List and discuss several inherent risk factors that would


ASSIGNMENT: AUDITING AND ASSURANCE SERVICES

One.Tel Case

Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern Assessment This Case is based on Week 5 to 8

Nature of the Entity's Business

One.Tel was launched in Sydney, Australia in May 1995. They were described as a global telecommunications company offering a fully integrated product list including low-cost international and national calls, Internet services, prepaid and post paid calling cards plus GSM mobile phone services. Their strategies as customer-focused and dedicated to providing innovative, quality telecommunication services at reduced prices. Details of total revenue by geographic segment for the year ended 30 June 20001 are as follows:

Country

$M

%

Australia

429.4

64

UK

144.7

21

France

15.1

2

Netherlands

36.6

5

Hong Kong

39.2

6

Other

13.2

2

Total

678.2

 

The Industry

 

 

Australia's telecommunications infrastructure with a fully digitised network is as sophisticated and as modern as any in the world. Land based phone lines penetrate about 96 per cent of all households, with 2 million Internet subscribers and over 7 million Internet users. Mobile phone services are well established in Australia with more than 8 million users or 42 per cent of the population, one of the highest user rates in the world. Telstra, Optus and Vodafone each operate separate GSM mobile networks. Telstra's market share is around 57 per cent, Optus 31 per cent and Vodafone 11 per cent. (Source: US Department of State FY2001 Country Commercial Guide)

Prior to the deregulation of Australia's telecommunications industry on 1 July 1997, there were two carriers. There are now 35 carriers who are often former service providers and are generally reliant upon leasing network capacity from Telstra, although some are developing their own switching and network capability.

The influx of smaller carriers into the telephony market has acted as one of the major developments in producing important competitive results in the deregulated market. These carriers typically provide international and long-distance calls and, more recently, complete telephony services. The

1 Note 22 of Financial Statements for year ended 30 June 2000 for One.Tel Limited, ACN 068 193 153, and Controlled Entities, One.Tel web site growth in revenue does not correspond directly with growth in the number of telecommunication service providers due to greater market competition, reduced prices, and lower revenue per company.

Telstra, the former monopoly carrier, is the dominant provider of Australia's land-based telephony service. This network has nearly 10 million connections and an annual growth rate of five per cent. Telstra still dominates the telecommunications environment although its market share has dropped significantly in recent years.

Mobile phone services are well established in Australia with more than 8 million users or 42 per cent of the population, one of the highest user rates in the world. Telstra, Optus and Vodafone each operate separate GSM mobile networks. Telstra's market share is around 57 per cent, Optus 31 per cent, and Vodafone 11 per cent.

Management

The Board of One.Tel comprised nine members, including five non-executive directors and four executive directors. Due to the rapid growth of the industry described in the previous section significant managerial experience in the industry was limited. The functions of the board included:

i. approval of corporate strategy, and financial plans;
ii. identifying and addressing areas of significant risk facing the company;
iii. reviewing and monitoring management processes and reporting mechanisms;
iv. monitoring financial performance;
v. appointment of the senior management team.2

2 Statement of Corporate Governance in Financial Statements for the Year Ended 30 June 2000 for One.Tel Limited, ACN 068 193 153, and Controlled Entities; One.Tel web site.

Financial Statements3

BALANCE SHEETS AT 30 JUNE 2000

 

 

Consolidated

Parent Entity

 

Note

2000

1999

2000

1999

 

$M

$M

$M

$M

CURRENT ASSETS

 

 

 

 

 

Cash

25

335.7

172.6

164.2

170.8

Receivables

9

218.4

72.0

104.0

58.9

Inventories

10

5.1

2.5

4.5

1.8

Other

11

68.9

49.1

50.8

35.3

TOTAL CURRENT ASSETS

 

628.1

296.2

323.5

266.8

NON CURRENT ASSETS

 

 

 

 

 

Investments

12

-

-

26.0

17.1

Receivables

9

-

2.9

356.7

62.0

Plant and equipment

14

155.7

41.0

85.9

28.1

Intangibles

15

559.8

28.0

522.3

-

Other

11

91.9

157.9

71.1

132.3

TOTAL NON CURRENT ASSETS

 

807.4

229.8

1062.0

239.5

TOTAL ASSETS

 

1,435.5

526.0

1,385.5

506.3

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

16

277.2

73.0

115.5

50.4

Borrowings

17

92.2

7.2

20.2

7.2

Provisions

18

5.8

4.7

5.2

4.4

TOTAL CURRENT LIABILITIES

 

375.2

84.9

140.9

62.0

NON CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

16

-

-

2.3

1.2

Borrowings

17

107.3

62.9

80.5

62.9

Provisions

18

8.2

15.2

8.1

14.6

TOTAL NON CURRENT LIABILITIES

 

115.5

78.1

90.9

78.7

TOTAL LIABILITIES

 

490.7

163.0

231.8

140.7

NET ASSETS

 

944.8

363.0

1,153.7

365.6

SHAREHOLDERS' EQUITY

 

 

 

 

 

Share capital

19

1,225.6

355.6

1,225.6

355.6

Convertible notes

17

0.1

3.7

0.1

3.7

Retained profits/(accumulated losses)

 

(282.1)

9.1

(68.7)

9.6

Reserves

20

1.2

(5.4)

(3.3)

(3.3)

TOTAL SHAREHOLDERS' EQUITY

 

944.8

363.0

1,153.7

365.6

3 Financial Statements for the Year Ended 30 June 2000 for One.Tel Limited, ACN 068 193 153, and Controlled Entities; One.Tel web site.

FINANCIAL STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2000

 

 

Consolidated

Parent Entity

 

Note

2000

1999

2000

1999

 

 

$M

$M

$M

$M

CASH      FLOW       FROM       OPERATING

 

 

 

 

 

ACTIVITIES

 

 

 

 

 

Receipts from customers

 

510.9

300.1

283.3

250.2

Payments to suppliers and employees

 

(684.8)

(328.1)

(327.4)

(250.2)

Interest received

 

16.9

1.9

11.1

1.9

Interest and other borrowing costs paid

 

(11.9)

(3.5)

(7.5)

(3.5)

Income tax refunded

 

-

0.7

-

0.7

Net cash used by operating activities

25

(168.9)

(28.9)

(40.5)

(0.9)

CASH FLOW FROM INVESTING

 

 

 

 

 

ACTIVITIES

 

 

 

 

 

Proceeds from sale of investments

 

-

1.6

-

1.6

Proceeds from sale of plant and equipment

 

-

19.2

-

19.2

Payment for plant and equipment

 

(87.5)

(34.0)

(32.3)

(20.0)

Purchase of licences

 

(525.6)

(9.5)

(523.1)

-

Purchase of Controlled Entities

 

-

(6.9)

-

(6.9)

Payment of deferred consideration

 

(1.8)

-

(1.8)

-

Loans provided to wholly owned entities

 

-

-

(264.4)

(53.8)

Loans provided to other parties

 

-

(2.6)

-

(2.6)

Net cash used by investing activities

 

(614.9)

(32.2)

(821.6)

(62.5)

CASH FLOW FROM FINANCING

 

 

 

 

 

ACTIVITIES

 

 

 

 

 

Proceeds from issue of shares

 

818.5

280.3

818.5

280.3

Proceeds from borrowings

 

139.8

59.0

50.0

59.0

Finance lease principal repayments

 

(11.2)

(4.2)

(11.2)

(4.2)

Dividends paid

 

(1.8)

(2.5)

(1.8)

(2.5)

Share buy-back

 

-

(106.4)

-

(106.4)

Net cash provided by financing activities

 

945.3

226.2

855.5

226.2

Net increase in cash held

 

161.5

165.1

(6.6)

162.8

Cash and cash equivalents at beginning of year

 

172.6

8.4

170.8

8.0

Exchange rate adjustment

 

1.6

(0.9)

-

-

Cash and cash equivalents at end of year

25

335.7

172.6

164.2

170.8

PROFIT AND LOSS STATEMENTS FOR THE YEAR ENDED 30 JUNE 2000

 

 

Consolidated

Parent Entity

 

Note

2000

1999

2000

1999

 

 

$M

$M

$M

$M

Eamings/(loss) before depreciation,amortisation,

 

 

 

 

 

interest, abnormal items and income tax

 

(230.4)

25.2

(57.3)

24.7

Depreciation and amortisation

2

(35.3)

(12.3)

(26.6)

(9.8)

Net interest (expense)/revenue and other borrowing costs

2

3.3

(1.6)

4.3

(1.6)

Operating profit/(loss) before abnormal items and income tax


(262.4)

11.3

(79.6)

13.3

Abnormal items

4

(33.5)

(1.4)

(5.4)

(1.4)

Operating profit/(loss) before income tax

2

(295.9)

9.9

(85.0)

11.9

Income tax (expense)/benefit attributable to operating profit/loss 3 4.8 (2.9) 6.8 (4.0)

Operating profit/(loss) after income tax

 

(291.1)

7.0

(78.2),

7.9

Retained profits at the beginning of the financial year   9.1 5.1 9.6 4.7

Total available for appropriation

 

(282.0)

12.1

(68.6)

12.6

Dividends provided for or paid

7

0.1

3.0

0.1

3.0

Retained profits/(accumulated losses) at the end of the financial year

 

(282.1)

9.1

(68.7)

9.6

Discussion Questions

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.

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.

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