Sharma Enterprises, a mid-sized textile manufacturing company based in Ahmedabad, India, had been thriving in the competitive market for over a decade. Led by Rajesh Sharma, the company prided itself on its quality produ

(a) Explanation of Specific Issues (Funding Risk): When it comes to financial accounting, funding risk is the potential risk that an organisation may face when it comes to its ability to obtain funding from lenders or investors. For organisations that are dependent on external financing, funding risk can be a major concern. If an organisation is unable to obtain the necessary funding to keep operating, it could quickly find itself in financial trouble. In this case, the funding risk is: The potential inability of Sharma Enterprises to secure or sustain sufficient financing to meet its obligations. This risk arises from poor financial management and external pressures, like the company's experience in 2024. A spike in raw material costs drained cash reserves, pushing the company to take a high-interest loan it couldn't easily repay. Unreconciled cash flows and overestimated funds worsened the situation, leaving Sharma unable to pay suppliers or manage debt. (b) Evaluation of Potential Fallout: When it comes to financial accounting, organisations must take into account funding risk in the decision-making process. Internal audit can play a vital role in identifying and evaluating funding risks, as well as in providing recommendations on how to best manage them. By considering funding risk in internal audit, organisations can make more informed decisions that can help protect their bottom line. Funding risk is critical in Sharma Enterprises' audit because it jeopardizes financial stability, as evidenced by the recent liquidity crisis. The audit revealed how sloppy accounting and loan reliance halted supplier payments and salary disbursements, nearly derailing operations. If overlooked, unpaid creditors could pursue legal action, clients might abandon the company over delays, and insolvency could become a real threat. These outcomes would erode market trust and competitiveness in the textile industry. By examining cash flow, debt levels, and funding sources, the audit delivers actionable insights to protect the bottom line and ensure long-term survival. (c) Actionable Steps to Improve Financial Management: There are a number of ways to avoid funding risks when it comes to financial accounting. First, be sure to have a clear understanding of organisation's financial situation and goals. This will help to make informed decisions about how to allocate funds and where to invest. One way is to choose investment vehicles carefully. Make sure to understand the risks associated with each type of investment before commit any money. The internal auditor should recommend three targeted steps to boost Sharma Enterprises' financial management and reduce funding risks. First, overhaul accounting by hiring skilled staff and enforcing monthly reconciliations to prevent cash flow errors like those that masked the shortfall. Second, establish a liquidity buffer - either a cash reserve or a pre-arranged low-cost credit line to absorb shocks like raw material price hikes without resorting to costly loans. Third, implement cash flow forecasting tools to predict funding needs and avoid over-reliance on debt. These measures, grounded in audit findings, address the root issues and strengthen resilience against future financial strain.