Factors of Inherent Risk

Discuss about the Auditing and Assurance for Global Environmental Politics.

A business runs under shadow of immense competition, as well as complex scenario. This leads to exposure of the business to various risks. An inherent risk is one that exists in the system due to the nature of business reporting or various forms of regulations. However, such risks cannot be tame by internal control techniques or the presence of an auditor. When the business expands its function, product and selects the process of diversification then the business get expose to the risk that is inherent in nature. The risk evaluation process of the business contains external, as well as environmental factors, misstatements that have occurred, ethical problems like theft or fraud, improper transactions or certain transactions that needs huge estimates of the management (Manoharan, 2011). However, as the business progress, various risks indicated by the management and traced at an earlier level. This depends on the line of action and other factors like measurement and control. The evaluation of the business happens in two major ways like the micro, as well as macro factors that needs to be taken  into consideration from the point of entry till the time revenue is collected, taxes are paid, profits are distributed, etc (Fernando, 2009).  Therefore, the internal control at each level considered under the evaluation of business risk and this leads to tracing of the weak points. However, there is a general tendency that the tracing of any fraud or misstatement is not discovering until it takes a huge form.  The accounts department tends to ignore the mistakes that have small mistakes and leads to a path of inherent risks. For this purpose, the internal, as well as external audit is need to be present so that any weak area can be traced with ease and flexibility.  The presence of mistakes in smaller chunks leads to a grave mistake. In the case of One Tel, gross mismanagement happened and the ignorance of the department of accounts that is present from lower level manager to the Finance director. Innumerable factors like the inappropriate terms and conditions, weak management, ineffective diligence, absence of independence of the Executives and auditors led the downfall of OneTel.  The business did not take serious steps when it comes to assessment of risk. The Founder, as well as the Managing Director found to making claims that were untrue and fabricated. It portrayed that the business was making strong profits and had surplus but it was altogether a different scenario.  As the evaluation of the risk of the business could not be done in an effective manner, it became difficult and complex to uncover the risks that are inherent in nature. If the process were strong then the window dressing can be easily trace. However, the unearthing of the problem happen a common scenario when a grave situation happens. Assembling all these pitfalls, OneTel suffered a huge blow and was unable to operate further.

Irregularity in Reporting and Accounting

The factors of inherent risk arises directly from the improper attention provided by the management in respect of the ageing debtors, as well as creditors, cheques un cleared, trial balance, as well as other statements. Failure in this respect leads to account balance that is inaccurate in nature. The main changes in the accounting policy by OneTel even enhanced the time for existence, as well as establishment of inherent risks that are unique. Repeatedly, the accounting policies were change that made the entire process complex in nature and hence, ascertaining the account balance became difficult, leading to more risk (Kruger, 2009). Accounting policies should be regular and continuous because it leads to better presentation and helps in providing relevant facts that can be understood by the related parties. Initially the company followed a policy of not accounting for intangibles and further changed it considering the expenses that are defer in nature. Hence, a change in a short span of time shakes the foundation and does not go well with the situation.

It projects the shortcomings and leads to complexity in terms of understanding. The irregularity in the process of financial reporting tends to question the balances shown by the account and the new auditors question those (Ernst & Young), they issued a qualified opinion.  However, the previous auditor issues an opinion that unqualified and it covered all the company’s malpractices. As per the submission of financial statements to ASIC, projected imbalance in a number of account balances and hence, innumerable expenditures were exposed and losses that were concealed in nature. Hence, the irregularity and ignorance projected by the management led to inherent risk and this occurred due to the accounting mistakes (Heeler, 2009). If the management does not reveal the actual figure, it leads to suppression of relevant facts and ultimately the investors are duped that will not help the community of the shareholders. The main cause that can be attributing to the failure is the ignorance towards accounts, as the company was involved in marketing, as well as growth. The proper reporting process that pertains to each accounting entry generates the account balance accuracy. This process was disturbed due to mismanagement, as well as internal control mechanism that are weak in nature.  Moreover, practices of fraudulent accounting led to inherent risk and the company faced a severe blow (Goodstein, 2011).  Therefore, it is imperative from the discussion that the reporting process must be free from any flaws otherwise; it enhances the inherent risk and ultimately leads to downfall. Moreover, the auditor should be strong occupied with the relevant tools and techniques to trace any mistake and should provide an independent decision.  The auditors at OneTel failed to carry on their obligation and hence, the entire system became complex in nature (Cook, 2001).

The Going Concern Concept

The assumption of going concern is the main reason that the organization will continue in the near future and there remains no reason for the wind up. As per the evaluation of the balance sheet, it is evident that that there is a strong increment in the current, as well as non-current assets and liabilities. However, it is a point of ponder that the share capital of the company has increased while the profits has fallen immensely that is not a good indicator. Falling profit does not signify a strong momentum and the stakeholders are always interested in the profit earning capacity of the company (Goodstein, 2011). The losses that accumulated in the previous year stands over 200% in contrast to the last year figure. The income statement is projected that shows the EBIDT in negative numbers. It is clear from this that the loss enhanced in big numbers as the expenses in strong numbers was debit to the profit and loss account.  It signifies that the company has two options: either to enhance the revenues or reduce the debts to wipe of the losses (Cook, 2001). However, the size of the loss stands in huge numbers and it is difficult to get it cleared in one or two pears. This needs the attention and hard work of the management to bail the company out of danger. However, the challenge lies ahead because there are many limitations. The flaws of the company are exposed and even reporting is done by the agencies.  It came to the forefront that the Finance Director has failed to authenticate the books, trial balance, journals, ledgers, etc.  Moreover, it was a deficiency on the part of the management because the executives failed to perform their duties. There was a big loophole in terms of ageing report of the debtor, listing of cheques, etc. which were left ignored and this led to a severe crisis. Moreover, the entire management performed in a poor manner that weakened every department. If the company continue to operate in such a fashion then it will create a big gulf between profit and loss where the loss figures will stand severe. Such happening will shake the solidity of the company and will create a negative impact on the functioning and deteriorate the goodwill (Kaplan, 2011). Therefore, the concept of going concern is at severe risk and considering the overall scenario, it can be said that financial mismanagement, weak system of internal control and weak financial scenario of the company will affect the going concern concept (Brown et. al, 2006). It should be evaluated quickly. The going concern concept state that the company will run for an indefinite period. However, the company can bear all such situation until a limit. If the company continue to operate in losses and accumulate big losses then it will be difficult to run the company as sources of funds is block and financial mismanagement will bound to occur. A company can perform when the funds move back and forth and the operation are carried on with ease and flexibility. However, once the crisis strike it will be difficult for the company to operate in such a scenario.  Hence, the company needs to strike on this concept and remove the irregularities so that the company does not wind up.

References

Brown, J.W., Chasek, P. & Downie, D.L 2006,  Global Environmental Politics,  Boulder, CO:Westview Press.

Cook, T 2001, Collapse of Australia’s fourth largest telco adds to growing list of corporate failures viewed 12 September 2016,  https://www.wsws.org/en/articles/2001/06/onte-j08.html

Fernando, A C 2009, Corporate Governance Policies and Principles, Prentice Hall.

Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley

Heeler, D 2009,  Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

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 13 September 2016, https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html

Kruger, P., 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics, pp. 304-329

Manoharan, T.N., 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.