Situation 1: Threat of advocacy
1. In the present context of CJI is taken into our case study which is an audit firm performing an Audit of luxury travel holidays Ltd. As per the case study, the audit firm headed by the partner Geoff finds certain issues on the factor of audit independence. Geoff has appointed Michael and Annette for various auditing and tax accounting services to be delivered to the relevant company. As an audit manager of the CJI identification and evaluation of threats in relation to overall audit independence has been observed in below-mentioned points-
This threat occurs when professional gives his submission with respect to its client position or an opinion to the point that the auditor’s subsequent objectivity is compromised (Al Nawaiseh & Alnawaiseh, 2015). In other words when in some way auditor is being asked to promote position or scrolling up its image in market for achieving organizational business goal represent their client this would be an unethical approach. So as per the given situation LTD company is threatening CJI that it will reappoint the firm for audit assignments for the future only if it gives speech about promoting LTH travelling business at next travel agency seminar to attract more investors
When we create close business and family relationship with trustees, members, auditor etc. It results in creation of self-interests and cannot helps in achieving independence in audit assignments because that may not be sufficiently skeptical or it will create sympathy towards the person to with whom we are having relationship (Hargreaves, 2010). This will lead to compromise the objective requirement of code and to accepting their work for example benefit, incentive, reward is given by the client for creation of self-interest it would be an unethical approach. It includes role of professional with assurance team and the member holds position with the client so as per the given situation the LTD company is giving benefit to CJI company auditors and their family, members to impress them for long term projects and might create an unjust and unethical advantage and affect auditor independence.
When the member of the assurance team, an officer or certain employees does have the personal relationship with the client, this may create self-interest, familiarity or personal threats. As in such situation, a person feels to be sympathetic and sufficiently skeptical towards with whom they are in the relationship and compromise the objective requirement of code. A close relationship will result in influence of judgment of the profession and as a result, it would motivate the person to make a decision without gathering and making proper efforts in audit evidence (Beattie, et. al., 2005). The auditor in this case structure might make the decision in accordance to the individual favor because of close family relationship with a client. So as per the given situation the auditor is in close relationship with the client who is controller and responsible for the preparation of LTH financial report and as a father he is trusting his son [Michael] an auditor of CJI company without sufficient audit evidence give positive report of the financial statement and did not disclose the mistakes of his son and this affect the achieve of audit independence. Further, there might be a possibility that an auditor might hide certain material facts which came into his consideration during the audit procedures (Jelic, 2012).
Situation 2: Threat in creating long term relation with client through gifts and rewards
Self-review threat occur if a non-audit service such as provision of accounting services or provision of taxation services performed by an audit team or by any other person within the audit firm give rise to self-review and such threat attacks the objectivity of profession and as per given situation (Nasution, 2013). Annette being the member of the CJI audit firm helping LTH in tax calculation and preparation of accounting entries give rise to self-review threat and attacks the objectivity of the profession.
Safeguard are measures to eliminate or reduce various threats faced by a financial and accounting professional in an acceptable manner identifying the threat and ensuring that unethical work, behavior, judgment is identified and eliminated or can be reduced by removing the individual from the assurance team (Losiewicz-Dniestrzanska, 2015). The following safeguards must be implanted by the manager of CJI firm to bring effectiveness and efficiency in terms of auditor’s independence-
- CJI should remove such individual like Michael from the assurance team who has close relationship with the client.
- CJI can have external review look at certain files as it make possible for staff and partners to safely work with former employees.
- CJI should refuse to accept the reward of holiday trip from LTH Company that creates familiar relationship.
- Education, training and experience requirement for entry into the profession.
- Disciplinary action against the profession for unethical behavior.
- CJI should carry out external review of the work carried out by the professional for unethical work.
- Top management should emphases the importance of ethical behavior.
- CJI should hold various training program for employees.
- CJI should evaluate whether the result of the external configuration provision provides relevant and reliable audit evidence.
- CJI ensure fair treatment of whistleblowers that are encouraging employees to report unethical practices without fear.
- Organizingcontinuing professional development programmer for the professional so that the professional not only remain updated but is also able to upgrade their skill.
- Strict disciplinary action against violators and reward system for ethical behavior.
- Legislation governing independence of the professional.
- Professional standard carrying out the audit and assurance engagement and preparation of book of book and financial statement.
- Recruitment procedures incorporating reference checks and background checks so that the employees having a strong sense of integrity are hired.
- CJI should maintain strong internal control in the audit firm.
- CJI should discuss independent issues with the board of directors or audit committee.
LTH should ensure policies and procedures to CJI audit team to not make or assume responsibility for management decision (Ali, et. al., 2011).
In the present context of Campton and Hasaad performing an audit of mining supplying Ltd [MSL] is performed. MSL has equipment purchase order contracts with a number of manufacturing suppliers based in Europe, US, and China. As an audit senior with Crampon and hassad discussing two business risk to MSL that will explain business risk in the audit planning are discussed as follows –
The business risk in the present context overall tends to the creation of certain possibility which supports inadequate profit or uneven loss due to uncertainties. For example, unsatisfactory outcomes from the customer point of view while delivering the home services rendered by the group through external agencies, happening of strikes by the workers of the organization, increased external competition, change in government policies, obsolesce of equipment due to changing market trends and innovations etc (Khorwatt, 2015). Every business contains various risks while performing the operational task such as external and internal hazard related to uncertainties in profit or loss and the events that could cause a risk due to some unforeseen events in future which might impact its going concern. The macro and microenvironment hazard is depending upon the nature and size of the MSL.
While taking internal risk into account the relevant risk refers to those hazards that are arising from the certain events taking place within the business organization group. There are here are certain factors which raise the internal risk of an association. Some of the commonly known factors are detailed as follows–
- Technological factor [emerging technologies] – As in the present case study, the company is dealing with the mining business which is related to supply and manufacture of certain equipment and spare parts. With the change in technology in the external macro environment, the company faces a hurdle of technological backwardness. The company has to update its manufacturing output as per the latest external trend. Further while entering into the process the company has to face the loss of dead stock of old technological products already manufactured.
- Physical factor [failure of machine, fire or theft]– The organization has to install certain backups to cope up with such misfortune situations. Alternatively, security and control systems are needed to be installed by the company.
- Operating factor related to cost in manufacturing and maintenance procedure.
- Human factors include management of workers and other personals.
Situation 3: Close relationship, familiarity and personal threats
Taking into account the external risk factor these are referred to specific hazard that is arising from the event taking place outside the organization or the factors which exist in the business macro environment. For instance, economic factor, market risk, pricing pressure, natural factor flood earthquake political factor compliance and regulation of government are the certain variable which is outside the controlling appetite of the business enterprise.
Compliance risk /integrity risk. Compliance risk in the present case of MSL company structure arises when exposure of financial forfeiture, material loss and various legal penalties an organization might face when it don’t work as per the overall industry law and relevant law of the land. The company face additional compliance risk in future with the given case when an employee’s deals with customers in different countries remote areas sometimes get unwittingly breaks the rule, or when employee give poor quality of services that don’t meet the expected level of customer satisfaction also various fraud and bribery practices makes MSL company responsible for action of their employees.
Management risk associated with the improper management decision as the management put their own interest and benefit ahead the interest of company, shareholder and investors like if incompetent, in ineffective, destructive or underperforming money manager of MSL company then consistently makes bad investment decision for a fund, improper allocation of resources funds, uncontrollable use of funds, poor financial planning, unnecessary raising financial resources, poor dividend policy and more emphasis on profit making motived results into loss to shareholders and risk to investors will lose their money or threats to organization capital and earning (Khorwatt, 2015).
Auditing experts of MSL facing risks involved in the business while they are planning audit for the assessment year 2015, which affects the statements of the organization.
Audit risk – The risk that auditor expresses an inappropriate audit opinion when the financial statement are materially misstated audit risk is a function of the risk of material misstatement and detection of risk For eg. Non integrity of financial statements, mechanics is directly dealing with customer can enter into unethical approach.
As per the case study, MSL is facing the risk of material misstatement which may affect the level of Accounts Balances and related transactions.
The risk of chance of misstatement in MSL company transaction, account balance or disclosure that will be material either individually or in aggregate considering that related control does not exist.
The approach of wrong billing, employee fraud, and errors assets and accounts of the MSL are prone to misstatement which may affect the work efficiency of the organization. Auditor of the company may keep in mind the risk and they have to take corrective measures to solve the conflicts to save its company from any legal matters and proceeding Income services are recorded by management as free services for showing losses in financial books of accounts for evasion of taxes (Miller, et. al., 2012).
Risk at a level of Account Balances & Transactions- It increases the chances of complexion in transactions and also affects the quality of accounting system of MSL. Transactions which are involved in the organization gave chances to unusual transactions at or near period end (Miller, et. al., 2012).
The risk of chance of misstatement in MSL company transaction, disclosure and account balance that will be material either individually or in aggregate considering that related control fails to prevent detect fraud or error.
The risk that arises due to nature of auditor procedure applied by auditor with Crampon and Hasaad fails to detect the misstatement caused due to fraud and error during the period of audit.
References
Al Nawaiseh, M. A. L., & Alnawaiseh, M. (2015). The Effects of the Threats on the Auditor’s Independence.International Business Research,8(8), 141.
Hargreaves, L. (2010). Threats to the integrity of the teaching profession: encountered, confronted and uncovered.
Beattie, V., Fearnley, S., & Brandt, R. (2005). Auditor Independence and Audit Risk: A Reconceptualisation.Journal of International Accounting Research,4(1), 39-71.
Jelic, M. (2012). The Impact of Ethics on Quality Audit Results.International Journal for Quality Research 6 (4).
Nasution, D. (2013). Essays on auditor independence.
Losiewicz-Dniestrzanska, E. (2015). Monitoring of Compliance Risk in the Bank.Procedia Economics and Finance,26, 800-805.
Ali, K., Akhtar, M. F., & Sadaqat, S. (2011). Financial and non-financial business risk perspectives–empirical evidence from commercial banks.Middle Eastern Finance and Economics,11, 150-160.
Khorwatt, E. (2015). Assessment of Business Risk and Control Risk in the Libyan Context.Open Journal of Accounting,4(01), 1.
Miller, T. C., Cipriano, M., & Ramsay, R. J. (2012). Do auditors assess inherent risk as if there are no controls?.Managerial Auditing Journal,27(5), 448-461.
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