The Impact Of Business Risk Audit Approach On Auditors' Independence And Financial Ratios Analysis Essay.

It has been suggested that the independence of auditors is compromised through the business risk audit approach.

1. Explains and evaluates the need for audit independence
2. Briefly describes the business risk audit approach
3. Evaluates the impact that this approach has on the independence of auditors.

Importance of Auditor Independence in Providing Unbiased Opinions

The primary responsibility of the auditors is to provide the shareholders of the companies with an honest opinion as to whether the financial statements of the company reflect true and fair financial position of those companies. For this reason, it is important to have independence in the audit process so that the audit opinion of the auditors is not influenced by any relationship between the auditors and the audit client. It is expected from the auditors that they will provide an honest and unbiased professional opinion about the financial statements of the companies to their shareholders (Wright & Capps, 2012). There are many instances where the independence of the audit process has received doubts from different stakeholders and different types of incidents in the organizations are responsible for these doubts to the independence of the auditors. It needs to be mentioned that there is an appositive relation between audit independence and corporate governance as the implementation of effective corporate governance helps to retain the independence of the audit process. There are many instances where the opinion of the auditors is highly influenced by the relation between the auditors and the clients. In case this happens, there will no longer be any audit independence and the shareholders will not be able to rely on these audit reports. In other cases, because of mutual underatsding with the auditors, the clients set low audit fees and the rest part is paid through other benefits (Schmidt, 2012). This aspect also affects the independence of the audit process. Apart from these, sometimes the auditors are found to provide different non-audit services like consultancy services, tax advice and others. It implies that the auditors have monetary interest in the property of the audit clients. Due to all these reasons, the auditor of the companies become bias to their audit clients and because of these, they provide their audit opinion in the favor of te audit client. In this situation, it needs to be reminded that the auditors are the representative of public and the audit opinion report should be developed by considering the interest of the stakeholders and shareholders of the companies (Schmidt, 2012).    Thus, in order to avoid all these issue and to generate true audit opinion, there is a strong need to have independence in the audit process.

In the recent years, different types of audit approach can be seen and Business Risk Audit Approach is considered as an effective approach. Business risk refers to a threat that creates hindrances to the businesses in achieving their goals and objectives. These risks can be divided into internal and external factors. Under the business risk approach, the auditors examine all aspects of the client’s business like internal and external business environment (Tepalagul & Lin, 2015). After that, the auditors analyze and evaluate various business risks to which the business operations are exposed. In this context, it needs to be mentioned that business risks affect the company’s ability to achieve their goals and objectives; and these risks many be controllable and uncontrollable. The auditors are concerned about these risks so that they can be eradicated. Under the business risk approach, the auditors of the companies acquire full underatsding about all the business operations of the companies so that they can make effective audit strategies to prevent those risks. The next part is audit planning. In the process of audit planning, it is the responsibility of the auditors to consider all the relevant factors associated with the audit process and for this reason, the auditors are required to take into consideration all the risk factors associated with the business organizations. After the understanding of all the business activities, the auditors develop the audit plan after considering the identified risks in the business organizations (Tepalagul & Lin, 2015). Thus, it can be seen that the business risk approach of auditing helps the auditors to analyze and evaluate all the risk aspects of the companies in a more effective way.

Issues with Auditors' Independence

It needs to be mentioned that business risk audit approach has major impact on the independence of the auditors. With the assistance of business risk approach, the auditors are required to obtain more information about the business risks for the preparation of true and fair audit opinion. For this reason, the auditors are forced to continue their jobs in the ethical way so that they can obtain all the information. In addition, the auditors do not get the scope to overlook the major issues in the organizations (Holland & Lane, 2012). Apart from this, under this audit approach, the auditors have to put more emphasis on the strategies of the organizations so that the quality of the management can be judged. Most importantly, the business risk approach makes the auditors provide justification about the important factors of the companies to their stakeholders. In all these processes, the auditors do not get any chance to make negotiation with the audit clients. On the same time, the adoption of this approach reduces the possibility of having any financial interest of the auditors to the property of the audit clients. All these aspects help in the development of true and fair audit opinion for the audit shareholders (Sarkar & Sarkar, 2012). Hence, from the above discussion, it can be seen that business risk approach of auditing has a positive impact on the independence of the auditors and this relation put good impact on the audit operation of the companies.

From the provided information of Jack George Pty Ltd, it can be observed that the audit team has calculated certain ratios about the company that shows the overall financial position of the company. Cost of goods sold/sales ratio shows a decreasing trend from 2016 to 2017. Cost of goods sold is considered as a major expenditure of the organizations and the decrease in this ratio shows the increased efficiency of the company (Arens, Elder & Mark, 2012). Operating expenses/sales ratio indicates the incurred operating cost of the companies to make the sales. According to the information provided, decrease in this ratio can be seen for Jack George Pty Ltd and it implies that the company has become able to fetch more sales out of less operating expenses that show the increased efficiency of the company. It can also be observed that there is a decrease in selling and administrative expenses/sales ratio from 2016 to 2017. This particular ratio implies that the company has increased its performance efficiency by reducing the selling and administrative expenses. It can be observed that there is not any mention about the interest expenses/sales ratio from the side of the auditors (William Jr, Glover & Prawitt, 2016). The analysis of this ratio shows that there has been a high increase in this ratio for Jack George Pty Ltd from 2016 to 2017. According to the provided information, it can be seen that the company had to take double amount of loan for purchasing the replacement machine of woodcutting. Due to this aspect, Jack George Pty Ltd had to pay high amount of interest that affected the revenue of the company (Christensen, Glover & Wood, 2012). The same incident can be seen in case of the ratios of total cost/sales and profit/sales, as the audit team has not mention about them. From these ratios, it can be seen that Jack George Pty Ltd has been able to decease the overall cost of the company by more than 10%. In addition, there has been also increase in the net profit of the company. These two aspects show the improved business performance of the company. The audit team has provided correct comment on the inventory turnover ratio as the decrease in this ratio implies that the company has been able to clear the stock in less time (Knechel & Salterio, 2016). The same trend can be seen in case of accounts receivable turnover ratio. The decrease in the accounts receivable turnover ratio implies that Jack George Pty Ltd has been able to collect their dues on early basis. This is an indication of the improved liquidity position of the company. Increase in the current ratio from 1.2 to 2 implies that Jack George Pty Ltd has improved their liquidity position in order to pay their current obligation. However, there is not any mention about the profit/capital ratio of Jack George Pty Ltd. Provided information shows increase in this ratio and it shows the increased ability of the company to generate profit out of the capital invested. The decrease in this ratio will affect the profitability potential of the company, as the retained earnings of the company will be decreased.

Business Risk Audit Approach and its Positive Impact on Independence

From the above discussion, it can be seen that there are some aspects in Jack George Pty Ltd requires audit testing at the end of the years. The provided information about Jack George Pty Ltd shows that the operating profit of the company increased and at the same time, slight fallen in the sales can be seen. Thus, it is required for the auditors take this aspect into consideration for audit testing for validating the truthfulness of this aspect (Mock et al., 2012). The next matter required to be consider is the issue regarding the purchase and repurchase of computerized wood cutting machine. It can be observed that there has been an issue going on within the organization regarding the machine and the company had to double their bank loan for the repurchase of machine. Thus, there can be a control risk in the company regarding this matter and it requires audit testing. However, in case of the financial ratios of Jack George Pty Ltd, it can be observed that the provided analysis by the audit team is correct. However, there is a need for the final review of these ratios (Duncan & Whittington, 2014). Thus, all these aspects are required to consider at the time of yearend audit testing.

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