Auditor Independence and Non-Audit Services
At the time of conducting the audits, the auditors are responsible for following the generally accepted standards of auditing (Wong and Millington 2014). Auditor independence refers to the independence of the internal auditor or an external auditor from parties who have financial interest in the business that is being audited in fair means. Furthermore, Independence means integrity as well as an objective approach to the audit process. The auditor should be independent from the client company where the audit opinion will not be influenced by any relationship between them. The auditors are expected to give an unbiased as well as honest professional opinion on the financial statements to the shareholders (William, Glover and Prawitt 2016).
Non-audit services are those services that are rendered by the auditors to his clients that are out of scope (Srivastava, Rao and Mock 2013). This takes into consideration tax related services, management services as well as promotion of clients business at the same time. These services are provided mainly in exchange of additional income or any form of non-monetary advantage. Furthermore, it is noted that contributing non-audit services actually leads to the impairment of independence of auditor at the time of rendering services to the potential clients. One of the major segments that need to be taken into consideration is the impact of non-audit services. It is important to consider the fact that audit quality is a major issue that often receives criticisms from the stakeholders as well as regulators. Advocacy, on the other hand, is one of the threats to independence to auditor that needs to be taken into consideration in the particular situation. Advocacy refers to the situation where an auditor gives an opinion but the people feels that the quality of the audit is being compromised. Ethics will be compromised when an auditor renders advocacy services and thereby adversely affect auditor’s independence (Soh and Martinov-Bennie 2015).
In this particular situation, it is noted that independence of an auditor gets threatened hugely when an auditor takes any monetary or non-monetary benefits other than the prescribed fees for the audit services (Simnett, Carson and Vanstraelen 2016). The auditor may take any other benefits from that are not mentioned in the audit agreement or engagement and affect the auditor’s independence. In this situation, the client was offered a holiday package voucher for the audit firm member. In case the auditor accepts such type offer, then there is a case when auditor tries to accept non-monetary benefits that affect auditor independence (William, Glover and Prawitt 2016). If the auditor will keep on receiving the extra benefits that should not be availed by them, then threat to independency of the auditor will also increases at the same pace
Threats to Auditor Independence
In this particular situation, it is noted that auditors spouse, dependent as well as parent and siblings are closed family members (Peters and Romi 2014). Financial interest takes into consideration debt guarantee, short-term or long-term securities as well as ownership that are directly owned by the person in association with the persons or through intermediary when person participates as well as supervises at the time of making the investment decisions that controls over the intermediary (Simnett, Carson and Vanstraelen 2016). In this case, the father of the proposed accountant is the financial controller for the particular business. In that scenario, if Michael accepts the given offer for being part of audit team, then it will endanger the independency of the auditor (Marques, Santos and Santos 2013).
In this particular situation, it is noted that there is close relationship present between the client, employees as well as officers and directors who gets influenced by the risk that aligns with the business environment of the client (Louwers et al. 2013). Addition to that, in most of the cases an auditor is endangered of being sympathetic as well as associated with the client. There is close relationship present with the client that leads to high levels of trust with the client as well as representing the data in an accurate way. Furthermore, it happens that auditors already have the necessary information of the client as she had been a part of LTH just a month before. The auditor was responsible for carrying out the services that requires essential tax calculations after making the accounting entries for the year ended 30th of June 2015. Therefore, it is not feasible for an auditor to audit his or her own work (Junior, Best and Cotter 2014).
There are various forbidden services that are give to the clients as well as auditor should give any service that actually compromise their independence (Hayes, Wallage and Gortemaker 2014). Addition to that, there are several measures that need to be implemented that will strengthen the independence of an auditor and these are as follows:
One of the measures that should be applied for intensification independence of an auditor is rotation of an audit partner (Eilifsen et al. 2013). This means rotating system of audit partner that eliminates the danger over knowledge as well as self-centeredness as it will encourage the independence characteristic without any type of substantial cost. Furthermore, knowledge on institutional as well as historical will be made available to the team members that will help them in maintaining high quality of audit (Duncan and Whittington 2014).
Measures to Strengthen Auditor Independence
It is necessary to have an efficient audit committee who should maintain high level of transparency. This will act as an effective tool so that auditor independence is maintained in the most appropriate way (DeFond and Zhang 2014). The audit team should be well-qualified as well as have the essential resources where they can easily assess the objectivity and independence that results in future outcomes that are made available to the public.
An auditor who is independent should aim at regulating as well as contributing towards maintaining quality audit and audit independency at the same time (Cohen and Simnett 2014). One of the main characteristics is efficient oversight of an auditor who takes into consideration independence especially from the political interference as well as audit profession. Auditor should maintain transparency that will represent true as well as fair and involve in sharing of confidential data (William, Glover and Prawitt 2016).
It is necessary for an auditor to follow the ethical standards at the time of conducting audit such as Auditing Standards as well as Code of Ethics (Byrnes et al. 2015). They should follow the international set of high quality independence as well as ethical standards that can help in reducing the complexities in the give auditing procedures.
In this particular part, management of risk is explained that is an important element used for managing the spare-parts inventory but in most of the cases, managing the stock is executed very poorly (Arens et al. 2015). Addition to that, business organization considers the risk management factors where they analyze the risk as well as take steps for reducing the risk as far as possible. Some of the risks that are identified by the business organization include reputational risk, commercial risk as well as risk relating to health and safety (Srivastava, Rao and Mock 2013). There is downtime risk that leads to financial loss where business organization fails to take into account implementing technologies in relation with the risk management of spare parts. Furthermore, there are two types of business risks in association with the purchase of spare-parts as well as equipment at the time of planning of audit. The risk that should be taken into consideration by business organization is operational risk as well as strategic risk (Arens, Elder and Beasley 2014).
Strategic risk is one of the risks that are not related to the trade approaches as well as selection of the organization who decides over the right or wrong products and market (Srivastava, Rao and Mock 2013). This particular risk takes into consideration inventory management of spare parts where company manages with the spare parts in the most appropriate way. Business organization selects ad-hoc facilities where the business spends on the items for purchase through use of no definite policies that are formal in nature. The organization appoints experienced managers who can provide their active judgment especially on daily procedural issues. It is necessary for an organization for selecting aspects used for managing the spare parts in a way where there is standardization of financial management activities. Business organization should be focusing more on investing finance to manage with the stock as well as risk level in association with the potential loss. They need to carry out the extended downtime experiences as well as losses that get associated with a way for handling the risks by use of large quantities purchase. It is then required for business organization for implementing ad-hoc strategy that should be appropriate in nature. Furthermore, when a company cannot afford the extended downtime as well as large investment in stock, it is then needed for an organization for finding better strategy for managing the spare parts in an effective way (Simnett, Carson and Vanstraelen 2016). Therefore, it is required to evaluate the alternative ways for mitigating or avoiding probable losses in the most appropriate way.
Risk Management in Spare Parts Inventory
Operational risk is other risk that is associated with the operational downtime. Addition to that, risk is related with the selected approach depending upon the execution level (William, Glover and Prawitt 2016). It is necessary for the business organization for setting strategic management approach who fails to execute in an efficient way. Business organization should be implementing a policy for stocking at the time of making decisions in relation to the standardization. It is the organization who manages with the operational risk that assures proper implementation of approaches and manages with the inventory in proper ways (Srivastava, Rao and Mock 2013). It is necessary to manage the risk that is faced by business organization that assures identifying the suitable approaches used for correcting the practices.
In this particular section, associated risk considers as the inherent risk (Simnett, Carson and Vanstraelen 2016). Addition to that, inherent risk takes place because of omission or error as noted in the financial report that owes to the factor than the control failure. Furthermore, the risk takes place where the nature of transaction is complex in nature and the situation need high level of judgment especially for financial projections. There is various risk association that has an impact over the stock balance as well as account receivables amount. In that case, there are some accounts where transactions are highly associated with inherent risk such as risk related to the stock management (Srivastava, Rao and Mock 2013). Therefore, it hugely affects the balance of accounting based on the transaction classes.
There are various associated risks that include operational risks as well as detection risks. In addition, there is a probability that an auditor will not be able to note the misstated figures in association with the financial statements (William, Glover and Prawitt 2016). It is the case when organization conducts analysis as well as substantive test procedures for future purpose. For this, detection risk is one of the risks where an auditor had concluded that there is no significant error found at the time of implementing audit report (Srivastava, Rao and Mock 2013). In this risk, auditor expects for implementing accounting balances as well as assessing the accountant. Furthermore, it affect with the accounting balances that depends upon the given transactions as well as amount that is involved in the transaction. Therefore, most of the accounts are susceptible in nature that aligns with the type of risk and the risks associates with purchase account, revenue account as well as sales account and inventory account (Simnett, Carson and Vanstraelen 2016).
Reference List
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