1. As an audit firm CJI is performing an Audit of luxury travel holidays Ltd a travel company from past few years. The audit firm headed by the partner Geoff , while performing the audit of LTD the audit firm CJI has identified and evaluated various threats in each situation that might affect auditorsindependence.
Threats are the possible risks and hazards that affect the auditor integrity and independence .
When a professional is require to promote his client work for getting future reappointment might create self-interest threat in business and affect auditors independence in framing opinion. As per the given situation advocacy threat is arising when Geoff is asked to give a speech about LTH at the next travel agency seminar, to assist in promoting LTH’s business to attract more investors.
When a client is offering undue gifts and reward for the maintaining long term and future relationship with the client influence the judgment of the professional (Khorwatt, 2015). So as per the given situation LTD offer to CJI a complimentary 14-day holiday package voucher for four people to the Greek isles for both Geoff’s and family to express sincerity towards CJ and Geoff, and to maintain the good relationship in anticipation of another smooth audit for 2015 is unethical and unjustable.
When an audit firm or any member of the audit firm having close blood relationship with the client team member that might influence the judgment of the professional and result in blood relationship threat.so as per the given situation close relationship between the financial reporter of LTH and auditor of the firm Michael creating a threat that might affect the auditor independence.
When audit firm or any member of audit firm is performing any non-audit service such as provision of accounting services or provision of taxation service give rise to self-review threat as this attacks the objectivity of the professional in decision making (Dai & Handley-Schachler, 2015). As per the given situation Anette work is considered as non-audit work performed by the member of audit team influence the auditor judgement.
Safeguards are those measures that are used to eliminate these threats in an acceptable manner that affect overall auditor independence. Safeguard are created by the professional, legislation or regulation or they are created within the organization.
- An external review from a person may be outside the audit team of CJI makes possible safely work with former employees.
- Rotate the concern CJI , and if still the threat exist and its material withdraw from the engagement.
- CJI should humbly refuse and cancel the gifts and hospitality offered by the audit firm as its affects the auditor independence.
- CJI should inform audit committee or the person in charge in case of undue gifts and hospitality.
- CJI should give rewards and promotion for ethical behavior as it helps in elimination of unethical behavior.
- CJI should properly check the background and references during recruitment procedures so that employees having a strong sense of integrity.
- CJI should encourage employees to report unethical practice without fear.
- CJI should train , educate and experience the requirement before entering them into the profession(Beattie, Fearnley, & Brandt, 2005).
2. As per the given case Crampton and Hasaad an audit firm is planning and performing the audit of Mining supplies LTD (MSL) for the year ended 30 June 2015. MSL sells spare parts and mining equipment to mining companies across Australia and has operational centers in Perth, Newcastle, and Mt. Isa. With each warehouse of equipment and spare parts and provides sales and maintenance services. As an auditor will discuss various kinds of business risk in audit planning.
Business risk relates to uncertainty in profit or risk of loss and risk of uncertain events in business that could cause business failureBusiness risk is a much-expanded form of audit risk. Business faces various types of risk that can cause serious loss of profit among these various risk auditor of MSL has identified two main business risk that can cause failure of business (Khorwatt, 2015).
This type of risk arises when organization fails to achieve its goals due to less effective strategy because of change in technology, change in customer demand according to dynamic environment or a new powerful competitor entry into the market and sometimes failure to adapt strategic risk led to bankruptcy for MSL (Szívós, 2014).
This type of risk arises when organization faces unexpected failure in day to day operation caused due to technical failure or by people or by process for example of operational risk as per the given situation when the employee of MSL company writes the wrong amount on the cheque and paying out rupees 200000 instead of 20000 from MSL account.
According to standards of auditing the auditor through understanding the entity and its environment the auditor identify and assess the risk of material misstatement. While performing the audit of MSL the auditor has identified following risk in relation to audit. The risk when auditor fails to detect fraud and error in the financial statement due to which it may issue an unqualified report.
Audit risk is consists of
The material misstatement exists in assertion of financial statement due to no internal control as a result high inherent risk leads to higher existence of material misstatement.
The material misstatement exists in assertion because of ineffective internal control system of the entity due which frauds and error are not prevented, controlled and detected by entity before entering in the financial statement (Khorwatt, 2015).
When material misstatement exists in financial statement and auditor fails to detects in it frauds and error and because of that it express an inappropriate opinion on the financial statement (Khorwatt, 2015).
Beattie, V., Fearnley, S., & Brandt, R. (2005). Auditor Independence and Audit Risk: A Reconceptualisation .
Dai, Y., & Handley-Schachler, M. (2015). A Fundamental Weakness in Auditing: The Need for a Conspiracy Theory. Procedia Economics and Finance .
Khorwatt, E. (2015). Assessment of Business Risk and Control Risk in the Libyan Context.
Szívós, L. (2014). The Role of Data Authentication and Security in the Audit of Financial Statements.
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