The section 110 is issued by the Accounting Professional and Ethical Standards Board (APESB), which is initiated by the institute of chartered accountants of Australia and CPA Australia. It is required by auditor to fulfill the fundamental requirements these are: Auditor should be open toward his professional relationship, not be biased, confidentiality to be kept until and unless there is a requirement by law, proper compliance of all the rules and regulations relating to audit and ethics (AICPA, 2016).
Threats can be reduced to acceptable level by obtaining full information and about the client, management orientation and activities done and obtaining commitment from client towards corporate governance policies (APESB, 2010).
Direct communication can be done between the auditor and client regarding any threat identified; it is more preferable to get the consent of the appropriate authority of the company preferably in written during audit engagement. It would enable the audit firm to present as evidence if any case filed against them. Documentation is done to reduce the liability of firm toward the corporate governance, in which member has to document the threat, its nature and its extent over the organization.
It is prescribed that an audit entity should determine the possibilities of threats by reviewing previous audit conducted by the firm.
One of the accountants who was a part of 2014 team , he owns shares in HCHG, as per APES 110, when any auditor has any direct or indirect interest in the working of the organization, it is to be mentioned in the audited statements. Hence it can be a threat to the audit team, though it is not found material to them, but to safeguard the threats it should be mentioned to remove the future conspiracies. It is the responsibility of the audit team to emphasize any loans and advances, any merger and acquisition done or removal of the key managers, or employing or installing any new workforce, tangible and intangible resource. Hence Fellows and Associates should mention this holding in their report.
In an audit firm there can be following threats:
Circumstances which can lead to familiarity threats for a member:
Previous audit conducted or reviewing financial and business relationship with the audit client. And even if there are threats and management of the client is refusing to accept, then the audit firm has an option to go to ‘those charged with governance’ or the governing body.
Safeguards are the measures which help in reducing eliminating threats and reducing them to the acceptable level. Action that needs to be taken by Fellowes and Associates to eliminate the potential threats are as follows:
According to IESBA if an auditor is unable to eliminate or reduce threats to an acceptable level, then he can discontinue his service, or if required he can resign from audit engagements. There might be removal of the person appointed in the assurance team. It has been given permission to the auditor to communicate with the client’s internal auditor; by this the audit firm will get help regarding the threats involved in the organization and what should be the nature and extent of audit procedure conducted. The audit firm can also visit the organization without prior informing to check whether the company maintains the records and follow rules and procedures as it says. And even if the client did not accept the audit firm saying then in such a case auditor can mention his statement in footnote of auditor report.
In the given case study the client has requested the firm to provide an opinion that the instruments used in the hospital are fir to use where they are actually harming the patients through its harmful radiation. Hence in this case if it seems to auditor that this issue is material, the auditor must mention this in his report rather accepting it in the exchange of the clients’ company goodwill.
Safeguards hat can help in eliminating or can reduce them to an acceptable level. They are broadly classified in two categories:
Safeguards by profession or law
working environment safeguards
Safeguards by profession or law are: Corporate governance regulation, professional standards, disciplinary procedures, third party review, and professional development requirements.
Whereas in working environment safeguards the firm should follow the fundamental principles, various procedures and policies regarding quality control, documentation regarding the audit work( internal policies, procedures), communicating the audit work to all the members (Allen & Siegel, 2002).
AICPA,(2016), A framework for the auditor independence, Journal of accountancy
Allen,W,T & Siegel,A,.(2002), Threats and safeguards in the determination of auditor independence, Washington university law review, volume(80), issue (2)
APESB, (2010), APES 110 code of ethics for professional accountants, accessed on 26 December, 2016, viewed at https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf
APESB. (2015). Standards and guidance, accessed on 26 december,2016, viewed on https://www.apesb.org.au/page.php?id=12
Carey, P,. Subramanian, N,. & Ching, K,C,W,.(2006), Internal audit outsourcing in Australia, Accounting and finance,(46),(11-30)
Christopher,J,.Sarens,G& Leung,P,.(2007), Analysis of internal audit function, a critical independence of the internal audit function: evidence from Australia
Kendalls, B. (2009), Australian master accountants guide, CCH Australia limited, Sydney
Taylor & Francis. (2016). Visualizing intangibles: measuring and reporting in the knowledge economy
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