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Auditor Independence And Audit Quality System

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Question:

Auditor Independence and Audit Quality System.
 
 

Answer:

Introduction:

In the first situation, Clarke and Johnson (auditor) can become eligible for reappointment if it offers an effective speech to the stakeholders regarding the company’s well doings. This is the case of intimidation threat to CJ by the CEO of the company. Thus, since CJ has a fear of losing its reappointment, an independent opinion cannot be provided on its part. In the second scenario, the company’s CEO is providing gifts in kind to the auditor, together with the specified audit fees to obtain another smooth audit procedure like that of the previous This is the case of familiarity threat as the CEO intends to manipulate the auditor’s opinion in the company’s favor due to a strong relationship already set between them. In the third scenario, Michael being the auditor is under an obligation to investigate the affairs of the company including that of his father, as he is the financial controller of the company. Since Michael has a self-interest in the audit process; he will not report any misconduct on the company’s part, as it can result in loss of his father’s job (Holland & Lane, 2012). In the last situation, Annette being appointed as an auditor is under an obligation to examine her own activities (tax computations and entry preparation) being conducted in the year 2015. Hence, this is a self-review threat that cannot offer a fair opinion, and such job must be delegated to some other professional.
 
The best available safeguard in the first situation is the establishment of a corporate governance structure like an audit committee in order to attain effective oversight and communication regarding the services of audit firm (Tepalagul & Lin, 2015). This safeguard can assist in mitigating the threat of intimidating an auditor to provide an unfair opinion. In the second situation, the most appropriate safeguard will be rotation and reassignment of auditors from the assignment of audit in order to mitigate the threat of close relationships (familiarity threat). In relation to the third situation, the best safeguard to encounter self-interest threat is to select the auditors in such a way that the appointed auditor does not possess any financial or personal interest in the company. Moreover, an additional qualified professional can also be hired who does not possess any such interest, thereby providing an independent opinion (Kalpan & Williams, 2013). In the last situation, involving an additional qualified individual to review the work will be the most effective safeguard because one cannot simply review his or her own work and provide an unbiased judgement.

 

 
The first business risk is the risk of theft or fraud. Since MSL (Mining Supplies Ltd) purchases its goods from international markets; it has to send its mechanics to provide maintenance services to the customers for fulfilling the warranty criteria. Hence, the auditor to ascertain any effective steps undertaken by the company must assess the quantum of risk (Gilbert et. al, 2005). Furthermore, in association with the purchase of equipment, the auditor must evaluate whether insurance policies have been agreed to by the company to tackle such risk.

The second business risk is the overstatement or understatement of the requirement of spare parts. Since spare parts arrive from distant places, proper assessment of the quantum of purchase is vital as it can result in disrupting the smooth flow of resources, thereby minimizing the quantum of purchased equipment (Heeler, 2009). Further, the company financials would depict a wrong figure due to such complication, thereby resulting in loss of competitive advantage in the market because the adequate quantum of equipment would not be prevalent to cater to customers’ needs. Besides, the amount of interest income that could have been gained in lieu of correct anticipation of demand of spare parts cannot happen.

For the first risk, the auditor must examine whether company equipment and spare parts are covered under insurance agreements because carrying of spare parts to customers’ places can lead towards theft or fraud. Besides, the auditor must also take the cost influence of such insurance into consideration. Further, the auditor must also observe whether the company to gain from insurance claims conducts unethical activities. Lastly, since mobile contractors go far areas, the auditor can himself travel to customers’ place to evaluate the cost, and compare the same with that of mobile contractors, thereby safeguarding company’s trust upon the auditor and falsification of facts (Heeler, 2009).

In relation to the second risk, the auditor must take corrective actions to identify whether the product’s sale price needs to be depicted as an expense in P/L account or whether must be minimized by expenses of the spare parts. Moreover, the auditor must also scrutinize the maintenance contracts in order to determine what parts can be shown as expenses and vice-versa (Cappelleto, 2010). This is because wrongly stating expenses of spare parts as revenue can enhance the company’s revenues, and vice-versa.

 

References

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne

Gilbert, W. Joseph J & Terry J. E 2005, ‘The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, vol.3, pp. 66-92

Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Holland, K. & Lane, J 2012, ‘Perceived auditor independence and audit firm fees’, Accounting and Business Research, vol. 42, no. 2, pp. pp.115-141.

Kaplan, S. & Williams, D 2013, ‘Do going concern audit reports protect auditors from litigation? A simultaneous equations approach’, The Accounting Review, vol. 88, no. 1, pp. 199-232.

Tepalagul, N. & Lin, L 2015, ‘Auditor Independence and Audit Quality A Literature Review’, Journal of Accounting, Auditing & Finance, vol. 30, no. 1,  pp.101-121.

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