BFA303 Auditing and Functional Statement Level

Question 1

It is the responsibility of the auditor to determine risks at the time of working with clients. In that way, one of the risks that auditors need to be aware of is inherent risk. At the time of assessing the level of risk, it happen those auditors ignore the fact on whether the client has internal control in that place like minor appraisal of monetary declaration for mitigating the inherent risk (Soh, Leung and Leong 2015). It is necessary for the auditor to believe the strength of the internal controls at the time of assessing the control risk of the clients. It is the job of the auditor to assess the inherent risk for evaluating on how to suspect the financial statement declaration that are material misstated based on the nature of client business (Simnett, Zhou and Hoang 2016). There are few key features that can augment inherent risk to some extent and these are listed below with proper justification:

Environment and external factors- There are several environment as well as external factors that lead to increased high inherent risk.

• Rapid Changes-It is noted that trade whose stock becomes outdated rapidly knowledge high inherent risk (Soh, Leung and Leong 2015).
• State of the economy- It is noted that general level of financial growth is other external factors that affects all types of business (Soh and Martinov-Bennie 2015).
• Availability of financing- One of the external factors includes interest rates as well as related financing availability. In case a client faces any issues for meeting the short-term cash payments as well as loan availability, then low interest rates varies that stays in business operations (Botica?Redmayne 2013).
• Prior period misstatements- This means if a corporation had previously made any type of mistake that even was misstated figures, and these errors still present in the fiscal statements. For this, it is needed to combine the previous period misstatements with present year misstatements to see the need for asking the user for adjusting the explanation for the total misstatement (Simnett, Zhou and Hoang 2016).
• Propensity to theft or fraud- In case where convinced asset is liable to theft or fraud, then the account balance level may be treated as intrinsically risky (Carson, Fargher and Zhang 2016).

It is a known fact that financial statements as well as annual reports guide proper ways for determining a true and fair value for any company. There are different types of statements that help in predicting the financial position of a given company such as income statement, balance sheet and cash flow statement (Simnett, Carson and Vanstraelen 2016).

Inherent risk is one of the risks that arises from material misstated figures that are present in the financial statement and arises due to error or omission as a result of factors other than the stoppage of controls (Soh, Leung and Leong 2015). These factors causes because of misstatement due to lack or descend of controls that are treated unconnectedly for assessing the control risk. In addition to that, inherent risk are those risk that are normally treated to be high where high degree of decision as well as judgment gets involved or where dealings of the business entity that are highly multifaceted in nature (Simnett and Huggins 2015).

For instance, inherent risk in the audit for any business organization that has significant trade and exposure in complex derivative instruments needs to be treated significantly higher after comparing it to the audit of a well-managed business enterprise that operates in a relatively stable competitive environment (Soh, Leung and Leong 2015). Here, operational and business plan is one of the factors where the business plans for undertaking all the types that gets connected with the new business plan after determining the alternatives in the most appropriate way. Market condition is one of the factors where the business reports in getting proper financial information after identifying the risks and linking it with the future changes (Sethi, Martell and Demir 2015).

Question 2 

It is necessary for the auditor to recognize as well as assess the risks of material misstatement at the financial statement level as well as declaration level (Seguí?Mas, Bollas?Araya and Polo?Garrido 2015). It is important to understand the fact where it requires identifying as well as assessing the risks of material misstatement, it is needed for an auditor to recognize the risk of misstatement by using the information that is accessible from performing risk assessment procedures as well as considering the accounts and the revelation in the financial statements. The assessor needs to evaluate a situation on whether the recognized risks directly narrate with the financial statements that affect at an assertion level (Soh, Leung and Leong 2015). Further, an auditor needs to evaluate with the types of potential misstatements that effect from the recognized risks, assertions as well as accounts and disclosures that could be affected in some form or other. It is needed for an auditor to assess the likelihood of misstatement that takes into account possibility of multiple misstatements as well as magnitude of potential misstatements for determining the possibility where risk results in material misstatements of the financial statements (Redmayne 2013).

Question 3 

The Going Concern concept is one of the concepts that state an assumption where business should be considered as they will carry on functioning indefinitely or at least long enough so that they achieve with the purpose (Moroney et al. 2014). Addition to that, the idea assumes that business will have the longer life and not closed or sold in the intermediate future. Therefore, companies that are predictable to close in the near future cannot be treated as going concern. This idea is enormously vital to generally accepted accounting principles. It is noted that companies would not have the ability to prepay or accrue expenses without the existence of going concern assumptions (Knechel and Salterio 2016).

Liquidity ratio help in analyzing the ability of the business to pay off both its current liabilities as they become due and long-term liabilities as they become current (Simnett, Zhou and Hoang 2016)

From the above graph, current ratio of One Tel has been shown for the year 1999 and 2000. It is noted that current ratio has been decreased from 1999 to 2000 but has maintained 1.5 in both the years (Kend, Houghton and Jubb 2014). The current ratio help investors as well as creditors to appreciate the liquidity of One Tel Company and how easily that business will be paying off its current liabilities

From the above graph, solvency ratio of One Tel has been shown for the year 1999 and 2000. Debt ratio for the year 1999 arrives at 0.31 and 0.34 in the year 2000 that reveals there is significant decrease in the debt ratio for One Tel Company. The company has lower debt ratio in both the years that reveals a more steady trade with the possible of long life because lower debt means lower overall debt at the same time. Equity ratio for the year 1999 arrives at 0.69 and 0.66 in the year 2000. There is negligible decrease in the equity ratio from 1999 to 2000. One Tel has higher equity ratio should have less financing as well as debt service costs than companies with lower ratios (Soh, Leung and Leong 2015). Debt to equity ratio for the year 1999 arrives at 0.45 and 0.52 for the year 2000. There is significant increase in debt to equity ratio from 1999 to 2000. The given ratio means that One Tel has half as many liabilities as there is equity (Junior, Best and Cotter 2014).

There are three types of profitability ratio that are calculated and presented through use of graphs are return on capital employed, return on assets and return on equity (Soh, Leung and Leong 2015). It can be noted that there is negative figure for each of the profitability ratio that cannot be treated as favorable condition for One Tel. The company failed to generate enough of profits or cash revenues for the given years 1999 and 2000. The company could not meet operational expenses that can be noted after close analysis of cash flow statement of One Tel. Therefore, the company faces shortage of funds and continues with operations from retained earnings as well as additional capital funding issue (Hardy 2014).

It is noted that One Tel Company is suffering from net loss as well as shortage of funds. Still, One Tel Company has adequate assets where they can cover the liabilities as well as losses and can be considered to be medium going concern (Cohen and Simnett 2014).

Reference List

Botica?Redmayne, N., 2013. Auditing and Assurance Services in Australia: An Integrated Approach. Pacific Accounting Review.

Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research. Australian Accounting Review, 26(3), pp.226-242.

Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

Hardy, C.A., 2014. The messy matters of continuous assurance: Findings from exploratory research in Australia. Journal of Information Systems, 28(2), pp.357-377.

Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: a historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.

Kend, M., Houghton, K.A. and Jubb, C., 2014. Competition issues in the market for audit and assurance services: Are the concerns justified?. Australian Accounting Review, 24(4), pp.313-320.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.

Moroney, R., Campbell, F., Hamilton, J. and Warren, V., 2014. Auditing: A Practical Approach. Wiley Global Education.

Redmayne, N.B., 2013. Auditing and Assurance Services and Ethics in Australia: An Integrated Approach. Journal of Accounting & Organizational Change.

Seguí?Mas, E., Bollas?Araya, H.M. and Polo?Garrido, F., 2015. Sustainability assurance on the biggest cooperatives of the world: an analysis of their adoption and quality. Annals of Public and Cooperative Economics, 86(2), pp.363-383.

Sethi, S.P., Martell, T.F. and Demir, M., 2015. Enhancing the role and effectiveness of corporate social responsibility (CSR) reports: The missing element of content verification and integrity assurance. Journal of Business Ethics, pp.1-24.

Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.

Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.

Simnett, R., Zhou, S. and Hoang, H., 2016. Assurance and other credibility enhancing mechanisms for integrated reporting. In Integrated Reporting (pp. 269-286). Palgrave Macmillan UK.

Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.

Soh, D.S., Leung, P. and Leong, S., 2015. The development of integrated reporting and the role of the accounting and auditing profession. In Social Audit Regulation (pp. 33-57). Springer International Publishing.