2. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level.
3. Do you believe that the area of going concern should be assessed as high, medium or low? Identify the factors that are the basis for your decision.
The Management has a major responsibility towards the preparation of the financial information. The management must present financial statements and reports that must be accurate and fair in nature to reflect the efficient structure of the organization. The feature of the corporate governance takes into account, the structures or procedures with the help of which the organizations are directed and controlled. It has a major concern with the internal controls related to the management of the concern and thus has the features of the risks related to the inherency.
The Inherent risk is a factor that is considered by the auditor in the process of assessing the risks of the material misstatements that have an association with the line of items contained in the financial statements. The whole audit areas are considered for the assessment and the auditors consider the planning and designing of the procedures related to the accounts that will have an association with the accounts and bookkeeping. They are the susceptibility levels of the material misstatements that would come into existence if there would be no controls (Hayes et al. 2014). The audit areas are assessed by an auditor assesses as low, medium or high categories of inherent risk.
The factors, which will have an effect on the inherent risks at the financial level, are discussed in the below mentioned points:
<?php include 'blur_pg.php';?><br>t-align: justify;">Integrity and honesty of management and administration
There might be a lack in the objectivity and integrity possessed by the management. The loopholes and drawbacks in the management can thus result in the poor reputation and goodwill of the business and organization. The indication and the lack of the honesty and integrity can be given by the number of attempts made towards the limitation of the accessibility of the auditors towards the people or other factors (Ruhnke and Schmidt 2014).
Experience, information and alterations of the management achieved during the period
There may be an effect on the preparation of the statement and reports related to financial performances by several factors. The factors constitute the inexperience, lack of awareness and information and other features and personality traits of the management. The inherent risks are increased and enhanced in situations when there is a frequent turnover in the positions of the management and in the cases where the auditor is observing the same. The honest individuals are expected and have a probability of resigning the positions of management and administration, as they will not take any steps in the spreading up of the frauds within the organization (Arens et al. 2015).
Unusual stress on the administration and management
The management may have many incentives for the misstating of the financial reports and the same are illustrated as under:
- The problems of the cash flows faced by the management
- Liquidity of poor state and condition
- Results of operations and functions undertaken of poor state and condition
- There might be situations in which there is a provision of obtaining bonus and other rewards for the misstatement of the results. The case occurs in cases where the earnings or the prices of shares have an attachment with the schemes of management compensations (Coetzee and Lubbe 2014).
Nature and character of the business of the entity
The latest economic and modern day approaches used by the companies in terms of technology and other aspects will be able to derive prospective benefits. They will be able to set up goodwill and reputation for the company along with reliability based on the sources of income and other proceeds that will be risky in terms of inherency.
The nature of the business of the entity is also affected by a variety of factors that are associated with the same. The nature of the company related to the structure of the capital will lead to an increase in the inherent risk within an organization. Furthermore, the transactions related to the related parties can also lead towards the enhancement of the risks of inherency, as the transactions that have been carried on are not a part of an independent nature or structure (Cohen et al. 2014).
External Factors affecting the industry
There are a wide range of factors that have an effect on the industry under which the entity operates and the factors constitute the conditions of the economy and the forces of competition. These factors have the most noteworthy impact on the inherent risks of an entity on a financial level (Contessotto and Moroney 2014).
The above factors might have led to the increased inherent risk assessment at the financial report levels and the factors among the above that may be identified during the strategic business risk assessment consists of the following:
- The risks that have aroused from the nature and character of the business and the overall entity
- The risks that have arisen from the transactions that have been recorded and processed by the auditors and the management
- The risks of pervasive nature and character that takes into account the technical aspects that are necessitated by the staffs and the management of the entity
- The integrity and honesty of the managers will also constitute the important factor of strategic risks related to the risks of inherency
- The inexperience, lack of awareness and information and other features and personality traits of the management can lead to risks and inefficiency (Hines et al. 2015)
The several inherent risk factors that may have been contributed towards the increased inherent risk at the account balance and transaction level that are listed as follows:
The accounts that have a likeness of being altered and modified
The complications involved in the transactions of underlying nature
There are various judgments that are involved in the determination of the balances of accounts
The nature of vulnerability related with the assets towards any losses or misappropriations
The occurrences of transactions having nature of complexity and unusualness
The dealings and the transactions that is not subjective to the ordinary processes and procedures
The consequences or the results derived from the previous audit that were conducted and that many frauds and errors are involved in the accounts receivables.
There are substantial amounts of the accounts receivable that have remained overdue for a significant period (Huang et al. 2015)
The pricing errors related to the inventories of the company
Cut off problems and others related to the inventories of the company
The approximations and estimates that have a relation with the provision for doubtful debts that had an inaccurate position in the past (Hribar et al. 2014)
The concept of the going concern assumption is considered as the principle and significant part and segments of the financial reports and statements. The management of the company have the major role and responsibility to assess the ability of an entity to grow and continue to be qualified as a business of going concern. The assumption of going concern must be used appropriate and the same is the major responsibility that must be considered by an auditor during every engagement in audit. The ISA 570 i.e. Going Concern has an established feature of the details that must be considered by the auditors to check the appropriateness of management in looking forward to maintain the policies and principles of the assumption of the going concern (Myers et al. 2016). The major features of the concept of going concern are as follows:
The crisis for credits has also led to a downturn in the economic conditions. Further, the lack in the credit available due to the credit crisis and downturn in economy can have an effect on the ability of a company in continuing itself as a going concern. Thus, this factor is relevant for the auditors to analyse the budgets prepared by the management.
The managers give disclosures related to the financial statements of the entity and the auditors has the liability and responsibility to take steps in analysing the disclosures. The disclosures help in the evaluation about the continuing feature of the company as a going concern.
The management, those charged with governance, other members of the entity along with the auditors do not contain the ability of predicting or forecasting the future situations or events of an organization. The situations on the going concern is thus a hideous issue and cannot be identified by anyone easily i.e. the same requires effective analysis and evaluation. The unexpected effects related to the, credit crisis and the economic downturn that can have severe impact can understand this and can hamper the entity will full speed and haste (Dhaliwal et al. 2013).
Therefore, the uncertainty of the assumption of going concern and the vague references and connections found in relation to the auditor’s report and the financial statements cannot be taken in a nature of guaranteed events and situations in future. The guarantee can only be given if there is any certainty in the provided or obtained references related to the entity.
The current conditions of economy do not alter the management or the responsibilities of the auditors that has a relation and connection with the assumption of going concern. There are no hesitation about the past year events and the outlooks based on the challenges to be faced in the present and the future times (Sundgren and Svanström 2014).
Thus, based on the above discussions, we can see that the area of assumption must consider the analysis and assessment that must be rates as per the probability of high, medium or low situations.
The ISA has described a wide range of factors that has relevance towards the utilisation of the going concern from the point of view of the management. It has a wide range of factors that include the following:
- Signal and indications related to the withdrawal of monetary support through the creditors
- Incapability to act in accordance with the loan agreements and its terms
- Failure of a chief market, authorization, permit or most important supplier
- Non-cooperation and compliance with the requirements related to capital and other legal ones
- The borrowings that are fixed in term and is approaching maturity but has no prospect of getting repaid or renewed
- Excessiveness in the reliability on short-term borrowings
There might be an existence of one or more situations in the entity that are highlighted in the standards and discussed above. The existence is not of proper significance about the existence of the material uncertainty. On further analysis and identification, there are prompts provided by the auditors for the performance of the procedures of audit. The analysis is done for collecting appropriate evidences of audit for the confirmation of the existence of material uncertainty.
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