Preliminary Going Concern Assessment †Free Samples For Student

Question: Discuss About the Preliminary Going Concern Assessment? Answer: Introduction This assignment has been executed on the topic Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern Assessment in which discussion will be made regarding the factors which have resulted in the rise in the Inherent Risk Assessment at Financial Report Level and the different inherent risk factors. Risk assessment is an important aspect which directly creates the impact on the performance of the business. A case study of One.Tel has been provided which was founded in Sydney, Australia in the year 1995. One.Tel is a global telecommunications company which is providing different services including low-cost international and national calls, prepaid and post-paid calling cards with GSM mobile phone services and internet services. 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. There are several factors which have contributed towards the rise in the inherent risk assessment at the financial level for One.Tel. These factors are mentioned below: The absence of managerial skills: due to the lack of effective managerial skills, development process of the structure of the company has got affected along with the competitiveness of the company. This has increased the chances of material misstatement of the financial statements of One.Tel (Benson, et. al., 2016). Low operational profits: there is a rise in the debtors of One.Tel by 203 % in the consolidated results and in respective of this, there has been a very slow rise in the sales of the year 1998-1999. One.Tel is ineffective in enhancing the turnover and increases the profits in spite of having a large customer base (Cruz, et. al., 2015). Table 1 has attached below which shows the figures for the analysis of the key performance indicators. Table 1: Key Performance Indicators of One.Tel Parent Entity Consolidated Key Performance Indicators 2000 $M 1999 $M Change $M % Change 2000 $M 1999 $M Change $M % Change Receivables - Current Assets 104.0 58.9 45.1 77% 218.4 72.0 146.4 203% Sales Revenue 359.1 269.2 89.9 33% 653.4 326.0 327.4 100% Operating profit/(loss) after income tax (78.2) 7.9 (291.1) 7.0 Net Margin to Sales Ratio (%) -21.8% 2.9% -44.6% 2.1% Total Operating Cash flows (40.5) (0.9) (39.6) (168.9) (28.9) (140.0) Cash at the end of the year 164.2 170.8 (6.6) 335.7 172.6 163.1 Debtor Days (Days) 106 80 122 81 Lack of effective customer policies: it has been analysed from the above-attached tables that credit policies of the company are not effective which has been depicted from the higher receivables of One.Tel. Trade receivables in the consolidated and parent entity have increased twice in comparison to the revenue (Dash Mahakud, 2012). Hostile pricing policies adopted by the company in the competitive business environment: One.Tel had adopted a low priced strategy for pricing its products due to which it has developed large customer base but this has affected the revenue of the company due to the slow rise in the revenue (James, et. al., 2014). Lack of effective reporting in financial statements: the company must ensure that the financial statements must be presented in a fair and true manner. It has been identified that the financial statements of the company may be presented in an unfair manner. The worsening liquidity has raised a concern on the financial statements of the company (Kepper, et. al., 2014). There has been a rise in the intangibles of the company and scrutiny must be done of that. The deficit of operational funds: From the analysis of the cash flows of the company, it can be analysed that company has suffered cash losses from its operating activities. The cash losses have increased from $28.9 Million to $168.9 Million. Factors which can be identified during the strategic risk assessment are stated below: Credit policies for customers: increasing receivables shows that company has not collected cash from the debtors which have created the impact on the liquidity of the company (Kokolakis, et. al., 2010). Setting low prices for the products: One.Tel has set low prices which have affected the profitability of the company. Lack of effective company structure: lack of effective managerial skills has affected the structure of the company (Labbi, 2014). 2. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level. There are different inherent risk factors which have resulted in the increase in the inherent risk assessment at the account balance level. These inherent risk factors must be dealt in an effective manner so as to ensure that the performance of the business is not getting affected due to these risk factors. Identification of these inherent risk factors must be done in an effective manner so as to eliminate the impact of these risks on the business and on its profitability and growth. One.Tel has adopted a low pricing strategy according to which it has set the prices of its products low. This has affected the profitability of the business at large. Prices of the products must be kept after proper analysis of the costs and profit margin of the company (Moss, et. al., 2010). This will ensure that the profits of the business are not getting affected. Another factor which has acted as an inherent risk factor is the lack of effective managerial skills which are responsible for the ineffect ive structure of the company. One.Tel has started its operation in 1995 and due to this short span of time; it doesn't have effective managerial skills for the management of the operations of the company. One.Tel has adopted poor credit policy due to which inherent risks have increased. One.Tel has also suffered cash losses from its operating activities. There has been the rise in the sales of the company but this sales growth has not contributed towards the increase in the profitability of the company. It has also faced ineffectiveness in the preparation or reporting of the financial statements of the company (Martin, et. al., 2013). All these inherent risk factors have increased the risk of the company. There is a need to adopt effective credit policy which will help in enhancing the satisfaction level of the customers. Effective pricing policy must be adopted so as to ensure that One.Tel is generating high profits as well as maintaining the large customer base. Managerial skills must be developed for the purpose of ensuring that the company is performing well and structure of the company is maintained. For gaining the competitive advantage there is a need to enhance the managerial skills and enhancing the profitability of the business. Pricing policy must be adopted in an effective manner for the Land-based phone lines, Internet services and Mobile telephony services. 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. A company must maintain its accounts in a fair manner so as to present a true and fair picture of the company. After analysis of the financial performance of One.Tel, it can be stated that the assessment of the area of going concern must be done at the high level. The reasons or the factors responsible for this decision are mentioned below: The company has generated cash losses from its operating activities which show that the intangibles of the company have increased at large which creates suspicion. One.Tel has purchased plant and equipment which have affected the liquidity position of the company at large (Nwogugu, 2012). The decrease in profits and increase in cost: Sales of the company have increased but this has not contributed at large to the profits or revenues of One.Tel due to the low prices of the products. This has resulted in the rise in the cost of the company. It is tough to analyse whether the company can earn high profits and recover losses after the rise in the sales (Ruhnke Schmidt, 2014). The liquidity of the company is depleting as there is a rise in the receivables of the company which shows that company is not capable of recovering the cash from its debtors. Management of One.Tel must take steps for resolving this issue and till that issue is not resolved assessment must be done at high priority (Telfer, et. al., 2010). Conclusion From the execution of this assignment, it can be concluded that risk associated with the business must be analysed so as to enhance the performance of the business. This assignment has discussed different factors which are responsible for the increase in the inherent risk and these factors include lack of effective customer policies, hostile pricing policies adopted by the company in the competitive business environment, lack of effective reporting in financial statements and deficit of operational funds. The discussion has been made regarding the factors which are responsible for the manner in which assessment needs to be done of the area of going concern. 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