Factors contributing towards the rise in inherent risk assessment

In this assignment, the discussion will b made regarding the different aspects which are related to Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern Assessment. Risk assessment is an important aspect of every business as the assessment of the risk ensures the safety of business from different issues which have potential to create the impact on the performance of business. One.Tel which has been established in the year 1995 is providing different services to the customers. One.Tel is a part of the telecommunication industry which is offering telecommunication industry services at global level.

1. List and discuss several factors that would have contributed to an increased inherent risk assessment at the financial report level. Also, identify which of these factors may be identified during the strategic business risk assessment.

Risk assessment is crucial for business which helps in the analysis of the risks faced so as to ensure that these are dealt in a proper manner. The term inherent risk can be explained as the risk of material misstatement which may occur in the financial statements of the business due to mistakes, errors or omissions due to lack of control. In the case study of One.Tel different issues have been identified which have acted as factors contributing towards the rise in the inherent risk assessment of the financial statements. These various factors have been covered in the below-mentioned points.

• Operating profits are decreasing: Decrease in the operating profits is a major concern for the business. It has been analysed the number of debtors has increased by 203 % but there is a slow increase in the sales of the company (Berk & Kase, 2010).  
• The absence of the managerial skills for maintaining the structure of the company: It has been analysed in the case study of One.Tel that there was the lack of managerial skills due to which the structure of the company got affected in an adverse manner. Due to the absence of the managerial skills, the chances of material misstatement have increased (Finkel, 2013).
• No proper process for reporting of the financial statements: it must be ensured by the company that the reporting of financial statements is done in an effective manner. The condition of liquidity of One.Tel is depleting which has increased the concern and disclosed that the reporting has not been done in an effective manner (Hoffmann & Harder, 2010).
• Low prices of the products offered: Another important factor which has affected the profitability and sales of One.Tel is the low prices of the products which are offered by it to the customers. These low prices have contributed towards enhancement in the customer base of the company but the sales and profits of the company have decreased due to this step was taken by One.Tel (Holland & Shepherd, 2013).
• Decreasing operating funds: Cash loss suffered by One.Tel has increased from $28.9 Million in 1999 to $168.9 Million in the year 2000. This has disclosed that company has suffered cash losses from its operating activities. This is due to incapability of the company to meet the cost of the products (Hwang & Leong, 2013).  
• Lack of adoption of an effective customer credit policy: another factor which has been considered is the lack of adoption of an effective customer credit policy. A credit policy helps in determining when the company must ask its customers for paying back for the goods and services they have consumed. One.Tel has not adopted any policy due to which its receivables have increased and affected its sales, profits and liquidity (James, et. al., 2014).

During the process of strategic risk assessment, various factors have been identified and these factors are low prices of the products and services, credit policies for the customers, lack of managerial skills and lack of effectiveness in maintaining the structure of the company. One.Tel has adopted a strategy where it has set prices of the products and services low for gaining a large customer base which will provide the competitive advantage to the company. This has affected profits of the company. Credit policies have not been adopted for the collection of dues from the customers and debtors. Lack of required managerial skills has affected the structure of the company (Khaire, 2010).

2. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level.

Inherent risk factors are the reasons for the increase in risk to the business and these inherent risk factors must be analysed at right time. For this analysis, inherent risk assessment can be done at the account balance level. Various inherent risk factors have been identified and these inherent risk factors include low prices of the products and services, the absence of the credit policies for customers, lack of the managerial skills, short operational duration, and increasing cash losses from the operating activities and inadequate structure of the company. Low prices of the products and services have enhanced the customer base but due to these low prices profits and sales have decreased (Mayer, 2013). Credit policies for the customers were not there in One.Tel due to which the company was not able to collect cash from the debtors of the company. This has adversely affected the liquidity position of One.Tel. Managerial skills were not developed which have adversely affected the structure of the company. The short span of operation has acted as a barrier for developing managerial skills. Cash losses have also increased as the company was not able to collect cash from the debtors and the debtors have increased due to which losses were increasing (Oxelheim & Wihlborg, 2012).   

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.

Low prices and credit policies affecting business operations

It has been suggested from the analysis of the different factors that assessment should be done of the area of going concern on high priority. This decision has been taken after analysing different aspects which have formed the base for the decision of assessment. Different factors have been considered for the decision regarding the assessment as different aspects related to the case study of One.Tel has gained focus. One of the most important factors on which decision of assessment is based on is the liquidity position of the company which is depleting with the change in the number of receivables and low pricing policy has also affected the position of liquidity of the company. Liquidity of the business determines the effectiveness of the company in paying or meeting the current liabilities and determines the financial condition of the business (Schwarcz, 2012). One.Tel has fixed prices of its products low due to which it has attracted a large number of customers but has not contributed to increase the sales and profits of One.Tel. Another factor is falling sales and profits of the company. Reason behind this fall in the profits and sales of the business are the prices of the products and ineffectiveness in a collection of cash from the debtors due to which receivables of the company have increased (Taylor & Brice, 2012). Cash losses from the operating activities of the business have also increased which is affecting the liquidity of One.Tel. There is a rise in the intangibles of One.Tel which has also helped in taking a decision for the assessment. In the current financial year, One.Tel has purchased plants and equipment of $87.5 Million. All these factors have formed a base for the decision as these factors or aspects discloses the actual picture of the financial performance of the business (Valdez & Richardson, 2013).

Conclusion

This assignment has developed the understanding of different aspects so as to enhance the knowledge regarding the topic of the assignment. In this assignment, the discussion has been made regarding the Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern Assessment, which are crucial for every business. There are different factors which are responsible for the rise in the inherent risk assessment and few of these factors are the low pricing of the products, credit policies for the customers adopted by the business, no proper reporting of the financial statements of the business and losses suffered in operational activities of the business. It has been suggested to assess the area of going concern on high priority as different factors have provided support to the decision taken.

References

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