Business Finance Auditing Risks

Question: Discuss about the Business Finance for Auditing Risks. Answer: Introduction: An inherent risk is the risk that the risk that has been posed by the error or an omission in the financial statements would lead to the failure of the controls (Ready ratios, 2016). In the financial audit, the inherent risk is likely to take place when the transactions are complex in nature or in the situation wherein the situations include a high degree of the judgement on the part of the company (Tech target, 2016). In order to illustrate, in the case of a financial institution that has just been formed, it has complex exposure to the derivative instruments which may be considered to be higher than the other companies in the same industry (Accounting simplified, 2016). The following are the various factors that affects the inherent risk in an audit: First is the business of the client. If the client is engaged in the business that is very much complex in nature, then that business is likely to be exposed to inherent risks in the audit. Second is the technological changes, if the client is in the business that is exposed to rapid changes in the technological and advancements, then it is likely that the company would be exposed to some of the inherent risks (Research gate, 2016). Third is the experience of an auditor in case he has read the audit report issued by the previous auditor. If the company has the same, then the auditor would know whether the inherent risk for the client under question is to be assessed at high or not. Fourth is the previous engagement, if the auditor has been rendering his audit services to the same client over the previous years as well, then he would actually know the areas where the audit risk is to be assessed at high and where not. Fifth is the previous experience of the auditor. This would include the ability of the auditor to exercise his judgement, exercise his degree of skills and knowledge and experience that he might have gained over the period of previous years (Semo, 2016). Sixth is the non-recurring activities. These are the activities that the company is not usually involved in. That is, there are many of the activities that are conducted during the normal course of the business and hence, the client may not know how to account for the same. This would increase the inherent risk in the audit for that client. And then the auditor will have to plan his audit accordingly (ISA handbook, 2016). Inherent risk at the account balance level: The second question is related with the inherent risk at the account balance level. There are many factors that affects the inherent risk at the account balance level. The major factor is the nature of the business of the client. If the business of the client is such that it faces stiff competition from its competitors, then it is more likely that the client will manipulate his earnings so as to show profitability of its business. This holds true in the case of One Tel too since the company is engaged in the business wherein there are competitors that give a stiff competition to the client. Hence, the audit risk is assessed to be high. The second factor is the entering into the non-routine transactions by the company. An entity usually enters into the activity of sale or purchase of goods or the services. But there are situations wherein the client does not know as to how to account for these events such as when a loss by fire takes place. In the case of One Tel too, though there is not much information given but any loss by fire would have been reported in the statement of profit or loss. So, since this cannot be found in that statement, it cannot be commented upon. Then there is a factor of rapid technological changes. If the business of the client is such that many rapid changes in the technology takes place, then it is likely that the entitys assessed inherent audit risk would be assessed as high. So, is the case with One Tel. An auditor usually has experience with dealing with the business of the client. If he has been the auditor of the same company for many year now, he will know the exact problems that the company would be facing. And in which all transactions should the audit risk be assessed as high. In the case given, information with regard to this is not available, so nothing can be said in this regard. Going concern assumption: The assumption of going concern is one of the accounting assumptions on which the financial statements are prepared. This is the accounting principle that requires the various companies to be accounted for and ensure that the business continues to function in the future. Since the downfall of one company impacts the employees, the society in which it operates, its very important for the companies not to fail. These are the companies that must remain in the business and do not go bankrupt. This is the most important concept in the financial accounting since there are many others that are based upon the assumption that the companies will continue to function in the future. If this principle is automatically assumed, then there would be no requirement for the company to establish the ability of the company to accrue the expenses and make the prepayments for an asset. If this assumption is assumed, then all the expenses would not be required to be incurred and wouldnt be accrued (ACCA gl obal, 2016). The companies are duty bound to inform their investors and the creditors about the possible issues that may be related with the going concern assumption. In order to illustrate, in case the company has been facing the financial difficulties from the burden of the excessive debt, then there are many of the cautions in the notes in the financial statements that are required to be stated.in case, the company is not able to pay off its debt or interest thereon, then it could go bankrupt. There are many of the potential investors that have the right to know in case the going concern is being threatened since that could mean the financial issues or problems for the company (Accounting course, 2016). The assumption of going concern is one of the most vital accounting principles. In the absence of the same, the company will not be able to make the prepayments or accrue any expenses. The going concern assumption is one of the most important measures since it determines the financial position and the performance of the company. It further classifies the assets in the statement of the financial position. Hence this is of an utmost value (Knowledegiate, 2016). In the given case too, now, though it is very tough to determine the going concern assumption of the company. So, further analysis is required for the company. Like calculating the liquidity ratios of the company which have been calculated as follows: Ratios 2000 1999 Current ratio: 1.67404 3.48881 Current assets 628.10 296.20 Current liabilities 375.20 84.90 Acid test ratio: 1.66045 3.45936 Current assets-inventory 623.00 293.70 Current liabilities 375.20 84.90 The above shows a decrease in the various ratios and this is one of the cause of concern for the company. References: AUDIT RISK MODEL. (2016).Www4.semo.edu. Retrieved 28 September 2016, from https://www4.semo.edu/gjohnson/notes/audit_risk_model.htm Audit Risk Model | Inherent Risk, Control Risk Detection Risk. (2016).Accounting-simplified.com. Retrieved 28 September 2016, from https://accounting-simplified.com/audit/risk-assessment/audit-risk.html Going Concern Assumption. (2016).My Accounting Course. Retrieved 28 September 2016, from https://www.myaccountingcourse.com/accounting-dictionary/going-concern-assumption https://www.accaglobal.com, A. (2016).Going concern | ACCA Qualification | Students | ACCA Global.Accaglobal.com. Retrieved 28 September 2016, from https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/going-concern.html Inherent Residual Risk. (2016).Ishandbook.bsewall.com. Retrieved 28 September 2016, from https://ishandbook.bsewall.com/risk/Assess/Risk/inherent_risk.html Inherent risk. (2016).www.researchgate.net. Retrieved 28 September 2016, from https://www.researchgate.net/publication/230001235_The_Importance_Of_Inherent_Risk_Factors_Auditors'_Perceptions Inherent Risk. (2016).Readyratios.com. Retrieved 28 September 2016, from https://www.readyratios.com/reference/audit/inherent_risk.html Team, K. (2014).Importance Of The Going Concern Assumption In Accounting - Business Finance and Accounting Blog.Business Finance and Accounting Blog. Retrieved 28 September 2016, from https://www.knowledgiate.com/importance-of-the-going-concern-assumption/ What is inherent risk? - Definition from WhatIs.com. (2016).SearchCompliance. Retrieved 28 September 2016, from https://searchcompliance.techtarget.com/definition/inherent-risk.