Auditing Structures of Business Reporting

Question: Discuss about the Auditing for Structures of Business Reporting. Answer: Inherent risks are those that are present in the system due to the complex structures of business reporting or the large network of companies and the dynamic financial regulations. These risks cannot be easily avoided by creating additional internal controls or increased auditor training. As the size and functions of the business increases, product line expansion and diversification also leads to the increased inherent risks. The strategic business risk assessment includes environmental and external factors, prior period misstatements, susceptibility for fraud or theft, the non-routine transactions, or such transactions that require lot of estimates of the management (Kaplan, 2011). It is possible that the business risks assessment can indicate the possibility of the existence of some inherent risks (Barney, 2009). The analysis of business includes micro and macro factors to be analyzed ranging from the entry point until the collection of revenues, payment of taxes and distribution o f profits. Hence, the internal controls at every point are tested under the business risk assessment and so it is highly likely that a few loose areas are discovered by this assessment. The entry point for frauds and thefts is not paid close attention until it becomes a big figure and is evident. The accounts department tends to ignore mistakes involving small amounts that pave the way for more inherent risks. For this reason, the internal and external audit is required to be done without leaving any such susceptible areas. The combination of small amounts of mistakes makes it a bigger one (Gilbert et. al, 2011). At OneTel there as gross mismanagement reported and the clear negligence of the entire accounts department ranging from the lower level managers until the Finance Director. Factors like lack of appropriate and adequate regulation, failure of the management to exercise due diligence, lack of independence of the Executives and Auditors all killed OneTel (Monem, 2009). It woul d not be wrong to say that OneTel had not taken appropriate efforts to carry out a serious business risk assessment also as the Founder and Managing Director of the company were found to be making false claims about the company having big cash surpluses and heading towards reaping high profits. Thus since the business risk assessment was not properly done, it was impossible to unearth inherent risks associated with the same. The inherent risk factors clearly arise from the lack of attention given by the management towards the verification of the ageing of debtors and creditors, un presented cheques, monthly reports, trial balances and such other reports and statements (Barney, 2009). The failure to do this leads to inaccurate account balances and the resultant inherent risks factors. The significant accounting policy changes made by OneTel also increased the possibility for the existence and incorporation of new inherent risks. The frequent shifting of accounting policies made it difficult to ascertain the accurate account balances and subsequently led to increased inherent risks (Monem, 2009). The company first followed a policy of not accounting for intangibles and then immediately changed the policy in the subsequent year regarding deferred expenditures. These inconsistencies in financial reporting made account balances questionable by the next auditors, Ernst Young, and they issued a qualified opinion (Kruger, 2015). The previous auditors had issued an unqualified opinion and covered all such malpractices of the company. The submission of the financial statements to ASIC revealed the irregularities in a majority of the account balances and as a result there was millions of concealed expenditures and concealed losses because of the same. Thus, the negligence shown by both the management and the auditors in the recording and reporting of account balances paved the way for inherent risks to creep in from a majority of the accounts. The root cause was the failure and intentional negligence towards accounts as the company was only focusing on marketing and growth. The accuracy of account balances is arrived by the accurate reporting of each accounting transaction (Hoffelder, 2012). This activity was flawed due to both mismanagement and weak internal controls. In this way, fraudulent accounting leads to inherent risks and the ultimate fall of the company. The going concern assumption is the underlying point for the fact that the entity will remain operational in the near future and there are no practical reasons for the entity to wind up in the near future (Heeler, 2009). Upon analysis of the balance sheet, it can be concluded that there is significant increase in the current and non-current assets and liabilities. The share capital has also increased but the profits have fallen drastically resulting in accumulated losses of over 200% in comparison to the prior year. The Profit Loss Statement has also been referred to which commences with a negative Earnings before Interest, Depreciation and Taxes. The loss only is increased further as expenses like interest, depreciation and taxes are debited to the Profit and Loss Account (Monem, 2009). This clearly indicates that the company has to either increase its revenues or reduce its expenses to clear off the loss. The size of the loss is such that it is not likely to be wiped off in a year or twos time. The management has to take serious efforts to get the company back on the track. However, there are inherent limitations and flaws of the company mentioned and reported by the audit agencies. It is reported that the Finance Director has hardly verified the daybooks, journals, ledgers, trial balances, so on and so forth. The various designated executives are also not suitably verifying the required reports. The debtors ageing report, unpresented cheques listing, so on and so forth are not monitored and all this clearly reveals the inherent flaws and the poorest management by the departments concerned. If the company continues to function and operate at this stage, then it will only widen its net of losses and until strong and operative internal controls are installed in place, it is unlikely that the company will continue in the near future (Christensen, 2011). It is evident that the going concern assumption is at risk and for all the reasons related to financial misma nagement, weak internal controls and overall financial position of the company, the going concern assumption should be assessed as high. References Barney, J 2009, Scandals, Executive Compensation, and International Corporate Governance Convergence: A U.S.-Australia Case Study. Christensen, J. 2011, Good analytical research, European Accounting Review, vol. 20, no. 1, pp. 41-51 Gilbert, W. Joseph J Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92 Heeler, D 2009, Audit Principles, Risk Assessment Effective Reporting, Pearson Press Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press. Kaplan, R.S. 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp. 367383. Kruger, P 2015, Corporate goodness and shareholder wealth, Journal of Financial economics, pp. 304-329 Monem, R 2009, The Life and Death of OneTel, Griffith University.