Auditing And Inherent Risk

Question: Discuss about theAuditing And Inherent Risk. Answer: Inherent Risk at Financial Reporting- Causes Discussed: The chances of occurrence of misstatements or errors in financial recordings due to factors other than the lack of internal operational control are mainly attributed to inherent risk. The few main causes of the inherent errors can be discusses as: Complexity of financial transaction Dynamic nature of the controlling standards Higher level of stringency in statutory norms Necessity of maximum judgment during financial budgeting for any project or financial year In this context, Sanderson (2013) mentioned that the inherent risks are one of the significant risks that the assessors need to detect most essentially during the audit process. The audit process actually needs the thorough in-depth understanding of the total operations process on going in the organization, One Tel here, and evaluate the risks that can be associated to the overall process. The financial reporting is also evaluated during the process and the causes of inherent risk gets analyzed alike the other risks like control risks and detection risks. The most common occurrence of the inherent risks is observed in the financial service processes. The contributors of inherent risk indicate that the chances of inherent risk are proportional to the complications, changing nature and stringency of the norms which enhances the complicacy in the maintaining the financial services correctly. Here, the present scenario is to understand and realize the main contributors of inherent risk to the financial reporting at One Tel, Australia. Impacts of the following are identified to be maximum contributing in the inherent errors: Competition in the Telecom Sector: Lothe (2013) stated that the Australian telecom market is an over grown market with very dense competition. The overall sale volume or profit margin of any particular company is dependent and inter-linked with the marketing strategies and performance of thee other competitors in the market. With more than 35 odd telecom operators in Australia, the survival of a single operator is dependence on the competition in the market with the most leading operators in the region. One Tel occupied the fourth position among the largest telecom providers in Australia with extreme completion with Telstra, Optus and Vodafone. The extreme level of competition and the variety of offers provided the customers with lots of option to select and even switch over depending on the availability of different offers at that particular phase of time. The customer behavior mapping at the beginning of the fiscal year can emerge out to be completely. Beck and Mauldin (2014) specified that the errors that can creep into the system due to the mismatch of the forecasts, can lead to the inherent errors in the financial records. The records maintained in the previous parts of the fiscal year keeping in view the future sale forecasts lead to inherent risks on the complete reversal of the market conditions. Effect of Multiple Substitute Services in the Market: The present condition of telecom market offers a series of multiple service providers in the market. The automatic impact of the excess of substitute services in the market provides multiple options for the customers which causes the constant switching over from one service provider to the other. Ihendinihu and Robert (2014) mentioned that customer loyalty is at a decreasing trend and the occasions of portability are mostly observed to lead to a bad debt for the previous service provider. The customers using post-pay services use the services for almost a whole bill cycle and when the bill is generated, the same remains a question on payment. The customers, who switch over mostly keep a pending bill and creating a bad debt for the service providers. One Tel also suffers from similar case and the recoding of the bad debt is highly essential as the correct figure can only lead to the actual revenue volume of the organization. One Tel need to be particular about the appropriate policies to recover the pending payments as far practicable. Else, the sales figure gets into ambiguous figures leading to inherent risks in every step. The profit margin and the tax calculation become ambiguous influenced by the incorrect bad debt figures incurring even more inherent risks in the process. Qualification of the Top Management: The top management of the organization consists of the board members and the directors including some of the senior most positions in the organization (Kannan et al. 2014). The top management of an organization deals with the main strategic operations of the same. Here, in case of One Tel, the composition of board members and the senior management is significant in determining the potential and effectiveness of the decisions taken by the team. One Tel like other organizations, have concentrated in taking more number of technical members in the board. In this context, Rust (2011) mentioned that the technical members can truly be helpful in operations teams and can prove to be most promising in resolving technical issues. On the contrary, to lead to a financially strong strategy to lead to a strong financial position in the market, board composition needs to have more number of financial experts in the organization. Only this can lead to lowering the inherent risks in the organization due to supervision and guidance of financial recordings under experts. Autonomy of Board: Study has revealed that inherent risks are incurred in the system of financial recordings once the board composition tends towards autonomy. In other words, William (2016) stated that independence of board members can lead to changes in decisions and financial recording processes in the organization. The changes in operations or recording processes lead automatically the inherent risks in the process. The autonomy of board is dependent on the fraction of non-executive members in the board (McNeil et al. 2015). Here, the non-executive board member is in equal proportion to the executive board members of One Tel leading to a considerable board autonomy leading to inherent risk to a considerable amount. Absence of Team to Manage the Auditing Process in One Tel: The senior team members of the finance and technical department need to constantly monitor the operations and financial recording process in One Tel. Here the most important part is that the internal auditing part can be performed by the selected senior team. According to Zeff (2016), the team need to oversee the complete audit process to ensure clear understanding of the complete operations process of One Tel in addition of assisting the external auditors through the audit procedures. On the contrary, Sadgrove (2016) mentioned the responsibility of the team is also to ensure no unfair non-conformity is placed on the organization. Being aware of the full process inside One Tel, thorough overseeing the operations, financial and auditing process by the team can reduce the chances of inherent risk in One Tel. Training and Development Program for the Employees of One Tel: The one process that can ensure continual development of the employees of One Tel is training and development. The senior team members can be given the responsibilities to train the finance team who maintain details of all the financial transactions and the records thereof. The inherent risk is caused mainly to lack of correct concept of recording the financial transactions. Training and development programs can help in clarifying the concepts leading to lowering the inherent risk associated with the misstatements in financial transactions. However, Zadek (2013) mentioned constant monitoring the performance of the trainees are equally vital in reducing the inherent risks in the organizations like One Tel. The variety of products is launched at every time and the financial recording processes get affected. The trainers need to be at constant monitoring so that the changes in processes cannot impact the recording processes. Issues Related to Ambiguity in Revenue Recognition: The dual mode of services of One Tel has different scenario for revenue recognition. In case of pre-pay services, when a customer purchases the talk time voucher or data card or even rate cutter packs for a stipulated period, the service is not used completely as soon as the voucher is purchased. The ambiguity is observed among the finance team in determining the revenue recognition time. Whether the purchase of voucher should be recognized as revenue or when the service usage notification reaches the service provider. On the contrary, Mironeasa and Codină (2013) mentioned that the post-pay services are used for a complete bill cycle and then the bill is generated and remains dependent on the customer for payment. Now the revenue recordings are to be done on usage notification or payment remains confusion for One Tel. Here, One Tel needs to have an expert team to remove the confusion to eliminate the inherent risk associated with the ambiguities. Causes of Inherent Risks at Account Balance Level: There are certain factors that may lead to inherent risk in any organization at the account balance level. It is necessary for the management to identify such inherent risks and devise strategies to eliminate the inherent risks. Some of the most common factors causing inherent risks are discussed below: Two Different Ways of Service Offering: Prepaid and postpaid are the two major modes of service offerings made by One Tel in the telecom market. Prepaid customers pay prior to using telecom services whereas postpaid customers are just the opposite of the prepaid customers who pay after using the connection. Presence of two completely different modes of service offering makes it difficult for the accountants to calculate the total figure of sales revenue on any particular date. Problem may also arise in regards to calculation of trade receivables as services are offered equally to both types of customers though the payment process is different. On the other hand, Bowling (2014) mentioned that determination of provision for bad debts is one of the challenging aspects related to accounting in the telecom sector due to multiple payment options and service types. Prevalence of Multiple Tariff Rates: One Tel, like any other telecom company in Australia has a wide range of tariff packs for its customers. These also differ depending on whether a customer is prepaid or postpaid. There are various top-up recharges, message packs, data packs, rate cutters and others available for prepaid customers of One Tel. On the other hand, there are different types of postpaid connections available from One Tel and the charges of call rates, data usage rates and others are determined by the type of connection taken by a postpaid customer. This makes revenue recognition and sales account difficult for the account of One Tel. On the other hand, accountants are required to segregate the total sales data into postpaid and prepaid ones to ensure that only confirmed sales are entered in the profit or loss account. Determination of bad debts also becomes difficult. Evaluation of the Going Concern Concept for One Tel: Going concern concept in the field of financial accounting is concerned with the sustainability of any organization. This accounting concept makes an assumption that a business organization is established with the intention of doing business for a considerably longer time frame. This requires a business to treat its financial transactions in a way to recognize this going concern concept. In this context, Gunin-Paracini (2014) stated that going concern concept requires companies to spread the cost of any asset throughout the entire life of the asset in a suitable proportion. On other words, a company is required to recognize its assets and expenses over the entire period in which benefits from the same is expected to be derived. However, here it is important that mere making assumptions does not ensure of long-term sustainability. Instead, there are certain internal and external factors that influence the sustainability of an organization. In addition, both financial and non-financial factors can influence the growth and non-sustainability of an organization. In current scenario, one of the most positive factors contributing to the long-term sustainability of One Tel is the high growth in the telecom sector of Australia. This has a positive impact on the sales revenues of the company. This would further strengthen the financial base of the organization. However, from a porters five forces model, the threat from new entrants needs to be considered as high for One Tel. This can be attributed to the scope of making high profits from the Australian telecom sector which might attract a large number of new firms into the market thereby raising the competition level. On the other hand, it is also important to consider the financial performance and financial position of One Tel. Analysis of the financial performance of the company reveals that there is not much need to be concerned about the liquidity position of One Tel as the same has improved considerably in 2000 compared to the same in 1999. On the contrary, One Tel is seen to be indulged in high degree of debt financing. As mentioned by Jang and Kim (2016), high level of debt financing can badly affect the financial performance of a company as interest payment associated with such high debt level reduces the profit margin of the company. Reference List: Beck, M.J. and Mauldin, E.G., 2014. Who's really in charge? 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