Standards for Auditing and Independence
While performing the audits, the auditors must comply with the generally accepted standards of auditing. The standards require that the auditors must carry out the audit procedure with care and objective status of mind. The term independence is a conceptual term and is not easy to define. However, the auditor must maintain integrity, objectivity, avoid biases and make true and fair representation of his opinion.
The services that are provided by the auditors to his clients out of the scope of audit is known as non-audit service. These may include management services, tax related advice, promotion of client’s business. Non-audit services are provided in exchange for additional income or any non-monetary advantage. However, offering non-audit services lead to the impairment of independence of auditor in appearance while providing services to the clients. The potential impact of non-audit related services is a crucial segment of concern. Quality of audit is a crucial issue as it often receives criticism from the Stakeholders And Regulators. One of the threats to independence of auditor is the threat of advocacy. This takes place when the auditor promotes the client business or opinion to such a point where the people may feel that the objectivity is being compromised. Therefore, if an auditor or audit firm provides advocacy services, there may take place the serious compromise of ethics and which in turn, affect the auditor’s independence.
The independence of the auditor is threatened if the auditor or the audit firm receives any monetary or non-monetary benefits in any form other than the fees prescribed for the audit services. This may arise from availing any other benefits out of the audit engagement agreement. For instance, in the given case the client offered holiday package voucher for the members of the audit firm. If the auditors accept such offer, definitely the question regarding his independency will arise. Further, the amount of threat to independency increases with the amount of benefits to be received.
An auditors spouse, parent, dependent, non-dependent child and siblings are considered as the close family members. The financial interest involves guarantee for debt, ownership, short or long term securities that is directly owned by the person, in association with other person or through the intermediary, if the person participates or supervises in the investment decision or controls the intermediary. Here, in the given case, the father of the proposed accountant is the financial controller of the client’s business. If Michael accept the offer of being the part of audit team, it will endanger the independency of the auditor.
Non-Audit Services and Threats to Independence
With regard to the close relationship with the client, its employees, and officers and directors, a risk of influence is associated with the business environment of the client. In these circumstances, the auditor is endangered to become too sympathetic and associated with the client. Too close relationship with the client’s business lead to excessive trust with the client and the insufficient representation. There is a chance that the auditor’s representation will be affected as she already has some valuable information of the client due to her previous assignment with LTH just a month before. She was carrying out the services related to the calculations of tax and preparation of accounting entries for the year ended 30th June 2015. Further, the auditor is not allowed to carry out the audit of his own work.
There must be a list of prohibited services that are provided to the clients and the auditor shall not provide any service that will compromise their independence. Various other measures that can be implied to to strengthen the independence of auditor are:
Rotation of audit partner – the rotational system of major partners eliminates the threat of over familiarity and the self-interest and will promote the objectivity aspect without considerable cost. In addition, the institutional and historical knowledge of the organization will be available to all the team members that will assist in maintain the high quality of audit.
Effective audit committee and wide level of transparency – The efficient audit committee is a crucial tool for maintaining the independency of the auditor. The auditor must be well resourced and the members of the audit team shall be highly qualified and independent. Moreover, as part of the audit quality, the audit team must assess their objectivity and independence and should make the outcome available for the public.
Oversight of independent auditor – An auditor, who is independent can regulate and contribute considerably to the audit quality and audit independency. The major features of the efficient oversight of the auditor involve independency from political interference and audit profession. They must provide transparency, true and fair in representation and must share and co-operate confidential data with other carefully.
Global consistency with the independence requirement of the auditor – the independency of the auditor will be strengthen through the use of robust and strong ethical standards like Auditing standards and code of ethics. An internationally consistent set of high quality independence and ethical standards will definitely reduce the complexities involved with the auditing procedure
Prohibited Services and Strengthening Independence
Management of risk is a crucial element for the management of spare-parts inventory, however, in most of the ways it is executed very poorly. Most of the organizations understand that the risk management factor and go to wide extent to analyse the risk and take steps for mitigating those risks in their companies, however these analysis are more often limited to the reputational risk, commercial risk and brisk related to safety and health. Beyond these risk, there may be downtime risk, which in turn lead to financial loss and most of the organizations do not take into account the implementation of technologies related to risk management of spare management. Among other, the two business risk associated with purchasing of spare-parts and equipment that Crampton and Hasaad must consider while planning the audit are Operational risk and Strategic risk.
Strategic risk – this risk is not related to the business approaches and the choice of the organization for right or wrong products and market. Strategic risk involved with inventory management of spare parts is regarding how the company manages the stock of spare parts. At one extent, the organisation may select to be ad-hoc, that means spend the items on the purchase, use no policies that are formal and engage the experienced managers to give their judgement on daily procedural issues. On the other extent, the organization may select to standardize the aspects for the management of spare parts in more or less same way as the financial management is standardized. The appropriate approach for the organization is depended upon the investment of finance in the inventories and the level of risk associated with the probable loss. If the business can carry the extended downtime experience and losses associated with that or handle the risks through large quantities purchase, then ad-hoc strategy may be appropriate. However, if the company cannot afford the extended downtime and large investment in inventory, then the organization must find a better strategy for the management of spare-parts. That means searching for alternative way to mitigate or avoid the probable losses.
Operational risk – this risk is not the risk associated with the operational downtime. Instead, this risk is related with how the chosen approach is executed. Most of the organizations set the strategic management rightly but fail to execute it efficiently. For instance, the organization may implement a policy for stocking for making decisions related to standardization, however, it is identified that either the policy is not adequate or their daily management approach does not pursue the implemented policies. Organisations those are not managing the operational risk by assuring the suitable implementation of their approaches, are seemed to be not taking their management of inventory seriously. Management of risk can be stated as to be smarter regarding the chances the organization takes. With regard to the inventory management of spare parts, management of risk simply means assuring to identify the suitable things to do but also to do them correctly.
Risk Management for Spare-Parts Inventory Management
The risk that is associated with the strategic risk is the inherent risk. This risk takes place due to omission or error in the financial report owing to the factor other than control failure. This risk takes place when the nature of transaction is complex or the circumstances require high level of judgement for the financial projections. This risk has an impact on the inventory balance and the amount of account receivables. Certain accounts, transactions are highly associated with inherent risk, for example, the risk related to inventory management. It greatly affects the accounting balances depending on the classes of transaction
Risks that are associated with the operational risk are detection risk. It is the risk that there is a probability that the auditor will not be able to find the material misstatement that are associated with the financial statement of an organization through the analysis and substantive tests procedures. Detection risk is that risk, which the auditor will conclude as no significant error were found during the procedure of audit. Detection risks are more expected when the auditor does not implement the appropriate processes or the procedures are not used correctly. The detection risk has a great impact on the accounting balance and it is beyond the assessment of the accountant. It can affect the accounting balances based on the transaction and the amount involved with the transaction. Mainly the accounts that are more susceptible with this type of risks are the purchase account, sales account, revenue account and inventory account.
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