Principles Of External Auditing: Auditing And Assurance Essay

Question:

Discuss about the Principles of External Auditing for Auditing and Assurance.

Answer:

Discussion of the several factors that can contribute towards increase in inherent risk assessment

The inherent risks refer to the risks owing to different error and omission in a financial declaration that can occur for a factor other than control (Arens et al. 2012). The inherent risk of One. Tel is therefore the risks due to the complex transactions or else situations that call for the need of the high degree of judgement concerning the financial approximations.

The different factors that can contribute towards increase in inherent risk assessment include the nature of the business of the client, outcomes of previous audits, initial and repeat engagement, associated parties, non-routine transactions, judgement necessary to record transactions, understanding transactions, factors associated to fraudulent financial reporting, factors associated to misappropriation of assets (Messier Jr 2016). As per the case study, recording the business transactions of operation of the company One Tel in different countries (Australia, UK, and France, Netherlands, Hong Kong and Other) becomes complicated. In addition to this, several competitors in the current telecommunication industry of Australia affect the overall nature of the business. This raises the inherent risk of the company, as there is greater competition, low price and therefore low revenue per business concern (Beasley et al. 2012).

Identification of the factors that can be identified during the strategic business risk assessment

The factors that can be identifies during the strategic business risk assessment include planned detection risk, acceptable audit risk, inherent risk and control risk. The detection of the planned risk includes measurement of risk due to material misstatement greater than tolerable amount. The acceptable audit risk refers to measurement of willingness of the auditors to accept the material misstatements after completion of the audit and to issue unqualified opinion. The management of the corporation can take into consideration the design of the supply network, IT infrastructure, execution issues, accuracy of forecasting, performance of suppliers and talents (Crous et al. 2012). Again, the factors that can be recognized for the business risk assessment include the natural disasters, terrorisms, corruption, and political instability, volatility of price and fluctuations of currency (Kunz et al. 2014). As per the business case study, the operating profit and the retained profits of the consolidated firm is (282.1) negative. This reflects a risk in the performance of the company. Again, as per the consolidated balance sheet statement, it can be hereby ascertained that the total liabilities of the corporation has increased as compared to the previous year 1999. In addition, the cash flow statement for the corporation during the year 2000 represents that there has been cash outflow from both operating as well as investing activities. Therefore, the assessors need to track the cash flows in order to assess the strategic business risks of the corporation.

Discussion of several inherent risk factors that can contribute to increased inherent risk assessment

The several factors that can contribute towards increased inherent risk assessment include the state of the economy, availability of the sources of finance, swift changes, material misstatements in the financial statements, susceptibility to theft or else fraud (Porter et al. 2014). As rightly, put forward by Messier Jr (2016), the inherent risk assessment increases due to impact of the state of the economy on the operations of the business. Again, the availability of different sources of finance leads to increased inherent risk of the business. In addition to this, the material misstatements also contribute also leads to misrepresentation of the correct financial condition of the firm (Arens et al. 2012). As mentioned in the case study, the nature of the business of the corporation also increases the inherent risk. The strategies of the corporation are customer centric that dedicatedly offer innovative, quality telecommunication services and that too at reduced prices. The innovative strategies lead to changes and the leads to increased inherent risk assessment.

Assessment of the going concern

As rightly put forward by Messier Jr (2016), the going concern can be regarded as a business concern that operates successfully and makes profit. Again, the going concern can also be considered as a business that successfully functions without facing the threat of liquidation in the near future. Furthermore, the assessment of the business concern can help in understanding the area of the going concern that can be categorised as high, medium or low (Porter et al. 2014). As per the study, it can be hereby ascertained that the company can be regarded as medium. The assessment of the going concern essentially involves the implementation of the financial ratio, liquidation prediction model (Beasley et al. 2012). The current ratio of the firm is 1.6 that implies that that the company has adequate assets to cover the current liabilities. However, the cash flows from the operating activities as well as investing actions are negative. In addition to this, as per the consolidated income statement of the company One Tel, it can be hereby ascertained that the earnings of the corporation before depreciation, amortisation, interest, abnormal items and income tax is negative. This negative consolidated financial statement reflects an unfavourable financial situation of the firm. Again, the operating profit/loss before abnormal items as well as income tax is negative during the year 2000. In addition to this, the operating profit as well as loss before income tax is negative that subsequently leads to operating loss and negative retained loss (Kunz et al. 2014). Therefore, the going concern can be categorised to be medium with medium expectation regarding the operations of the business for the upcoming 12 months.

References

Arens, A.A., Elder, R.J. and Beasley, M.S., 2012. Auditing and assurance services: an integrated approach. Prentice Hall.

Beasley, M., Elder, R. and Arens, A., 2012. Auditing and assurance services.

Crous, C., Lamprecht, J., Eilifsen, A., Messier, W., Glover, S. and Douglas, P., 2012. Auditing and Assurance Services. Berkshire: McGraw-Hill.

Kunz, R., Josset, D., Scholtz, H., Motholo, V., Graeme, O.R., Penning, G. and Rudman, R., 2014. Auditing & Assurance: Principles & Practice.

Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.

Porter, B., Simon, J. and Hatherly, D., 2014. Principles of external auditing. John Wiley & Sons.

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