Situation 1: Advocacy Services
While carrying out the auditing procedures it is required by the auditors to maintain ethical code and accepts the general accounting practice of audit. For making the true and fair opinion of the financial statements of the entity, it is essential for auditors to maintain objectivity, integrity and partiality in carrying out auditing procedures (Arens et al., 2014).
Situation 1:
Auditors in addition to providing audit services to their clients also provides non-auditing services and they fall exterior the auditing scope. Such services might comprise of promoting the business of clients, performing the taxation services and other management related service. One of the serious concern of auditors which performing such services is the lack of their independency. The given case study depicts the threat of advocacy as one of the pronounced threat and this arises when the auditors are engaged in promoting the business of their clients. Such threat might be perceived by individual that leads to compromising the objectivity while carrying out auditing tasks (Eilifsen et al., 2013). Therefore, the code of ethics would be breached if auditors perform advocacy services and it results in threatening of auditor’s independency.
Situation 2:
The independency of auditors can also be threatened if they receive some monetary or non-monetary benefits in addition to receiving the audit fees that have been prescribed. In this particular situation, members of Clarke and Johnson has been provided with holiday packages by its client Luxury travel limited. This complimentary holiday package is provided to four of its members and this is non-monetary benefits provided to the auditing firm. If Clarke and Johnson accept the offer, the question regarding the independency of carrying out audit procedure would arise. If the amount of benefits received increases, then the threat to auditors’ independency would also increase.
Situation 3:
The close family members of auditors involve spouse, parent, dependent child and siblings and financial interest involves payment regarding debt, person securities in relation to intermediary and those involves in controlling intermediary and making decisions concerning investment. The father of suggested accountant in the given state of affairs is the financial controller of the clients business (Frazzon et., 2014). Michael fathers is responsible for preparing financial report of LTH. Therefore, if the offer of becoming the accountant of LTH were accepted by Michael, there would be loss of auditors’ independency.
Situation 4:
The business environment of clients has intrinsic risk and this arises from improvement of close relationship with staff members, employees, directors and directors of the company. Auditors might develop sentimental relationship and they could be associated with the client business. Representation of auditors might be influenced due to the useful information in relation to the previous assignment of the clients (Fernandez-Feijoo et al., 2016). In this situation, Annette has been involve in preparing the accounting entries and calculating tax of LTH and he was on temporary assignment that was a month ago. Therefore, the self-evaluation services of auditors are not required to be conducted as it is considered unethical on part of carrying out audit procedures.
Situation 2: Gifts and Entertainment
The independence of auditors can be strengthened by following the measures listed below and he classification are as follows:
Adopting the transparent audit committee-, It is very essential on part of organizations to have audit committee with independent and qualified audit members. This will ensure that auditors are independent in providing services to their clients. Some of authoritative pronouncements that are relevant to audit committee are involved and this will help in maintaining the independency of auditors. It will help in gauging the independence and objectivity of auditors so that information about audit report are made public and available to stakeholders (Weirich et al., 2013).
Rotation of auditors- Rotation of existing auditors helps in reducing the threat of auditors becoming over familiar of information about their clients. If the auditors were mandatorily rotated then the considerable costs would be reduced while promoting objectivity aspects. In addition to this, higher quality of audit is maintained if the auditors are becoming aware of institutional and historical knowledge about their clients business.
Global need of auditors’ consistency- There is need for organization to have effective and robust standards of ethics that will be incorporated in formulation of auditing procedures. An international concept of high quality of standards that would minimize the risk of carrying out the auditing procedures.
The two-business risk that is associated with purchasing of equipment and spare parts are strategic and operational risk. For the management of the risk associated with inventories spare parts and inventories is of significantly important. It is well understood by most of organizations to analyse the risk associated with equipment management and adopting few steps and mitigating the risk. There are risk associated with managing of spare parts in relation to adoption of technology and this would lead to downtime risk and ultimately results in financial loss. Maintenance and development of operational process about spares will help in balancing the risks and operational needs with financial limitations. The process of asset management helps in employing of operational procedures for maximizing the return made to investment in buying the spare parts and equipment.
Operational risk- It is the risk associated with the approach for managing the spare parts and equipment. For undertaking the decisions associated with standardization of equipment and spare parts, it is essential for organization to initiate policies. It has been observed from case study that the initiated policy of organization is not aligned with approach of management. Management of risk in relation to purchasing of spare parts of inventories and equipment is feasible things and it should be done in accurate manner. It is certainly possible that the organization will not have suitable approach of implementing the policy for managing operational risk (Louwers et al., 2013). Concerning risk management relating to spare parts and inventories deals with assuring the things that is to be done correctly.
Situation 3: Family Relationship
Strategic risk- The risk that is related to the approach of business and organization choice for selecting the products related to managing the equipment and spare parts. The way company manages the spare parts and inventories is related to strategic risk. It might happen that some organization would have adopted an ad-hoc approach and does not make use of any policies for managing the inventories. Judgement about the equipment are made regularly by employment of some experienced purchase manager. Methods of adopting the financing of inventories comprise of the appropriate approach and it also encompasses the risk that is associated with possible loss. Adopting of the ad-hoc is considered appropriate for the organizations if the risks related with purchasing of spare parts and equipment is handled relating to large purchase quantities and the extended downtime experience is carried out by business (Reding et al., 2013).
The two type of risks identified above is strategic and operational risk. Inherent risk is the risk that is regarded to be associated with strategic risk of purchasing the spare parts and equipment. Such risk arises due to detection of errors and unfair opinion made to financial statements and it does not arise from failure of contributing factors of internal control. Some of other factors attributable to inherent risk is complex transactions involved that leads to estimating the financials by applying greater level of judgment. This has a great influence on inventory balance and account receivables. Based on transactional losses inherent risk has severely influenced account balances (de Almeida et al., 2015).
Detection risk is the risk that is associated with the identification of operational risk for managing the risk related to equipment and spare parts. In such type of risk, auditors makes the evaluation and substantive tests for detecting the material misstatement that are involved in carrying out the procedures of analyzing the financial statements. When the auditors fails to apply the relevant procedures in judging the financial statements, then detection risks are highly expected. Such risks comes from the conclusion made by auditors that no significant errors was found in the financial statements and in recording of inventories. The account of balances that have impact are revenue account, purchase account, inventory account and sales account. The amount and the nature of transactions involve is one of the major factor influencing the accounts of balances. Detection risk has a significant impact because of account balances it is not possible on part of accountant to assess such risk (Basten et al., 2014).
References:
Arens, A., Elder, R., & Beasley, M. (2014). Auditing and assurance services-An integrated approach; includes coverage of international standards and global auditing issues, in addition to coverage of. Boston: Aufl.
Basten, R. J. I., & Van Houtum, G. J. (2014). System-oriented inventory models for spare parts. Surveys in operations research and management science, 19(1), 34-55.
de Almeida, A. T., Cavalcante, C. A. V., Alencar, M. H., Ferreira, R. J. P., de Almeida-Filho, A. T., & Garcez, T. V. (2015). Spare Parts Planning Decisions. In Multicriteria and Multiobjective Models for Risk, Reliability and Maintenance Decision Analysis (pp. 273-296). Springer International Publishing.
Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.
Fernandez-Feijoo, B., Romero, S., & Ruiz, S. (2016). The assurance market of sustainability reports: What do accounting firms do?. Journal of Cleaner Production, 139, 1128-1137.
Frazzon, E. M., Israel, E., Albrecht, A., Pereira, C. E., & Hellingrath, B. (2014). Spare parts supply chains’ operational planning using technical condition information from intelligent maintenance systems. Annual Reviews in Control, 38(1), 147-154.
Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
Lengu, D., Syntetos, A. A., & Babai, M. Z. (2014). Spare parts management: Linking distributional assumptions to demand classification. European Journal of Operational Research, 235(3), 624-635.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2013). Auditing and assurance services. New York, NY: McGraw-Hill/Irwin.
Peters, G. F., & Romi, A. M. (2014). The association between sustainability governance characteristics and the assurance of corporate sustainability reports. Auditing: A Journal of Practice & Theory, 34(1), 163-198.
Reding, K. R., Sobel, P. J., Anderson, U. L., Head, M. J., Ramamoorti, S., Salamasick, M., & Riddle, C. (2013). Internal Auditing: Assurance & Advisory Services.
Weirich, T. R., Pearson, T. C., & Churyk, N. T. (2013). Accounting and Auditing Research: Tools and Strategies. Wiley Global Education.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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