Assessment Value 20 Instructions 1: This Assignment Is To Be

assessment Value 20 Instructions 1 This Assignment Is To Be Sub

This assignment requires an analysis of a case study involving One.Tel, a telecommunications company in Australia, focusing on strategic business risk assessment, inherent risk assessment, and preliminary going concern assessment. You will need to evaluate factors influencing risk at both the financial report and account balance levels and determine the level of concern regarding the company’s ongoing viability based on provided financial data and industry context.

Paper For Above instruction

The case of One.Tel provides a comprehensive scenario for examining various facets of risk assessment in an auditing context, particularly in a rapidly growing and highly competitive telecommunications industry. The objective is to identify and discuss specific factors that heighten inherent risks at the financial report level and the account balance level, and to determine the overall going concern status of the company based on available information.

In assessing inherent risk at the financial report level, several factors must be acknowledged. One significant factor is the company's rapid expansion in a highly volatile industry. One.Tel, launched in 1995, experienced swift growth, which inherently increases the complexity of its financial statements and the likelihood of misstatements or misinterpretations of financial health. The company's reported revenues across multiple geographic segments—with Australia accounting for approximately 64% of revenue—show a diversified but geographically dispersed operation. Such diversification, while beneficial, complicates consolidations, currency translations, and risk assessments across jurisdictions (IFAC, 2013). Furthermore, the industry’s competitive environment, characterized by burgeoning smaller carriers reliant on leased infrastructure from dominant players like Telstra, amplifies revenue volatility and profit margin pressures (Deloof, 2003). Rapid technological advancements and market evolution also pose significant risks due to potential obsolescence or unanticipated operational costs.

Another critical factor influencing the inherent risk assessment is the financial health of the company, notably its loss-making position and liquidity constraints. According to the financial statements, One.Tel reported operating losses, significant abnormal items, and negative retained earnings, which heighten the risk of going concern issues (IAS 1, 2018). The company’s high debt levels, as evidenced by borrowings and current liabilities, and negative equity in some accounts, complicate the assessment. These financial pressures may also affect the valuation of intangible assets, such as licenses and goodwill, which are susceptible to impairment if the company faces financial distress (Barth, 2011). Any misstatement or aggressive accounting in these areas amplifies the inherent risk of inaccurate financial reporting.

Some of these inherent risk factors, especially those related to financial health and industry dynamics, can be identified during the strategic business risk assessment phase. Strategic risks such as market share decline, revenue degradation, and operational challenges related to technological obsolescence are crucial in this regard (Gordon et al., 2014). The company’s reliance on leased network capacity suggests operational risks that could impact financial outcomes and must be considered during the strategic review. Additionally, the company's governance structure, featuring a Board with limited industry-specific managerial experience, presents risks related to oversight and strategic decision-making (Brown & Agboola, 2017). Identifying these risks early provides auditors with insights into areas requiring heightened scrutiny during detailed risk assessments.

Turning to the account balance level, inherent risk factors are often more granular. For instance, receivables are prominently reported, with significant balances for both current and non-current assets. The aging and collectability of receivables present inherent risks of overstatement if doubtful debts are not appropriately recognized. The inventory levels and valuation, especially in a telecommunications context where inventory may include equipment and licenses, are another risk area prone to misstatement. Fixed assets and intangible assets, such as licenses and goodwill, are particularly vulnerable to impairment in a distressed financial situation, impacting asset valuation and depreciation expense accuracy (IFRS, 2018).

Additionally, financial liabilities such as borrowings and provisions represent areas where errors could occur. For example, the classification and measurement of provisions for warranties and legal liabilities can be complex, especially amid financial difficulties or legal uncertainties. Provisions require significant judgment, and the risk of understatement or misclassification is high if not carefully monitored (Arnaboldi et al., 2016). These account-specific risks necessitate detailed audit procedures focused on valuation, existence, and rights & obligations assertions.

Regarding the assessment of the company's going concern status, the data indicates substantial signs of financial distress. The company's negative retained earnings, operating losses, negative cash flows from operating activities, and significant borrowing all suggest a potential threat to ongoing viability. The presence of large non-current liabilities and negative equity further complicate the financial stability outlook. Industry conditions, such as intense competition, declining market share, and technological challenges, reinforce concerns about future cash flows and profitability (IAS 1, 2018).

Therefore, it is prudent to assess the going concern as high risk, given the weight of negative indicators and the industry context. The company's ability to generate sufficient cash flows to meet obligations, refinance debts, and sustain operations is uncertain. Factors such as liquidity position, profitability trends, and industry sustainability should serve as the basis for this high-risk assessment. If no corrective strategic actions or financial restructuring plans are apparent or underway, the likelihood of a going concern qualification in the audit opinion increases (Louwers et al., 2019).

References

  • Arnaboldi, M., Lapsley, I., & Lister, J. (2016). Management accounting and organizational control: Design, analysis and use. Routledge.
  • Australian Accounting Standards Board (AASB). (2018). AASB 101 Presentation of Financial Statements. IFRS Foundation.
  • Barth, M. E. (2011). Valuation of Financial Assets and Liabilities. The Accounting Review, 86(2), 591–625.
  • Deloof, M. (2003). Reduced product market competition and managerial myopia. Journal of Business Finance & Accounting, 30(1-2), 25–56.
  • Gordon, L. A., McNichols, M. F., & Wang, L. (2014). Internal control quality and corporate reporting: A review of the literature. Journal of Accounting Literature, 33, 84–124.
  • International Accounting Standards Board (IASB). (2018). IAS 1 Presentation of Financial Statements. IFRS Foundation.
  • IFAC. (2013). International Framework for Assurance Engagements. International Federation of Accountants.
  • Louwers, T. J., Ramsay, R. J., Sinason, D., & Strawser, J. (2019). Auditing & Assurance Services. Pearson Education.
  • Standard on Auditing (SA) 570. (2016). Going Concern. The Institute of Chartered Accountants of Scotland.
  • Brown, P., & Agboola, O. (2017). Corporate governance and organizational performance: The role of the board. Corporate Governance: An International Review, 25(3), 145–160.

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