Situation 1: Threats to Auditor Independence
While analyzing the situation given in the case, it has found the threat of economic bond will hamper the independence of the auditor. This type of threat appears in the situation because the auditor is forced for presenting the financial statements of company in a seminar. This shows the undue influence on the auditor has been put for promoting the company so that the business of the organization can be increased by getting the more reliability of investors in company. Also, the auditor has been clued-up that if the auditor denies doing so then next year engagement will not be in his favor. (Edwin, 2015). The risk will be evaluated with the quantum of damage it will create to Auditor Independence in maintaining the true and fair reporting.
After considering the condition given, the threat of loss of engagement and threat of self interest are identified. These threats comes in the situation because the company has offered extra free benefits i.e. free holidays packages for audit team member and his family for two weeks. The free benefit has been offered for the coming year audit working so that audit can be done in even way. In this manner, the independence of auditor is in danger situation (Barizah, 2016). The risk in the situation will be evaluated by the level of self interest generated in the mind of audit team member. The auditor will issue the unqualified report if the company is able to create such type of interest and the extent of not reporting the error will increase automatically.
In this condition, after analysis the level of risk the threat of relationship has been identified by the Auditor. In this condition, one of the audit team members has close and cordial relationship with the Finance head of the company. Finance Controller of the company has dominance over Michael, member of audit team, as he is the father of Michael. Because of this dominant relationship, the Finance head influenced the audit team not to report certain matter or to report certain matter in manipulative manner. And this can create the situation of hiding of certain material facts. The risk in this type condition can be assess on the basis of degree of influence in the relationship and for how much time it will present during the audit tenure (UK, 2013).
After listening Annette, the risk involved in the condition under consideration is the threat of Self Review. This happens because the Annette has worked for organization for one month for areas not covered as audit services. The audit member provided the services on accounting entries and taxation matter. The member has build up very good relationship with the employees of the company with whom he has done accounting work finalization. If the audit team member has done mistake in making accounting entries, then he will not report the same in while doing the audit so that partner of audit firm will not scold him. The risk can be assess by ascertaining the quantum of work done by the Audit team member in relation to accounting and taxation matter and the facts suppressed by the her while doing such services (Parker, 2015).
Protective measures the methods which help to reduce the level of risks involved in any particular situation. In case of Audit, the auditor has to use these measures while conducting the audit to protect the independence or integrity so that the reporting done by him is true and fair in letter spirit. The protective measures which are available for auditor are laid down in different and applicable laws, regulations, rules, statutes of the country in the auditor is working. Also, the protective methods can be developed by the audit firm from its past experiences. Sometimes even the client policies lay the safeguards which the auditor will follow to save his integrity. The below are certain protective measures that are generally followed by the auditor in the situations given:
- Differentiating the Audit and non Audit service team member. This means the if the auditor gives audit and non audit services to client, the non services team member shall not be the part of Audit Team for the same client during the same year for which both the services are given to client.
- The member of audit team should work very professionally by applying the different professional ethics made of them. And they should not develop the dominant relationship with any of the officers of the company.
- If there is undue influence on auditor, then the auditor shall vacate the office of audit after informing to appropriate authorities.
- The auditor shall not accept any undue benefit given by client so that he can report about the matters of the company without any mental pressure.
- The audit partner should ensure that audit staff is not related to any officer of the company on the personal front (Livine, 2015).
Every business is full risks or threats. And while conducting the audit, the auditor has to take into account in his audit program the risk involved in the business of the client. The risks involved in the business increases as size and complexity of the business increase. The auditor has to see these risks before the start of the audit. The below are the two risks which are involved the business given in the situation:
- The major business risk involved in the given situation is deteriorating the Customer base. Revenues in the business are earned from the Customers of the products or services in which the company deals. The growth of the company depends on the happiness of their customers. In the given case of company of MSL Mining Supply Limited, the company is acquiring the raw materials from different locations of the world i.e. United States, United Kingdom, China etc. The raw materials are being purchase without having a proper warranty and substitution if case of damage. Similarly, the company is not giving the warranty and replacement to customers and has led to decrease the satisfaction level of customers. If the company wants to make their customers satisfied then the company has to incur the huge cost so that they can give warranty and replacement free of cost to their customers. These costs increase the overall expenses of the company and reducing the margin of the company (Imrie, 2011).
- The other business risk involved in the case is Loss of Goods in Transit. The company is purchasing the materials without having proper agreement with its creditors about the loss of stock in transit. So if there is any loss while transporting the material from supplier to company place, then the loss has to be borne by the company which in itself increases the cost of the company. Non clearance in agreement with supplier led the company in hay way situation which affect the profitability of the company (EY, 2016).
While conducting any audit, there are chances of risk involved in audit. The risk so involved should be taken into account by auditor while planning and doing the audit. The audit should consider these risk to given an uninfluenced opinion on the affairs of the company. The report presented by auditor is prepared after considering the risks of audit otherwise the audit report will not give an actual picture of the company. More importantly, the audit risk shall be defined in accordance with the business risks identified while planning the audit. Following are the audit risks that may be encountered by the auditor:
- Inherent Risk – It is the risk which occurs due to the inherent limitations present in the company. These limitations are due to the fact of having the same procedures and policies that have been prevailing from the inception of the company. The business risk of deterioration of the customer base has been due to the lack of internal control procedures in relation to management of the customer relationship is very weak and due to which there might be chances where the company may incur the losses and can go to liquidation of the company (Long, 2015 and Becker, 2015).
- Detection Risk- The detection risk is the risk that has been encountered in the second type of risk. The presence of this type of risk has been identified because of the fact that the auditor is not able substantiate with the documents and the earlier practices being followed by the company whether the cost of loss of stock will be borne by the company or by the supplier. He has to include in his plan of audit whether the substantive or additional procedures are required for the same or not. The account balances that have been identified in this and will be affected are the stock and account payables in comparison to the last year.
References
Becker E, (2015), “Audit Risk vs. Business Risk”, available at https://www.osyb.com/blog/small-business/audit-risk-vs-business-risk/ accessed on 27/04/2017.
Barizah N, (2016), “Threats to Auditor Independence”, available at https://www.academia.edu/260449/Threats_to_Auditor_Independence accessed on27/04/2017.
Edwin M, (2015), “Analysis of Threats to Auditor Independence and Available Safeguards against those threats”, available at https://www.academia.edu/9406967/ threats_to_auditors_independence accessed on 26/04/2017
EY, (2016), “Top 10 Business Risks”, available at https://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf accessed on 27/04/2017.
Imrie B, (2011), “Business Risks facing the Mining Industry”, available at https://www.in.kpmg.com/SecureData/ACI/Files/Top_20_Risks_the_Mining_Industry.pdf accessed at 26/04/2017.
Livine G, (2015), “Threats to Auditor Independence and Possible Remedies”, available on https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full accessed on 27/04/2017.
Long G, (2015), “Audit Risk and Business Risk”, available at https://www.cpaireland.ie/docs/default-source/Students/Study-Support/P2-Audit-Practice-Assurance-Services/audit-risk-and-business-risk.pdf?sfvrsn=0 accessed on 27/04/2017.
Parker A, (2015), “6 Key Threat to Auditor Independence”, available on https://www.intheblack.com/articles/2015/01/06/6-key-threats-to-auditor-independence accessed on 27/04/2017.
UK Essays, (2013), “Threat To Auditor Independence Accounting Essay.” Available at https://www.uniassignment.com/essay-samples/accounting/threat-to-auditor-independence-accounting-essay.php?cref=1 Accessed on 26/04/2017
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