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Impartiality Threats

Discuss about the Auditing for Luxury Travel Holidays Ltd.

In relation to the first scenario, the CEO of Luxury Travel Holidays Ltd (LTH) had directly stated that they would consider a path of the reappointment of Clarke and Johnson as an auditor, only on the condition if C&L would assist in procuring more businesses by offering a lecture in the upcoming seminar about the company’s effective performance. Furthermore, in the given situation, C&L being the company’s independent auditor is not being permitted to express their judgment or opinion upon the company’s financial statements. Besides, they are under an immense pressure to conduct such activity because of fear of losing their reappointment. In relation to the second scenario, the company’s CEO is providing a gift in kind together with specified audit fees to the auditors with an intention of attaining smooth audit processes (Blay et. al, 2011). However, it is shocking to observe that by a smooth audit process, the CEO referred to an unfair audit opinion to the stakeholders. Hence, this implies a situation of familiarity threat that means the CEO is willing to alter the judgment of the auditors, as they have been working like a family with the company since a long time (Mock et. al, 2013).

In relation to the third situation, another case of familiarity threat can be witnessed, as an auditor will be a part of an audit process, whose father is already working in the company as a financial controller. In this case, Michael as an auditor would have to review the work performed by his own father. This implies that Michael would not report any fraudulent activities performed by his own father or by the company as a whole, as it would result in his father’s termination of the job together with that of other employees. Nevertheless, in the current phase, an auditor’s fair judgment is not anticipated, and would ultimately result in an unfair audit process. In relation to the fourth scenario, it can be observed that C&L had been appointed as an auditor of the LTH, wherein Annette was on assignment for conducting computations of tax and preparing entries in order to accommodate these in the financial statements of 30 June 2015. In the current case, Annette has been opted to work with the audit team, and therefore, she must review her own undertaken activities. Hence, in relation to this case, the biggest threat prevailing is self-review threat. This is because an individual whether being an auditor or not, cannot analyze or assess his or her own doings. In other words, effectiveness can be achieved if another individual evaluates the doings of a specific individual (Coram et. al, 2011).

Misstatement of Financial Statements

In relation to the above situations, an auditor can implement various safeguards. Firstly, in the first situation, the safeguard is that the auditors conducting the process of an audit of the company must be appropriately selected because any individual possessing an interest (financial or personal) in the company cannot conduct an unbiased audit. Secondly, in the second situation, the best available safeguard is the rotation process of the senior members of the audit team. In addition, an efficient communication to the senior authority of the organization or the CEO must be offered in relation to non-acceptance of gifts in kind (Church et. al, 2008). Thirdly, in the third situation, the most appropriate safeguard is the consideration of rules and regulations mentioned in the SOX Act, wherein it is stated that an auditor cannot perform their role as the management. Moreover, the auditor must also conduct personal touch with the independent committee of the audit, and thereafter, report the advocacy risk of promoting clients. Lastly, in the fourth situation, the job performed by Annette must be taken into due consideration by any other chartered accountant in order to establish an independent judgment. Besides, Annette being an accountant must not be a member of the audit team, thereby avoid performing the audit for LTH.

In relation to the given situation wherein product demand could not be determined in association with the offering of maintenance services to the customers for two consecutive years since the product purchase, the first key business risk can be attributed to overstatement or understatement of the requirement of spare parts. In relation to such risk, as every product comprises of a two-year warranty, Mining Supplies Ltd (MSL) must have to efficiently evaluate the quantity for the purchase of spare parts because it comes from faraway sources that might have immense lead time. Therefore, it is the sole duty of the management to evaluate the adequate quantity of spare parts because if not, it can result in fund blockage, thereby resulting in a decline of purchased quantities of the equipment. Furthermore, the company would also disrupt the free spaces of its warehouses due to the spare parts that in reality would have been utilized after two years. In addition, the company might also lose its interest income that could have been procured if fund blockage would not have arisen in relation to spare parts. Due to such inappropriate expectation of demand for spare parts, the financial statements of the company including its profit and loss and balance sheet would also be influenced. Moreover, the company would also lose its efficient position to encounter its competitors in the market, as it was not able to provide an adequate quantity of equipment to its customers.

Product Demand Uncertainties

The second business risk relates to the risk of theft and fraud that can arise when the company will procure its goods from international markets, and when it directs its workforce to distant areas for maintenance services after customers purchase its products. Besides, such maintenance services will occur until the completion of two years from the purchase of equipment. Therefore, the quantum of fraud and theft in association with the equipment must be duly taken into account for the past three years in order to determine whether the company is agreeing to any affairs to trim such scenario (Hoffelder, 2012). Moreover, experiences of past years can be considered to ascertain whether the company has agreed to any insurance policies in opposition to such thefts and frauds. Further, such policies entered must be viewed in relation to purchasing of quantities and if, it was truly vital to agree on such insurance policies.

In lieu of the business risks identified above, the audit risk that plays an important part in the scenario relates to misstatements of the company’s financials. Being an auditor, since such risk directly relates to the conditions incorporated with the sale, he must be able to recognize whether the sale price of the product is required to be declined by the expenses of spare parts, or it must be highlighted as an expense in the company’s profit and loss account (Bedard, 2014). Furthermore, such spare parts could not collaborate under stock-in-trade because a portion of such spare parts that has been procured free warranty will be clubbed under liquid assets. Moreover, there are spare parts that are not covered by the company under maintenance of equipment. The company would depict these under the sale of spare parts. Furthermore, prior care must be provided in relation to maintenance contracts because an auditor can procure immense knowledge regarding the kind of spare parts that are chargeable as an expense and those which can assist in generating income for the company. Therefore, as the spare parts that could have otherwise been charged as an expense, if unintentionally or intentionally depicted as revenues, it would result in overstating the company’s revenues, thereby offering falsified information to the stakeholders (Carcello, 2012). Similarly, if such spare parts that could have otherwise been charged as revenues, if shown as an expense, it would result in overstating the company’s expenses or understating the company’s profits, thereby again resulting in decline of stakeholders’ earned dividends, manipulation of taxes being paid to the government, etc (Wright & Charles, 2012).

Theft and Fraud Risks

In association with the second risk regarding the risk of fraud of theft, as the company mechanics or engineers does not exist on its payroll, appropriate scrutiny of them is not done effectively (Holland & Lane, 2012). These engineers take the spare parts with them that could be utilized by the customers in relation to warranty services, but there is always a possibility of theft regarding such spare parts. Therefore, the auditor must not only observe whether such spare parts and the equipment are incorporated in the insurance policy but also the time when these are sold to the final customers. The auditor must also take the cost effect of such insurance into consideration. Besides, one crucial perspective that must be duly considered is that whether the company is endeavoring into making fraudulent agreements with its contractors for destroying or stealing its products, thereby procuring insurance claims out of such. Furthermore, because mobile contractors travel to distant locations, it consumes immense time that could lead towards manipulation of facts and inappropriate financials, thereby hampering the faith and trust in the company’s auditors (Tepalagul & Lin, 2015). Therefore, it is the duty of auditors to travel to such distant locations themselves in order to evaluate the expenses as provided by the mobile contractors.

References

Bedard, J. N,  Gonthier, B, & Schatt, A. (2014). Costs and Benefits of Reporting Key, Harvard Press

Blay, A. D & Geiger, M. A.  & North, D. S. ( 2011). The Auditor's Going-Concern Opinion as a Communication of Risk. Auditing: A Journal of Practice & Theory, 30 (2): 77- 102.

Carcello, J. (2012). What do investors want from the standard audit report? CPA Journal 82 (1),7.

Church, B., Davis, S. & McCracken, S. (2008). The auditor’s reporting model: A literature overview and research synthesis. Accounting Horizons, 22(1), 69-90.

Coram, P, Mock, T. J, Turner, J.  & Gray, G. (2011). The communicative value of the auditor’s report. Australian Accounting Review 21(3), 235-252.

Holland, K. & Lane, J. (2012). Perceived auditor independence and audit firm fees’, Accounting and Business Research. 42(2), 115-141.

Hoffelder, K. (2012).  New Audit Standard Encourages More Talking. Harvard Press.

Mock, T. J, Bédard, J, Coram, P,  Davis, S, Espahbodi, R. & Warne, R. (2013). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory, 32, 323-351.

Tepalagul, N. & Lin, L. (2015). Auditor Independence and Audit Quality A Literature Review’, Journal of Accounting, Auditing & Finance, 30(1), 101-121.

Wright, M.K. & Charles, J. (2012). Auditor independence and internal information systems audit quality, Business Studies Journal. 4(2), 63-84.

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