The Importance of Auditor Independence
Part A:
Identification and assessment of audit threats associated to the auditor independence:
While performing the work of audits, the auditors are assigned with the responsibilities of adhering with the accepted principles concerning audits. Independence of the auditors need integrity and an objective approach relating to the process of the audit (Arnold et al., 2013). The independence of auditor in general sense represents the independence of the internal and external auditor having financial interest in the business that is not audited.
The independence of auditor generally signifies that internal or the external auditor performs the work of audit through reasonable means. Additionally, independence is referred as integrity and objective approach in performing audit (Beil, 2013). The auditor should be independent from the client company where the opinion of the audit is not influenced by the association amid them. The auditors are anticipated to provide a bias free and true opinion of the financial position of the company to the shareholders.
Non-audit service is referred as services, which is provided to the client by auditors which is beyond the scope. Non-audit services comprise of tax services, administration service and simultaneously promotion of the client business (Belloc 2017). Non-audit services mostly consist of additional income or any kind of non-monetary benefit. Additionally, it is found that contributions in non-audit services results in impairment of independence of auditor while providing services to the probable clients. An important consideration must be paid in assessing the effect of non-audit services. It is vital to consider the material fact that quality of the audit of is the centre of issue that faces criticism from the stakeholders together with the regulators.
Advocacy is another threat of auditor independence that should be considered is this situation. Advocacy is defined as the state of affairs where the auditor state their opinion however individual considers the quality of audit is jeopardised (Chuprunov, 2013). Ethics would be jeopardized when the auditor provides service of advocacy and simultaneously creates an impact on the auditor’s independence.
Under this situation, it is noticed that the independence of auditor is facing threat since the auditor considered taking monetary and non-monetary benefit other than the prescribed fees for performing the work of audit. The auditor might consider taking the other benefits, which is not specified in the agreement of audit or engagement, effecting the auditor’s independence (Freeman, 2013). In the present circumstances, the client was provided with the holiday package voucher for the member of the audit firm. If the auditor accepts such kinds of offer, then there might arise a situation where the auditor can consider taking the non-monetary benefits that ultimately creates an impact on the auditor’s independence. If it is found that the auditor is constantly receiving additional benefits, then threats to auditor’s independence is increased.
Non-Audit Services and Their Risks
Under these circumstances, it is noticed that the spouse of auditor together with parent and siblings are closely related family members. Financial interest such as debt guarantee, both short and long-term securities and ownership that is directly owned by the person together with individuals or through intermediary, the participating and supervising person consider the decision controlling investment decision. As understood in the present situation if Michael considers accepting the present offer for being the part of the audit, then it might result in threat of auditor’s independence (Gul & Nurmazilah 2013).
In the present situation, it is found that there is a close association amid the clients, employees, officers and directors that is influenced with the risk associated with the business environment of clients. Additionally, it is found that in large number of situation where the auditors face threat of acting sympathetically with the clients. In the present situation, a close relationship is found to be present which ultimately creates a greater degree of trust to provide the client with the accurate data (Liu, 2015). Additionally, it is noticed that the auditors possess the essential information of the clients since she had been the part of the LTH prior to the month. The auditor is held accountable for executing the services, which needs necessary tax computations after recording the accounting entries for the year ended 30th June 2015. Hence, it is not practicable for performing their work of audit.
Identification of safeguard for the above stated threats:
A large number of forbidden services that is provided to the clients and the auditor is required to provide any service that usually jeopardize the auditor’s independence. In addition to this, numerous measures that is required to be applied would strengthen the independence of the auditor (Moeller, 2016). These are as follows;
- An important measure that must be implemented for strengthening of the auditor independence is rotating the auditing partner. This signifies that the rotating system of auditing partner removes the hazard of excess knowledge and self-centeredness because it would encourage the independent nature of the auditor without any form of considerable cost (Mohd, 2015). Additionally, institutional and historical knowledge would be available to the team members, which would assist in maintaining higher quality of audit.
- It is vital to form an effective audit committee that would provide greater degree of transparency. This would form an efficient tool of maintaining the independence of auditor in an appropriate manner (Montgomery, 2013). It is necessary to have a highly qualified audit team with necessary resources where they could gain the access of the objectivity and independence originating from the upcoming result, which is made accessible to the public.
- An auditor that is independent must target in regulating and contributing towards the quality of the audit and independency of audit similarly. The primary feature surrounds the auditor is the efficiency in considering the independence particularly from the political interference along with the audit profession (Moscardo, 2013). Auditor must maintain the transparency, which would offer a true and fair view involving the share of private data.
- An auditor is under the obligation of following the ethical standards while performing the audit by adhering to the Auditing Standards and Code of Ethics (Mustaq, 2013). Auditor is required to follow the international set of higher quality of independence together with the ethical standards, which would assist in eliminating the complexities involved during audit process.
Answer to Part A:
Risk involved in spare-parts inventory:
In the present situation, the risk involved in management is explained that forms the vital element that is used in the administration of the spare-parts however in large number of circumstances; administration of the stock is poorly performed. In addition to this, business organization should consider the risk of administering the factors where they assess the risk along with the steps that is necessary for eliminating the risk to greater extent (Pickett, 2013). There are few risks, which is identified by the business that includes commercial risk and reputational risk and risk associated to health and safety.
It is noteworthy to denote that there prevails a risk of financial loss where it is noticed that the business organizations have constantly been unsuccessful in taking into the consideration of applying the techniques of assessing the risk related to spare parts (Porter et al., 2015). During the planning of audit namely two audit related risk are related with the business.
Advocacy – Another Threat to Auditor Independence
Operational risk and strategic risk forms the vital risk for the business in the present study that needs to be considered. Risk that are not associated with the trade is known as strategic risk and it becomes necessary for the business to determine appropriate selections of products and market (Russell, 2013). Such risk considers the inventory management of the spare parts where the organization manages the spare parts in an effective manner.
It is noticed that business generally make the use of auditing practices where the organization can choose to spend on the purchase of products by using a policy that are definite and possessing the formal characteristics.
The organizations consider the appointment of the experienced managers that can provide active ruling particularly on the regular business process. The organization shoulders the responsibilities of selecting appropriate method of managing spare parts where organization usually considers the process of standardization for financial management.
Business firms must be placing emphasis on investing more to administer the level of stock and risk together with the probable loss. They must perform the extended amount of downtime experience for losses that is related with the handling of risk by using large quantities of purchase. It becomes vital for the business to apply the ad-hoc strategies in an appropriate manner (Vallabhaneni, 2013). Additionally, when an organization is unable to afford the lengthy downtime along with the investment in stock and simultaneously it is necessary for a company in locating the best alternative strategy for administering the spare parts in an effective manner. Hence, it is vital to assess the best alternative options of mitigating or avoiding the probable losses in an effective manner.
Operational risk on the other hand is another risk that is linked with the operational downtime. Furthermore, the risk is associated with the selected approach in respect of the implementation level. This becomes vital for the organization in forming the strategic management approach that fails to perform in an efficient manner. Business organization must be applying the policy for maintaining stock during the decision making process for standardization (Wells, 2014). The company manages the operational risk, which assures the appropriate association of the approaches and administration of the inventory in an effective manner. Administration of risk is necessary faced by the business, which makes sure in the identification of the appropriate approaches used for correcting the practices.
Audit risk and impact on the accounting balance:
As noticed in the present situation it is found that the associate risk comprises of the inherent risk. Furthermore, inherent risk arises due to the omission or error as noted in the financial report owing to the factor other than the control failure. Additionally, risk arises because of the nature of the transaction is multifaceted in nature and the state of affairs requires higher level of judgement particularly for the financial projections (Russell, 2013). There is numerous risk in association with the impact over the balance of stock and accounts receivables. As it has been found currently that the there are some kinds of accounting works that is to a greater extended associated with the inherent risk. One of the example is in regard to the current situation is the risk that is related to the management of the stock. An assertion in this regard can be bought forward by stating that it results an impact on the accounting balance relating to the class of transactions.
Numerous kinds of associated risk are associated with the identification of the risks. To be more precise there could be a certain circumstance where the auditor might in no circumstances would successfully recognize the figure that is misstated in the books of accounts.
It represents the situation when the commercial firm performs the analysis along with the procedure of substantive test procedure for the upcoming prospect. In order to identify the risk the auditor is expected to apply the method of identifying the balance of books of accounts, which ultimately keeps a check on the work of accountant simultaneously.
In addition to this, it creates an impact on the balance of the account that is reliant on the transaction along with the amount, which is involved in the transaction (Mustaq, 2013). Hence, a large number of the accounts are susceptible to the nature, which aligns with the type of risk, and the risk associated with the purchase account, revenue account together with sales account and inventory account.
Reference List:
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Vallabhaneni, S. (2013). Wiley CIA Exam Review 2013, Internal Audit Knowledge Elements. New York: Wiley.
Wells, J. (2014). Principles of fraud examination. Hoboken, NJ: J. Wiley & Sons.
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