First Situation: Threats Related to Non-Audit Services
At the time of the preparation of the accounts and conducting a review, the auditors have to follow the standards mandatorily that are accepted in a general manner. The act of having independence in the decisions means that the auditor must act and carry on the audit with integrity and objectivity. The self-governance must include the manner in which the internal or the external auditor must carry on fair means to audit about the financial interest of the parties or the clients. The auditors have the right and obligation to act in a manner independent from the clients so that the audit procedure is not influenced and the opinion is not modified by the affect of the relationships or connections within them (Abbott et al. 2016). The audit must give an opinion that is not biased and honest and the same must be explained and discussed with the shareholders or those charged with governance.
The first situation considers the case in which a proper clarification on the services of non-audit nature is provided. The services offered to the clients by the auditors are not under the scope and the non-audit services takes into account the services related to tax, management and the promotions of the client. These types of services have a provision in place or exchange of the further income or the variety of other forms of the non-economical benefits. The involvement of the auditors in the discussed services of the non-audit nature leads to a situation where there is a lack of the independence in situations of the services being provided to the clients (Baharud-din et al. 2014).
The non-audit services create a wide range of impact and consequence on the quality of the audit and trust of the stakeholders and other regulators. The quality is hampered along with the heavy criticisms generated from among the stakeholders and other regulators at the same point of time. The independence of the auditors are threatened in the given situation as the client gets the feel of compromised behavior in the quality of the audit, even though the same was carried with integrity. The situation of advocacy thus arises and the auditors using such system at the initialization of the audit will compromise the ethical segments along with the negative affect on the independence of the auditor (Carson et al. 2016).
The second case considers the most important and noteworthy fact that the auditor and his independence is majorly threatened by the unethical steps taken. The threat starts with the auditors taking the initiative to take the monetary and non-monetary incomes or profits that are not ethical in nature. The profits or the income is in addition to the fees that have been prescribed for the conduction of the report of audit. There are also wide ranges of the benefits that are undertaken by the auditors and that are nowhere mentioned in any agreements made before the conducting of the audit procedures. After the assessment and analysis of the above given situation, it can be understood that the client had been offered a voucher of holiday packages for the member of the audit firm (Christopher 2015). The auditor on accepting the offer by the clients will lead to case, which will hamper the ethical duties of an auditor, as the auditors will utilize the extra benefits from the clients. Therefore, the same will threaten the independence of the auditors.
Second Situation: Threats Related to Unethical Gifts
The third case or situation explains that the close family members of the auditors include the spouse, siblings, parents and other dependents. In addition to the above, the interest of the financial nature comprises of the guarantee of the debts, possession of the securities of the short term and long-term nature that are in actuality owned by the individuals through intermediaries. There is a participation of the individuals and supervision of making the decisions of the investment as having a power over the intermediaries. In support of the given case, the father of the projected bookkeeping is the monetary manager for the given companies. Consequently, if Michael agrees to the offer for remaining an element of the team of audit that will in reality cause danger to the self-governance of an auditor (Hardy 2014).
As per the fourth case, there must be an understanding of the positive linkage among the officers, clientele, employees and the managers who have an actual effect on the environment of the business of the potential clients. The auditor is required to be patient and sympathetic in comparison to the prospective clients. There is a positive connection among the clients for creation of the level of trust and in presentation of the facts in a proper manner.
There was an essentiality of an auditor in carrying the proper services, as there is a requirement of calculations of taxes at the passing of the journal entries at the end of 30th of June 2015. There is no possibility of the review or audit of the own work done by the auditor (Junior et al. 2014).
The part is noteworthy that the clients and the auditor who are rendering services that compromise their independence, give the forbidden services. A wide range of measures is implemented in reality for the development in the sovereignty of an auditor. A few of them are as under:
- The audit committee has major effectiveness and efficiency that helps in keeping up the clearness in the opinion of the audit. The committee will possibly assist in the effectiveness of the independence of the auditors and it checks and controls that the same is not hampered under any situation. The committee must contain a group of well-experienced and proficient auditors, those having the requisite possessions for evaluating the independence of the reviewers (Knechel and Salterio 2016).
- The rotation capacity of the audit partners must be considered as the important measure in which the auditor has an engagement of removing or diminishing the threat over the integrity and the sincerity of the knowledge. The same will reduce the capacity and the desire of the auditor to act in an independent manner devoid of any categories of the costs of substantial nature.
- The auditors must generate awareness and knowledge related to the historical and institutional characteristics and attributes that is important for the members of the team. The knowledge requirement must also include maintenance of the quality of the audit of high and efficient nature (Lenz and Hahn 2015).
- The auditor has an obligation and responsibility to work in an environment that is regulated as a result, that they can form a part of the considerations that involve the maintenance of the elevated superiority standards in the opinion of the auditor. The auditors must not be engaged in any affairs of politics and should not be involved in the biasness with the operations of the client company. They must be translucent and the auditor in such cases must have given a true and fair opinion on the audit to the client. The auditors must not have exploited the secret or confidential data of the client and thus uphold the trust and faith of the clients (Mat Zain et al. 2015).
- The auditor needs to follow the standards that are ethical in nature and present under the Standards of Auditing and the Code of the Ethics. There must be a set of high quality and standards of ethics that must be accepted internationally and helps in the reduction of the complexities in the processes of audit (Pearson 2014).
The risk must be managed that forms a part of the inventory of the spare-parts. In the given case, the inventory management is too poor and requires proper attention and the analysis of the risks must be done to reduce the same wherever feasible. The risks that are required to be identified by the enterprises include the commercial, health, safety, and reputational risk. The risk of downtime also has relation to the management of the spare-parts inventory, as there can be a failure in the implementation of several most up-to-date technologies that are used by the business. The two major risks that must be put under control include the risk of strategic and operational nature. There must be a management in relation to the purchasing of the tools and spare parts at the time of making an audit plan for the procedures and functions of the audit (Sarens et al. 2013).
The strategic risk is the initial or the first risk that must be identified and has no relation in any manner with the strategies of the business and in the selection of the enterprises. The risk arises with the decision making process that takes into account the concern as to what is right or wrong with the specific products in the market and in the business. The Strategic risk involves everything i.e. the effective administration of the inventory of spare parts in cases, where the corporation has an engagement with the parts of the management (Sethi et al. 2015).
It must be noted that the company chooses the ad-hoc conveniences where the enterprise spends on the items. It is done so that they can procure and there are no specific official policies for the implementations in whichever cases. There is a necessity for every association to employ knowledgeable and expert managers that can provide accurate decision or rulings on every day issues and concerns prevailing over the workplace. The association through investing more on financial management activities must administer the inventory of the Spare parts. It is necessary for any business association to invest in the financing for the management of the stock that has a relation to the probable losses. Thus, it is imperative to estimate and analyze the substitute strategies to help the organizations to stay away from the future possible fatalities and show the way to smooth execution of the business enterprise (Singh et al. 2014).
Operational risk is the other major risk that is identified and has direct connection with the operational downtime. Operational risk is the risk concerned with a specific methodology or approach following the dependence upon the executive rank. Each of the business enterprises must have a proper setting of the approach of strategic management, perform, and implement it in the best and most suitable manner. The management must find necessary ways for the implementation of the policies for the piling up or storing of the stocks or inventories at the time of undertaking every proper decision on subjects that has a relation with the consistency. The company or the organization is solely accountable and in charge towards the management of the operational danger. They have to involve themselves in carrying out an appropriate accomplishment of policies and administer among the stock in an effectual approach or system. Consequently, the risk of management is significant for the reason that there is a requirement for the identification of the most appropriate system or method with the intention of having an ability to correct the concerns related to the system.
There is a significance of understanding the fact that there is a relation to the risks with the risks of an inherent nature. The risk occurs due to the deletion or omissions or other errors that are present in the reports related to the financial reports and brings out numerous factors after the comparison with the failure of controls. A number of accounts in reality show dealings that have a high relation with the inherent risk. It includes an example like the transactions that has a relation with the inventory management.
The risk of Operations and detections are between the two major significant risks that are required to be taken into contemplation by the companies. There may be situations in which an auditor fails to note down the misstated figures as presented in the financial statements, at the time of auditing. At this time, the auditor carries on the review of the threat after the evaluation of the balances of accounting and getting in touch with the accountant at the same point of time. These actions in reality largely have an effect on the balances on the transactions of accounting.
Reference:
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