Auditor need to follow the generally accepted standards of auditing while they prepare the audits of accounting firm (Soh, Leung and Leong 2015). Addition to that, Auditor independence explains about the independence of internal auditor or an external auditor from parties who have the financial interest in business activities that requires to be audited through use of fair means. Independence actually means integrity and objective approach that require at the time of process of auditing. It is necessary for an auditor to act independently from the client company when the audit provides opinion and will not get influenced by their relationships. It is expected from an auditor to provide unbiased and honest professional opinion after viewing the financial statement of the business and explain it to the shareholders (Soh and Martinov-Bennie 2015).
In case of first situation, proper explanation is given on non-audit services where the services are offered by the auditors to his clients that are out of scope. These types of audit services include management services, tax related services and client promotion (Simnett, Zhou and Hoang 2016). In that case, these non-audit services are provided in exchange of additional income or any other type of non-monetary advantage. Auditors who involve in non-audit services leads to independence impairment when they provides services to the client
There are various impacts of non-audit services in the given segment where audit quality is hampered and receive criticism from the stakeholders and regulators at the same time. In that case, advocacy is serious threat to independence present for an auditor especially in the given situation. Furthermore, advocacy means a situation where an auditor gives an audit opinion but the client feels that the quality has been compromised largely (Simnett, Carson and Vanstraelen 2016). Therefore, auditors who use advocacy services at the time of providing audit opinion then they will be compromising ethics aspect and that negatively affect independence to an auditor.
In case of second situation, it is important to consider the fact that independence of an auditor gets threatened hugely when they start taking monetary and non-monetary benefits that are not ethical (Simnett and Huggins 2015). These benefits are in addition to the prescribed fees that are offered to the auditor at the time of conducting audit report. In some cases, it is noted that auditors take up benefits that are nowhere written in the audit agreement or engagement that affect the independence of an auditor. After evaluating the given situation, it is understood that the client was offered a holiday package voucher for the audit firm member. When the auditor accept the offer made by the client, then that case leads to auditor independence as they are using extra non-monetary benefits from the clients. It becomes a case of threat to independency of an auditor, if the auditor receives extra benefits and makes use of that for rendering audit opinion to the client (Sethi, Martell and Demir 2015).
In case of third situation, it has been viewed that auditors spouse, parent, siblings and dependent comes as close family members (Redmayne 2013). Addition to that, financial interest involves debt guarantee, ownership and short-term or long-term securities that actually owned by the person in relation with the persons or through intermediary. It is the case when individual participates and supervises for making investment decisions as it controls over the intermediary. For this, the father of the proposed accounting is the financial controller for the given business. Therefore, if Michael accepts the offer for being a part of the audit team that will actually endanger the independency of an auditor (Rahim and Idowu 2015).
In case of forth situation, it is important to understand the fact there is positive relationship between client, officers, employees and directors who actually get influenced by the risk in a given business environment of the potential client. In other words, an auditor is needs to be sympathetic and patience with the potential client. Furthermore, there is positive relationship between the client that builds trust level and presents the data in proper way (Pearson 2014). When an auditor have the necessary information because they have worked with the previous client and been a part of LTH
It was essential for the auditor to carry out the proper services as it include the required tax calculations at the time of passing journal entries that ends at 30th of June 2015. It is not possible or neither feasible for an auditor to audit his or her own work (Moroney et al. 2014).
In this part, it is noted that the forbidden services are given by the clients and the auditor who are rendering services that compromise their independence (Knechel and Salterio 2016). There are number of measures that actually are implemented for strengthening the independence of an auditor and some of these as under:
It is necessary to manage risk that takes place from the spare-parts inventory. In that case, managing the inventory is very poor and need proper attention at the same time (Soh, Leung and Leong 2015). It is necessary for the business enterprise on matters relating to risk management factors so that risk are analyzed and taken the major steps in a way where risk is reduces as and when possible. Commercial risk, health and safety risks, and reputational risk are some of the risk that needs to be identified by the business enterprise. Downtime risk is also included when there is risk to financial loss as business fails to implement any latest technologies. It may be related to managing the spare-parts inventory. Purchase of spare-parts and equipment are two types of business risks that need to be evaluated while the audit plans the audit function. There are two viral risks that need to be taken into consideration are strategic risk and the other is operational risk (Soh, Leung and Leong 2015).
The first identified risk is strategic risk that is not related to any way with the business strategies and selection of enterprise (Soh, Leung and Leong 2015). This risk involves to those who decide over what is wrong and what is right with the particular product as well as market. Strategic risk is that risk that involve from managing of spare parts inventory in case the company gets engaged with the management parts in an effective way. It is noted that the business enterprise selects the ad-hoc facilities where the enterprise spends on the items so that they can purchase and there is no definite formal policies that can be used or implemented in any case. It is necessary for any organization to appoint experienced managers who can give correct judgment on daily issues that prevails at workplace (Simnett, Zhou and Hoang 2016). Spare parts inventory must be managed by the organization through investing more on financial management activities. It is essential for any business organization for investing in finance for managing the inventory that relates to potential loss. Downtime loss should be taken into consideration the gets related to the way for handling the risk through use of large quantities purchase at the same time. Business organization needs to implement the ad-hoc strategy where they can implement the required strategies at the correct time. In case when a business fails to follow the extended downtime, then they need to find the best strategy so that they can manage with the spare-parts inventory in an efficient form (Junior, Best and Cotter 2014). It is thereby important to evaluate the alternative strategies so that the business organization can avoid the future probable losses and lead to smooth functioning of business enterprise.
The other risk identified is the operational risk that is directly related to operational downtime; it is the risk that is concerned with particular approach after depending upon the executive level (Simnett, Zhou and Hoang 2016). Every business enterprise should be properly setting strategic management approach and execute it in the most appropriate way. They should be finding ways for implementing the policy so that they can stock up the inventory while taking any proper decisions on matters relating to standardization. Business organization is responsible for managing the operational risk so that they can involve in proper implementation of strategies and manage with the stock in an effective way (Junior, Best and Cotter 2014). Therefore, managing risk is important because it needs to identify the best suitable approach that has the ability to correct the issues as and when applicable.
It is important to understand the fact that associated risk relates with the inherent risk (Soh, Leung and Leong 2015). This risk actually takes place due to any omission or error that is present in the financial report as it brings out various factors after comparing to control failure. There is complex transaction present after viewing at the risk and nature of transaction where it is require to conduct high level of judgment in case for predicting financial projections. In that case, there is different risk association that has an overall impact and views at the balance between the account receivables amount. Some account actually shows transactions that are highly related with the inherent risk like risk that is related to inventory management (Junior, Best and Cotter 2014). This management hugely takes into consideration the accounting balances based on transaction classes.
Operational risk and detection are two most important risks that need to be taken into consideration by the business enterprise (Simnett, Zhou and Hoang 2016). It may happen that an auditor at the time of auditing fails to note the misstated figures as presented in the financial statements. Mostly, it is viewed that an organization performs analysis and substantive test procedures in their operational activities for smooth functioning of business enterprise. In case of detection risk, an auditor could not find any types of errors at the time of preparing the audit report. Here, auditor reviews the risk after evaluating the accounting balances and contacting the accountant at the same time. These activities actually greatly affect the balances on accounting transactions. It is the case when accounts are susceptible and associated risk relates with accounts such as inventory, sales, revenue and purchase (Soh, Leung and Leong 2015).
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