Threats to Auditor Independence
In accordance with conversation made between the CEO of the company, Chris in the first situation, it appears that there is the threat of promotion of advocacy on part of the independence of the auditor. The presence of the threat of promotion or advocacy is solicited by the fact of having the event where the auditor of the company is asked to promote the company in various ways. It may include promoting the goods, products and services of the company and the share price and earnings per share of the company, etc (Edwin, 2015).
In the given situation the same has happened where the CEO of the company has informed that the company will engaged the auditor for audit of next year if and only if the auditor promotes the company in seminar conducted by the various industries.
It will be evaluated on the basis of the extent of harm to the independence of an auditor.
The CEO of the company, Chris, after giving the threat of loss of employment has given the audit partner a reward by the way of complementary gift of fourteen days package along with the family member. This has been offered by the company as token or gift to conduct the audit for the next financial year in the smooth manner.
In such a situation there is total self interest threat which includes not only the financial but also the non financial interest. Through this the independence of the auditor will be hampered very easily (Barizah, 2016).
It will be evaluated on the basis of the degree of interest that the company has offered to the audit partner.
This situation has witnessed the threat of mutual trust or threat of intimidation. It is generally occurs when the member of the audit team have the familiar or long lasting relationship with the officer or directors or any other employee of the company and because of this relationship, auditor tends to decline many of his audit objections at the cost of the objectivity or the integrity that will be hampered from the benefit that he will have.
The same situation is in this case where the father of Michael is the Finance Controller of the company of which Michael has to conduct the audit.
This threat will be evaluated on the basis of type of relationship and how long it has been in existence (UK, 2013).
Safeguards for Auditor Independence
This situation has purely witnesses the threat of Self Review. This type of threat generally occurs when the members of the audit team have already caters the services to the company but the services are not pertaining to the audit. It is totally different. Therefore, the person who has already done the accounting work will not be able to review his or her own work (Parker, 2015).
In the given situation, Annette has already worked for the company for accounting and direct and indirect taxation work for the period two months ago and has been included in the team of audit for the same company.
The evaluation of this type of threat will mainly be done on the non audit work done and the materiality of the mistakes which Annette has left in order to save her mistakes.
Safeguards should be there for any threats which can be caused due to any factor. In order to save the auditor from the threats of independence that may be faced by him during the course of audit or at the time of audit then the following are the heads in which the safeguards have been listed:
Safeguards issued by the various acts, laws, rules and regulations of the country in which the company is operating.
Safeguards issued through various measures adopted by the audit firm itself.
The safeguards clubbed under the above three broad categories have been listed on the basis of the situation:
- Auditors shall restrict the entry of those personnel to conduct the audit of that company of whose the personnel have already conducted the accounting and taxation work.
- Team members of the audit team shall keep on rotating on the proper and regular basis.
- The auditors of the company shall also be rotated on periodical basis at the annual general meeting of the company so that the chances of having the material misstatements and overlooking of the effective audit observations.
- All the team members shall be professionally trained and there shall be no scope of having the cordial and healthy relationships with the employees of the company whom can affects the power of their decision.
- The auditee company shall also not provide the extra benefits to the auditor of the company in order to have smooth audit (Livine, 2015).
The auditor has to consider various risks while planning for the audit of any company. These risks totally depend on the nature and type of the business of the company along with the size of the business. Following business risk will be considered by the auditor of the Mining Supplies Limited:
Loss of Customers – The customers are the source of income which every business should treat with the full and complete spirit. The customers’ satisfaction should be the main aim of the business. But as per the practice that the company is following in making the purchases from the supplier located in UK, USA and China is totally different to the requirements of the customer. It details that the company have been purchases without having a replacement clause or warranty clause for the main equipment. This will not only affects the reputation of the company but also reduces the customer base of the company (Imrie, 2011). Further if the company is in the urge of having and retaining the customer base then the company will start incurring the cost out of its own pocket and the company will be in total loss which in turn may lead to the situation where the company will have the loss from the total income.
Business Risks Faced by Mining Supplies Limited
Loss of Stock – After analyzing the situation of the Mining Supplies Limited, it has been observed that the company is making purchases without having the clear instruction from the supplier. There are two main requirements on which the company has not looked after. One is that whether the company is providing any warranty or replacement for main equipment that have been discussed in earlier point. The other point which the company has considered is that the company has not considered whether the goods that are being shipped from the overseas country are on FOB basis or on CIF basis. It means the company is unaware that if the goods are lost in transit then the company have to bear the cost or the supplier have to bear the cost (EY, 2016). Thus, this kind of unawareness will lead to the loss of stock along with the extra cost that the company has to bear from its own income.
Thus, these two risks shall be considered by the auditor in his audit plan.
Audit risk shall be considered by the auditor while planning for the audit. If the auditor does not considers the audit risk then whole purpose of the audit will be in fact gets mutilated. It is because if any type of risk is there and the auditor does not plans for it to how to check and proceed with this then the audit report will not serve the purpose of the users of the financial statements and also the conceptual framework will get affected. Following are the audit risk for each identified business risks:
Inherent and Control Risk – The inherent risk occurs only due the presence of the inherent limitations that the company has been facing from the commencement of the business. Both the risks give rise to this type of audit risk. Loss of stock implies the presence of the inherent limitations of not checking the customer requirements and further not checking the loss caused due to non provision for replacement or warranty of equipment (Long, 2015). This witness that the company has such policies which will not only hamper the working of the organization but also the customer base. Second Control risk implies that the company does not have strong internal control system which can divert the loss of customers through any policies, procedures or checks. The account balances that have been identified in this and will be affected are the accounts receivables, account payables and turnover in comparison to the last year (Becker, 2015).
Detection Risk – The detection risk is the risk that has been encountered in the second type of risk. The presence of this type of risk has been identified because of the fact that the auditor is not able substantiate with the documents and the earlier practices being followed by the company whether the cost of loss of stock will be borne by the company or by the supplier. He has to include in his plan of audit whether the substantive or additional procedures are required for the same or not. The account balances that have been identified in this and will be affected are the stock and account payables in comparison to the last year.
References
Becker E, (2015), “Audit Risk vs. Business Risk”, available at https://www.osyb.com/blog/small-business/audit-risk-vs-business-risk/ accessed on 27/04/2017.
Barizah N, (2016), “Threats to Auditor Independence”, available at https://www.academia.edu/260449/Threats_to_Auditor_Independence accessed on27/04/2017.
Edwin M, (2015), “Analysis of Threats to Auditor Independence and Available Safeguards against those threats”, available at https://www.academia.edu/9406967/THREATS_TO_AUDITORS_INDEPENDENCE accessed on 26/04/2017
EY, (2016), “Top 10 Business Risks”, available at https://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf accessed on 27/04/2017.
Imrie B, (2011), “Business Risks facing the Mining Industry”, available at https://www.in.kpmg.com/SecureData/ACI/Files/Top_20_Risks_the_Mining_Industry.pdf accessed at 26/04/2017.
Livine G, (2015), “Threats to Auditor Independence and Possible Remedies”, available on https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full accessed on 27/04/2017.
Long G, (2015), “Audit Risk and Business Risk”, available at https://www.cpaireland.ie/docs/default-source/Students/Study-Support/P2-Audit-Practice-Assurance-Services/audit-risk-and-business-risk.pdf?sfvrsn=0 accessed on 27/04/2017.
Parker A, (2015), “6 Key Threat to Auditor Independence”, available on https://www.intheblack.com/articles/2015/01/06/6-key-threats-to-auditor-independence accessed on 27/04/2017.
UK Essays, (2013), “Threat To Auditor Independence Accounting Essay.” Available at https://www.uniassignment.com/essay-samples/accounting/threat-to-auditor-independence-accounting-essay.php?cref=1 Accessed on 26/04/2017
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