up in the short span of time.

High risk

It is evaluated that if company has not paid its dues and debts on timely manner and has been failed to discharge its short term and long term liabilities then it may result into high risk to its going concern capacity. It is evaluated that accounting profit of company in 1999 was $ 25 million which went down to the loss of $ 230.4 million in 2000. It reflects that company has been facing downturn in its business functioning. It has also failed to earn at least return required for its capital employed. Nonetheless, Australian telecommunication market has shown very less amount of growth due to rapid changes in technologies and market conditions (Feng and Li, 2014). 

Medium risk

After evaluating the market conditions of telecommunication business, it is observed that company has medium risk in its going concern capacity. Nonetheless, other factors of One telecommunication reflect high risk for its going concern capacity.

Low level of risk

It is evaluated that company has good amount of capital in its balance sheet. However, the amount of losses which has occurred to One telecommunication throughout this four year is very high. These losses could be mitigated if company makes re- engineering in its value chain activities. therefore, by evaluating the capital structure and its weight age, it could be considered that One telecommunication has low level of risk in determining its going concern capacity.  

Factors affecting going concern capacity of organization (Identification of going concern risk as high medium and low)

This company has been following GAAP and IFRS rules and regulations. In order to mitigate all the inherent risk in its financial reporting level and at its account balance level, it has followed International financial reporting frameworks. There are several factors which would be identified for determining the high, medium and low level of risk in the going concern capacity of One telecommunication such as charges on its assets, brand image of company, sluggish market conditions, downturn in its profit earning graph and loss of its business functions (Hsu, 2017).

Therefore, on the basis of these factors, it is considered that One Telecommunication has high risk in its going concern business.

Conclusion 

After analyzing the financial statement of company, it is considered that it is logical for the auditors to set high risk in the going concern capacity of One telecommunication. It has drastic changes in its earning since last four years. In 1999 it had earnings of $ 25.2 million which got decreased to loss of 230.4 in 2000. This much of changes in its profit earning capacity provide logical high inherent risk in the manipulation of its earning while determining profit smoothing of business.

References

Abraham, S. and Shrives, P.J., 2014. Improving the relevance of risk factor disclosure in corporate annual reports. The British accounting review, 46(1), pp.91-107.

Amin, K., Krishnan, J. and Yang, J.S., 2014. Going concern opinion and cost of equity. Auditing: A Journal of Practice & Theory, 33(4), pp.1-39.

Bratten, B., Gaynor, L.M., McDaniel, L., Montague, N.R. and Sierra, G.E., 2013. The audit of fair values and other estimates: The effects of underlying environmental, task, and auditor-specific factors. Auditing: A Journal of Practice & Theory, 32(sp1), pp.7-44.

Cannon, N. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review.

Feng, M. and Li, C., 2014. Are Auditors Professionally Skeptical? Evidence from Auditors’ Going?Concern Opinions and Management Earnings Forecasts. Journal of Accounting Research, 52(5), pp.1061-1085.

Griffith, E.E., 2015. How do auditors use valuation specialists when auditing fair values?.

Hopkin, P., 2017. Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Hsu, Y.F., 2017. The Evaluation and Prediction of the Going-Concern Status for Companies: A Model Based on Structured and Un-Structured Data.

Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.

Maletta, M.J., 2013. An examination of auditors' decisions to use internal auditors as assistants: The effect of inherent risk. Contemporary Accounting Research, 9(2), pp.508-525.

Messier Jr, W.F. and Austen, L.A., 2010. Inherent risk and control risk assessments: Evidence on the effect of pervasive and specific risk factors. Auditing: A Journal of Practice & Theory, 19(2), pp.119-131.

Ruhnke, K. and Schmidt, M., 2014. Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments. Auditing: A Journal of Practice & Theory, 33(4), pp.247-269.