1. a) In the first situation, the CEO of Luxury Travel Holidays Ltd intends to reappoint Clarke and Johnson as the auditor, but only if CJ can assist in promoting the company’s business by giving a speech at the travel agency seminar. This case is clearly outside an auditor’s normal practice, as the CEO refuses to offer such engagement if CJ does not accept such offer (intimidation threat). The second situation states about the CEO’s willingness to offer travel packages to the auditor in addition to their audit fees for want of smooth audit. However, the CEO’s main intention behind such offering is to mold the auditor’s decision in the company’s favor because of the auditor’s long-term association with the company (familiarity threat). The third situation describes another familiarity threat wherein Michael being appointed as an auditor is obligated to conduct an audit of the company wherein his own father is the financial controller (Wright & Charles, 2012). Thus, Michael will surely not report against the company, as it can result in the loss of his father’s and other employees’ jobs. The last situation describes self-review threat wherein Annette being appointed as an auditor is obligated to review her own work conducted as a temporary assignment in the past year. Since one cannot review their own doings; this threat also poses complications to an auditor’s independence.
b) The safeguards for the first situation are first, persons other than management must ratify appointment or reappointment of auditors, in order to mitigate intimidation threat. Secondly, communication with independent audit committees regarding the matter can also assist in the issue. Further, in the second situation, removal, rotation, and reassignment of the senior members of the audit team can be done. Besides, steps can be taken to avoid any gifts like travel packages, to smoothen the audit process. The best safeguard for the third situation is considering the SOX Act so that any auditor having a personal interest in the company is restricted from being appointed. This can avoid the familiarity threat, thereby maximize the efficiency of the process of audit. In the last situation, since there is a threat of self-review, the best available safeguard is using different engagement teams and partners, with separate lines of reporting for providing effective auditing services to the client (Roach, 2010). Therefore, instead of appointing Annette as the auditor, another qualified professional may be considered for the audit process, as it will result in a more enhanced audit opinion.
2. a) In relation to Mining Supplies Ltd, since its each equipment comes with a two-year labor warranty and spare parts, the first major business risk is downplayed or overstatement of spare parts’ requirement. The auditor must properly examine the requirement of spare parts because these arrive from distant countries like China, Europe, etc, while the company is located in Melbourne. Therefore, the arrival of such products can consume immense time and inappropriate examination of the quantity of spare parts can cause fund disturbance, thereby diminishing the order for further spare parts (Mock et. al, 2013). This can also affect MSL’s financial statements and make it look undermined in the market, thereby granting leverage to its competitors.
Furthermore, there is another business risk that is a risk of fraud and theft because since the company’s products arrive from other countries, and the company offers maintenance services that may consume around one week, the amount of theft and fraud in relation to such must be properly evaluated. For this, a relevant figure for the present year must be worked out after considering the figures of past years (Mock et. al, 2013). In addition, the auditor must observe any prevalence of insurance policies in association with the purchased equipment.
b) The first audit risk is offering of inaccurate statements upon the company’s financial statements. This is because each purchased equipment comes with a two-year labor warranty and spare parts, and it must be evaluated whether sale price of the equipment must be lessened by the cost of spare parts, or whether it must be shown under expenses. Besides, MSL cannot show such spare parts under its stock-in-trade in the Balance Sheet as they are provided free to the customers under warranty (Cappelleto, 2010). However, they may be few spare parts that are not covered under warranties, and they can be depicted as sales in the company financials. Therefore, examining the maintenance services can assist in determining which spare parts are in the nature of revenue or expense because wrongly stating such items can result in misguiding the stakeholders. For the second business risk, since MSL sends its mechanics to distant locations (customers’ place), they also carry spare parts as required under the provision of maintenance services, hence there can be theft or fraud on their way. Thus, whether insurance policies have covered such spare parts must be ascertained. In addition, the auditor must himself travel to such remote areas to assess the truthfulness of facts provided by mobile mechanics in relation to time consumption and costs. Besides, the auditor must also observe whether the company to gain benefits fraudulently uses insurance policies.
Cappelleto, G 2010, Challenges Facing Accounting Education in Australia, Melbourne
Mock, T. J, Bedard, J, Coram, P, Davis, S, Espahbodi, R. & Warne, R 2013, ‘The audit
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Roach, L 2010, Auditor Liability: Liability Limitation Agreements, McGraw-Hill.
Wright, M.K. & Charles, J 2012, ‘Auditor independence and internal information systems audit quality’, Business Studies Journal vo. 4, no. 2, pp. 63-84.