Threats To Auditor Independence And Business Risks

S.NO.

ISSUES

THREAT OF INDEPENDENCE

DISCUSSION

SAFEGUARD

1

LTH Company wants Geoff to give speech about LTH in next travel agency seminar

Intimidation and Advocacy (Edwin, 2015).

The company wants the audit team member to present the affairs of the company in a business seminar as it will create more reliance among the investors of the company. While having words with officer of the company, the CEO wants that the auditor will explain the benefits of the services provided by the company in a seminar. Along with it, the company also said that if the audit team member is fails to do the promotion at the seminar about the services of the company, then it may be difficult for the company to engage the same audit firm for the next year. So if auditor promotes the company under the dominance of the client then the auditor will act as an advocate for the client and the threat of advocacy and intimidation hampers the independence of the auditor as Australian Auditing Standard Board. The risk can assesses by the level of how bias the auditor will become in reporting about the client.

The auditor should immediately resign from the auditor ship if such undue influence is created by the client on auditor. The engagement letter should clearly state the conditions relating to objectivity of the auditor and if they hurt, then auditor should report the same to regulatory bodies and vacate the office of the auditor of the company. The better corporate governance mechanism should be adopted by the audit firm while dealing with such type of situations (Livine, 2005).

2

LTH gives 14-day free holiday package voucher for four people for Geoff and his

Self Interest (Barizah, 2016).

The CEO of the LTH company offers the audit team member a free holiday package for him and his family member in relation to have edge over the auditor. The free package is offered to have smooth audit for 2015 which shows that the officers of the company wants to have overriding effects on queries raised by the auditor. This situation totally hampers the integrity of the auditor in relation to its independence. As per the policies and procedures laid down in Australian Auditing Practices Ethical Standard 110, the presence of self interest threat that auditor may have emotional and personal interest if he accepts the offer. The risk in this type threat can be ascertained by the degree of integrity compromise by the auditor while reporting the affairs of the company.

The audit staff and member of audit team should change after particular intervals so that if one audit member accepts any financial and non financial benefits from the company then it can hamper the reporting of client. Appropriate disciplinary actions laid down in ethical principles issued by Australian Regulatory Board can be taken in relation to such benefit taken by the audit team member (Livine, 2005).  

3

Relation with Finance Controller of LTH  

Complacency and Familiarity(UK, 2013)

While having conversation with Michael, it is come under the notice that the Finance Controller of the LTH Company is the father of the Michael who he one of the audit team member. His father is fully responsible for the preparation of financial statements of the company and follows up the implementation of company’s policies and procedures. The level of professional skepticism is hurt in case as audit team member may assume the work done by his father is correct and fully complied with generally accepted accounting principles. There may be chances of ignoring of warning signals by the auditor as he thinks his father can be scolded by the company if he identifies any mistakes in his father work. The familiarity threat is identified in this situation as defined by the auditing standards in this particular situation where the matter of trust in involved. The risk can be assessed in this situation with the degree of over confidence by the auditor in the officers of the company.  

The disclosure of the relation with the officers of the company should disclose before the team member to his audit partner and if such relationship existence comes under the notice of the audit partner then such member shall not be the part of the audit team. The discussion of issue with board of directors and audit committee and corrective actions can be taken as suggested by them. The audit firm should not assume that the policies and procedures adopted by management are fully adherence to the accounting principles governed the financial reporting (Livine, 2005).

4

Audit and Other services provided by same audit team member in LTH Company

Self Review and Intimidation (Parker, 2015).

After talking to Annette, it comes under notice that Annette was the part of the team who has provided non audit services like tax calculation and accounting entry preparation of LTH just a month ago from the start of the audit of LTH Company. The audit team member has the presumption that the taxation and accounting work has been done by him so there is less requirement of assessing the same. Also, he has good relationship with the employees of the company and he thinks it is easy for him to understand who works needs to checked by him or whose not. As per the provisions , in this types of situation the threats of self review and intimidation occurs which result in bad quality of audit as the auditor compromise his independence in making accounting treatments as per principles of the accounting in consideration of non audit fees paid to him by the company.

The assessment of such type of risk can be done by the degree of compromise and level of reliability lost by the auditor.

The same member from the audit firm should not perform both the services that are audit services and accounting services for the same client. Appointment of third party external auditor for reviewing the work done by the team member of the audit. The full disclosure of the services that will be provided by the auditor and fees to be charged in relation to the same in the engagement letter and informed the audit committee and board of directors about the same so that the financial influence cannot be taken by the client. The rotation of the staff of the audit team should be done as per the provisions of the APES 110 (Livine, 2005).

S. No.

BUSINESS RISKS

AUDIT RISKS

ACCOUNT BALANCES

1

Goods lost in Transit –The danger that has been present in the practices made the business is the business risk. In the given situation of the MSL Mining Supply Limited, the foremost risk in relation to purchase of Equipment and spare parts is the lost of this goods in transportation of these goods from the supplier place to the company place and from company place to the customer place. The company has to make provisions for such loss of goods as it does have clear agreement neither with supplier nor with customer. This will result in huge losses to the company and decrease margins of the company in the [particular year under audit (Imrie, 2011).

The audit risk that has been considered by the auditor before planning the audit in this particular case is Detection Risk. It is the risk associated with the audit in which auditor is not able to ascertain the degree of material misstatements in financial statements of the client. Omission and wrong procedures followed by auditor in relation to audit methods leads to increase the extent of this risk. Also, there are certain detection risks which present in the audit plan and also present in the given situation under consideration because of the inherent limitations of audit such as wrong selection of audit data, wrong measurement procedures of inventory and it’s lost (Long, 2015).

Account Balances that  impacted by Detection Risk are:

1. Raw Material Inventory

2. Goods in Transit

3. Abnormal Loss

4. Creditors

5. Import Purchases

6. Debtors

7. Sales

2.

Foreign Currency Risk – These risks present in businesses where the business involves dealing in multiple currency. In the given case study, the company is purchasing the raw materials from different suppliers located in the different countries of the world and the acceptable currency in that countries are different. So, when recoding theses transactions by MSL Company in its functional currency, the company has to follow transitional provisions and the exchange difference has to be recorded in the financial statements of the company. This can reduced by the following the relevant principles in relation to foreign currency transitions.

The audit risk that has been identified in the particular situation is the Inherent Risk. These risks occur due high degree of involvement of ten judgments that has to be made by the accounting staff of the company. Also, the nature of transactions is very complex in relation to purchase of inventory from different countries like UK, China and Europe is considered in assessment of this type of audit risk. The level of these risks is higher in the company under case study and they are generally present since the inception of the company (Becker, 2015).  

Account Balances that  impacted by Inherent Risk are:

1. Import Purchases

2. Accounts Payables

3. Foreign Exchange Gain

4. Foreign Exchange Loss

5. Foreign Exchange Reserve