Independence threats
Introduction:
(A) In a situation when the auditor is not free enough to take a decision, or there is an indirect pressure from the client on the auditor with regard to his views, it is said that the auditor’s independence is jeopardized. The effect of the same under different scenarios is as follows:
- In this situation, Geoff has been asked by LTH to speak about them in a travel agency seminar, with a view to promoting the business of LTH. Also, the appointment of CJI is subjective to the fact that Geoff should give a favorable speech about them in the seminar. The appointment of an auditor can be subject to constraints of law or negotiation of audit fees (Tepalagul & Lin, 2015). But if there is a constraint like in this case, Roth and CJI should acknowledge the threat to their independence in the audit engagement and refrain from accepting the audit.
- Taking any kind of gift be it cash or kind the value of which is more than the specified value amounts to infringement of independence of the auditor. Hence, this offer by LTH to Geoff and his family is going to hamper his independence and is a probable threat. This will influence the decision-making ability and hence, arrive at an independent decision will be difficult therefore spoiling the entire ethical base.
- Michael’s engagement in the audit team is a threat to auditor’s independence because his father is the financial controller to LTH. IT is again a possible threat to the independence of the audit team since there are chances of influence and undue pressure. This can lead to a difference in the decision-making ability and hence, a threat to the overall organization.
- A prior experience of a person who has no personal and substantial interest in the client’s business is in no way a threat to the independence of the audit team. Thus Annette will act as an advantage to the team, and not a threat to their independence. His understanding of the business of LTH is going to be a benefit (Wright & Charles, 2012).
(B) Audit threats in terms of independence can be rectified by taking steps at the very inception of these threats, or else they become difficult to combat.
- Undoubtedly the professional relationship between CJI and LTH is good. But still, there has to be a line drawn between what both parties do for each other in professional and personal capacity. Talking favorably in a seminar for the client is not detrimental to the professional ethics, but soliciting business for the client is against professional ethics. Geoff should refrain from doing so, more so because the engagement of the audit firm is dependent on the same.
- There is no safeguard here except a simple rejection of taking the gift from the client. LTH should not be made to give any such gift to any of the audit engagement partners or audit professionals. Taking any kind of personal favor or gift should be strictly prohibited.
- Michael should not be a part of the audit team because his father is the financial controller of LTH. Including Michael in the team can lead to prejudices and risks of misrepresentation or hiding of audit findings, which is not healthy to the professional spirit of the entire audit team. Hence, even if the audit professional is known to be of high repute or efficiency, holding any personal interest in the client’s business is to be avoided and refrained from (Niemi & Sundgren, 2012). This will benefit the spirit and credibility of the team.
- Including Annette in the team is riskless. Therefore there is no risk in taking Annette in the team and hence no safeguards to be imposed. In fact, taking Annette in the team will be beneficial for both the spirit as well as the efficiency of the team and the team can benefit from his prior experience (Roach, 2010).
Hence, these are the best safeguards in relation to the previously mentioned threats upon the independence of auditors. Moreover, it is entirely in the hands of an auditor to see whether his independence is affected by the company’s intentional or unintentional doings or not. Furthermore, these safeguards can play a key role in establishing a true and fair view of the financial statements of the company, thereby generating an unbiased and independent opinion as well.
- International trade is not a lay man’s play. The business and related risks are high, and so for an audit professional conducting the audit of a client conducting international trade, a lot of caution and care is needed. Mining Supplies LTD has its finance operations in Melbourne and operates in other parts of Australia. However, it purchases from Europe, US, and China. Given the disparity in operations in these different parts of the world, there are Commercial risks as well as political and governmental risks involved (Horngren, 2013). The above-mentioned business risks are very crucial in the smooth functioning of the business. Commercial risks can be of many kinds. From credit risks, which means a change in supplier’s policy of credits, and their credit policy changes, such as delay payment charges etc. Also, foreign markets are difficult to know. Since SDL is working with many countries for procurement, fluctuating foreign currencies, changes in credit system and credit policies, are existing risks of business.
The other type of risk is a political and governmental risk. Changes in the EXIM (Export- Import) policies of the government, changes in relationships between different countries and foreign trade policy changes across nations are a big threat to the business. Also, internal situations which are beyond the control of the company are a big risk in international trade. A delay in supplies and transit losses also pose threat (Ruhnke & Schmidt, 2014). Changing customer patterns in different parts of the globe are not the same in all countries. The demand of the buying country can be different from what the manufacturer is making. Although in MSL’s case, the suppliers make customized goods, the availability of materials in changing demand patterns and timely delivery to MSL is also a challenge (Hoffelder, 2012). Maintenance costs are a relevant portion of the company’s expenses and these can enhance to an immense level in the absence of a proper tracking mechanism. Therefore, this can result in inflation of the company’s other expenses like transportation and administration and in order to avoid destruction of goodwill, the company cannot judge the quality of services offered by such mechanics (Mock et. al, 2013). Furthermore, since there is no other method to procure the equipment from the suppliers, the company is bound to purchase such items directly from the suppliers; thereby resulting in an incapability to minimize its manufacturing costs.
- If there exist business risks, there are also chances of related audit risks involved. For commercial risks, there are so many audit risks involved. Foreign currency risks are difficult to compute. Also, changes in credit patterns in the foreign country will not be reflected in the audit findings as they would not directly affect the business. These business risks can only be identified if there is a concomitant audit or audit module placed within the system of the client. Hence the risk of missing out on these terms in totality is a factor (Christensen, 2011).
The auditor of MSL should be aware of the trade policies and other taxation policies and tax treaties and agreements between all the transacting countries.
The agreements between Australian countries within the continent, the agreements of Australia with European countries, US, Asia, China, as should be known to the entire audit team. The audit professionals allocated should be aware of the existing Exim policies and other trade practices. The prerequisite of an audit plan knows the business environment of the client (Heeler, 2009).
The audit risk arises due to lack of knowledge of business laws of different countries. Any audit cannot begin with no or less knowledge about the countries involved in the business. In other to mitigate these risks, knowledge of the business, it’s clients and suppliers, the specific laws and implications, knowledge of current affairs between countries, their business and taxation laws, their import and export rules should be there (Heeler, 2009). It’s obvious that it’s difficult for a professional to keep in mind so many laws and policies of various countries, but at least some basic working knowledge is a must. In other words, understatement of amounts of closing stock can diminish the profits of the company and overstatement of the same may increase the profits. All these complications can further result in stakeholders’ loss of confidence in the company (Cappelleto, 2010). Nonetheless, the account balances that can be directly influenced in this case are figures of closing stock, revenue figures, and suppliers’ balances.
Hence, these are the audit risks identified in relation to the previously mentioned business risks and thus, the offering of a judgment comprising of errors can be very destructive for the company.
References
Cappelleto, G 2010, Challenges Facing Accounting Education in Australia, Melbourne
Christensen, J 2011, ‘Good analytical research’, European Accounting Review, vol. 20, no.1, pp. 41-51
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press
Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.
Tepalagul, N. & Lin, L 2015, ‘Auditor Independence and Audit Quality A Literature Review’, Journal of Accounting, Auditing & Finance, vol. 30, no. 1, pp. 101-121.
Wright, M.K. & Charles, J 2012, ‘Auditor independence and internal information systems audit quality’, Business Studies Journal vo. 4, no. 2, pp. 63-84.
Niemi, L & Sundgren, S 2012, ‘Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs’, European Accounting Review, vol. 21, no.4, pp. 767-796.
Mock, T. J, Bedard, J, Coram, P, Davis, S., Espahbodi, R. & Warne, R 2013, ‘The audit reporting model: Current research synthesis and implications’, Auditing: A Journal of Practice and Theory, vol. 32, pp. 323-351.
Roach, L 2010, Auditor Liability: Liability Limitation Agreements, McGraw-Hill.
Ruhnke, K & Schmidt, M 2014, The audit expectation gap: existence, causes, and the impact of changes, Accounting and Business Research, vol. 44, no. 5, pp. 572-601.
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