Internal Audit Function Quality Deter Management †Free Samples

Question: Discuss about the Internal Audit Function Quality Deter Management. Answer: Introduction: In the modern scenario, businesses are exposed to various kinds of risks and the reason behind this can be attributed to immense competition between businesses. Moreover, inherent risks are also those kinds of risks that define the existing loopholes prior to the implementation of internal control measures. These risks cannot be avoided as they automatically prevail in the business operations. In other words, it is inherent in the business affairs (Geoffrey et. al, 2016). Besides, these risks measure the assessment of auditors likelihood that there prevail significant misstatements in the financial statements of a company prior to taking into account the internal control effectiveness. Therefore, inherent risks cannot be safeguarded even by the presence of internal control measures or by an auditors presence. Hence, in the event of an expansion of businesses, they become prone to such inherent risks and therefore, proper tackle of such risks is the need of the hour. The evaluation pr ocesses of risk consist of several factors both internal and external in nature that also accommodate thefts, errors, frauds, etc in the financial statements. Nonetheless, many risks are already recognized by businesses as and when it prospers, and this can be attributed to its control measures and other strategies (Geoffrey et. al, 2016). Further, it is notable that a specific business can be easily evaluated after considering various micro and macro factors that are relevant from the initial period until the procurement of gains, allocation of gains, and payment of taxes, etc. In the presence of effective measures and strategies, businesses are now able to mitigate the risks that are pre-identified in the initial stages and thereafter, corrective actions are implemented in relation to the same (Monem, 2009). However, there still prevails a general tendency amongst many businesses that discovery of misstatements or frauds in the company financials cannot be undertaken unless they t ransform into massive issues. Besides, often accountants tend to disregard such petty issues, thereby assisting such issues to give a path to inherent risks to arise (Matthew, 2015). Hence, prior evaluation of both external and internal factors must be undertaken in order to discover weak zones in the company financials very easily. If such factors are not assessed appropriately, these can mix up and form a bigger issue that can badly influence the performance of a company. This can be proved by the case of OneTel wherein due to the faulty planning on the part of the management resulted in the companys downfall (Cook, 2001). Furthermore, many other factors resulted in the collapse of the company, like ineffective due diligence measures, improper terms, and conditions, etc. In the case of OneTel, it is notable that due to improper implementation of effective actions by the management in order to assess the prevalent risks in the business, the company had to suffer. Therefore, prior evaluation of prevalent risks is crucial and it was failed to be undertaken by the management of OneTel. Furthermore, the managing director and founder of the company also took unethical paths by making fraudulent statements, thereby signifying fraud on the companys part in order to attain more gains. On a whole, this sheds light on the fact that risk assessment is very significant by business in order to safeguard future problems and since OneTel failed to undertake such step, it resulted in its disintegration because the complications and risks existing in its affairs failed to be discovered (Gilbert Terry 2005). Hence, it can be clearly observed how small factors can take the shape of a huge issue and crumble the entire company as a whole. If OneTel had implemented prior risk evaluation strategies, its downfall might be avoided or delayed to some extent, as a backup could have been gained to tackle the obstacles. The first and foremost factor that results in the generation of inherent risks in a business can be attributed to the ignorance on the part of the management in considering the financial statements of the company. Moreover, this ignorance is further admixed by additional factors like the improper action on the part of management regarding aging debtors, unclear cheques, etc. Thus, improper steps on the managements part on such issues shed light on inadequate balance in the accounts of the company. Moreover, since OneTel did not undertake effective risk assessment measures and its management made unethical ways to alter the accounting policies, it had to encounter disintegration in the upcoming future (Wood, 2011). Thus, the accounting processes must be constant and stagnant because it can play a key role in facilitating efficient representation and provision of material information that related parties can understand very well. In relation to OneTel, since it failed to implement acco unting policies for its intangibles and instead considered the deferred expenses, its accounting policies were negatively altered. In addition, there were many inaccuracies in the reporting methods implemented by the company because its account balances were inappropriate. Besides, this is the key reason why the new auditors of the company were forced to provide a qualified opinion in respect of the company financials. Furthermore, in contrast to this, the past auditors of OneTel had offered an unqualified judgment in respect of the company financials that sheds light on the fraudulent measures implemented by the company. Moreover, this is the prime reason why ASIC found the account balances of the company to be completely inappropriate and discovered many hidden expenses and losses done by the company. Nonetheless, these innumerable factors resulted in the generation of inherent risks within the company, thereby ultimately crumbling the company as a whole. Moreover, this also highl ights the fact that the responsibility of the management in respect of the financials is very relevant and provision of inappropriate account balances can not only harm the company but its investors and shareholders will also have to suffer. In addition, since the reporting methods implemented by the company were also entirely inappropriate, the inaccuracies in the account balance were also unidentifiable (Black, 2010). All these inefficacies can be subject to the faulty measures on the part of the management and poor internal control measures prevailing within the company. These are the key reasons why OneTel had to encounter downfall in its upcoming tenure. In relation to the previously mentioned discussion, it is now clear that the reporting methods within a company must be free from frauds or errors, as it can play a key role in the generation of inherent risks and users demand effective reporting from the companies as well. In addition, it is also the responsibility of auditors to adhere to ethical mechanisms in order to identify any inefficacies existing in the financial statements of a company, irrespective of whether such inefficacies are created unintentionally or intentionally by the management (Douglas et. al, 2015). However, it is also observable that the past auditors of OneTel offered a qualified opinion on its financials that clearly sheds light upon fraud on the companys part. Therefore, taking into account every single matter is compulsory for the auditors in order to offer an independent and unbiased judgment. According to the going concern concept, a company will function in the upcoming tenure and there will not be any reason to terminate its proceedings. Furthermore, based on the balance sheet evaluation, it is clearly notable that the liabilities, non-current, and current assets of the company have materially been increased. However, it is quite a shock that even though the company had garnered huge material losses, a significant increase in its share capital can be witnessed (Goodstein, 2011). Besides, a significant decrease in the companys profits is a very bad indicator because it depicts that the company is not progressing towards development, thereby resulting in the loss of stakeholders confidence. The garnered losses by the company depicted in the past year reported above 200% in opposition to the original figures of the past year. Furthermore, the EBITDA of the company was in negative figures that clearly sheds light on the fact that the company had attained major losses in the past year and its profit and loss account have also depicted huge expenses made by the company. Nonetheless, this gives rise to the fact that in order to mitigate the losses, the company can either enhance its revenues or minimize its debt obligations. However, in lieu of such massive loss figures, it is practically impossible for a company to get rid of all such losses in just one or two years (Bhasin, 2008). Hence, it is the responsibility of the management to concentrate on relevant matters in order to safeguard the company from future issues. As the flaws on the part of the company were exposed, it also came to light that the Finance Director of the company had not implemented effective strategies to authenticate the companys financials including trial balances, ledgers, etc. All the previously mentioned inefficiencies on the part of the management depict that the expected duties from the company executives were not duly performed. Due to the ignorance on the part of accounts department, the aging of creditors and debtors became vulnerable to many risks (Brown et. al, 2006). Thus, if the company still does not implement effective measures, a massive loophole will be established betwixt its profits and losses wherein the quantum of losses will be immense. In addition, the company will have to lose the confidence of its stakeholders entrusted upon it. Therefore, the going concern concept is at stake based on the scenario because it is duly affected by factors like faulty management, poor internal control measures, etc. Based on the concept, a company will continue for an infinite span of time, but these issues can be tackled up to a limited period and in the event of huge losses, debt obligations cannot be easily paid off, thereby creating problems for inve stment in future developments (Vause, 2009) Moreover, studies have also stated that companies with a uniform supply of resources are more likely to prosper in the future. Besides, if such a scenario influences the company, it will be nearly impossible for it to overcome the situation and re-conduct its affairs in an effective manner (Bhasin, 2008). Thus, it is significant that companies duly take the concept of going concern into account so that the factors like faulty management, inappropriate internal control measures, etc that exist within the company can be effectively avoided, and the company can be efficiently safeguarded from future concerns or disintegration as a whole. References Brown, J.W, Chasek, P. Downie, D.L 2006, Global Environmental Politics, Boulder, CO:Westview Press. Bhasin, M. L 2008, Corporate Governance and Role of the Forensic Accountant, The Chartered Secretary Journal, vol. 38, no. 10, pp. 1361-1368. Black, W. K 2010, Epidemics of Control Fraud lead to Recurrent, Intensifying Bubbles and Crises, Working paper, University of Missouri-Kansas City. Cook, T 2001, Collapse of Australia's fourth largest telco adds to growing list of corporate failures viewed 15 May 2017, https://www.wsws.org/en/articles/2001/06/onte-j08.html Douglas M.B, Todd, D.F Hermanson, D.R 2015, The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors' Risk, Judgments.Accounting Horizons, vol. 29, no. 3, pp. 695-718. Geoffrey D. B,Joleen K,K. Kelli SDavid A. W 2016, Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors, Accounting Horizons, vol. 30, no. 1, pp. 143-156. Gilbert, W. J Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol. 3, pp. 66-92 Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley Matthew S. E 2015, Does Internal Audit Function Quality Deter Management Misconduct?, The Accounting Review, vol. 90, no. 2, pp. 495-527 Monem, R 2009, The Life and Death of OneTel, Griffith University. Vause, B 2009, Guide to Analysing Companies, Bloomberg Press Wood, D A 2011,The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision, The Accounting Review, vol. 86. No. 6