Auditor Independence Threats And Safeguards In An Essay.

Case 1  

Clarke and Johnson have been auditor of Luxury Travel Holidays, which is a travel company for the past years. As the Board of Directors is impressed with the wok of auditors, they wanted to continue them as auditors of the company for next year also. However, another request which is made by the management to the auditor provides a speech in next seminar of the company regarding promotion of the company so that more investors can be attracted. In case the auditors are unable to do the same it would be difficult for LTH for continue to work any more. The present situation is covered under Advocacy Threat where the auditor is requested to promote his business or represent in some other manner.

If the auditor accepts the proposal of LTH Ltd then it  will not be able to continue with other fundamental principles such as Integrity; Objectivity;  Competence; Confidentiality and Professional Behaviour. Promoting or endorsing client’s business intentionally or unintentionally concludes to affect the judgement. Thus, if Geoff accepts the proposal of management than he will have to compromise with the independence with which auditors accomplish its main obligations and will also lose the confidence of shareholders regarding the independence of auditor while presenting an opinion in the report. Hence, the auditor can safeguard himself by refusing the proposal of management.

Situation

In this case, LTH Ltd has offered CJ and Geoff, a complimentary voucher of four people to Greek for their families. The expenses relating to accommodation and travelling will be paid by LTH, and the same is done for the purpose of expressing sincerity towards them. Self-interest threat exists as a result of the performance of a non-audit service by an auditor and amount relating to same is presented in the financial statements.

Evaluation of Threat and corresponding safeguards:

Acceptance of undue advantage offered by the client is not in accordance with the principle of objectivity. In case of auditors accept any such offer such as an exotic holiday with the intention of making the relation strong and better; the independence of auditor will surely get affected. The reason behind the same is that the decision of auditor will be affected due to acceptance of those undue advantages. For safeguarding himself from such kind of threat, auditor can disclose the independence issue with the management and refuse acceptance of such offers.

Situation:

In this situation familiarity threat exists; as the Geoff has suggested Michael to be part of the audit team and his father is responsible for preparing financial statements of LTH Ltd; as he is the Financial Controller of the company. Familiarity threat is faced by the auditor in case he is trusting client because of close relationship with him (Romero, 2010). In this case independence of auditor is adversely affected and the same also have impact on the decision taken by him for the organisation,

Evaluation of Threat and corresponding safeguards

In the present scenario, as the father of Michel is responsible for preparing financial statements; thus he cannot be part of the audit team. As his father is required to comply with all the regulatory requirements and its case any default is made by him in accomplishing his obligation the same would not be disclosed even if Michel comes to know about it. It will not only impact the financial records of firm but also the opinion formed by the auditor.  As per the study of Oringel (2012), independent auditor assesses the financial affairs in a more appropriate manner through testing internal and external procedures of the organisations. Thus family interventions impact auditor’s independence as well as could lead threat to professional standards so immediate measures should be taken for their mitigation (Samsonova and Siddiqui, 2016). The same can be done by resigning Michael from audit assignment. Still, if he remains in audit team, his work should be assessed and reviewed appropriately.

Situation:

In this case, it is prescribed that Annette is part of the audit team in present year. Last year, she was responsible for preparing taxation accounts. The entries of same will effect financial report in 30^th June 2015, thus if any errors will b”58e available in the records the same will be reviewed by Annette only. The existing situation will give arise of familiarity and social bonding threat. As she has been part of the organisation and developed good relations with the staff, thus the same will affect the independence while accomplishing auditing obligations (Nicol?escu, 2013.). It might be possible that she does not review the accounts properly as she is having blind trust on the employees.

Over independence of Annette on social bonds might lead to mistakes and the reason behind same will the trust of the relationship. Independence in appearance means neglecting relationships or circumstances which can threaten or scrutinise and criticise the management. Financial information is regarded as oil for modern capital market, and the same enables the investor to take an efficient decision (Hay,  Knehcel and Willekens, 2014). Therefore, it is necessary to understand that appearing independent is not sufficient and actual independence is independency of mind.  The other side is also possible in which she might be able to make understand the issue to her friends in more appropriate manner, and thus the performance of employees can be improved easily. But the problem might exist in areas of work such as tax accounts which has been performed as well as evaluated by her only. She might provide a false presentation of the financial report in order to provide his good impression in front of his friends and management. Thus the steps which can be taken for mitigating the risk are: not evolving Annette in the audit team in case she is having influence in the financial department for last two years or less, and evaluation of transactions which are prepared by her should be verified in detail. According to Tepalagul and Lin, (2015), the same would assess that whether any unreasonable amount has been transferred to her or not or any other default exist in financial accounts or not.

Impact on independence and objectivity

Crampton and Hasaad will have to consider the following risk in relation to purchasing to equipment and spare part while planning audit is as follows:

• Detection Risk
• Inherent Risk

In present case, specialised equipment and spare parts are purchased by a no of manufacturing suppliers from different countries. Equipment and spare parts are the main part of an asset as they cover a huge portion of same; thus it requires to be evaluated appropriately for ascertaining whether the utility of same will be for lifetime or not. As per the views of Chiang (2016), detection risk is the risk that auditors will not be able to detect the misstatement available in the books of account and evaluate whether it could be material or not. On the other hand, inherent risk is the presumed risk considered before assessing the effectiveness of internal control. The same is assessed for ascertain the attempts that should be made by auditors for the purpose of ascertaining material misstatement.

In the present scenario, one free service is provided by the company within the warranty period. Thus it should be properly assessed that whether free services are not accounted as chargeable services and the manner of billing those services should also be verified. The main issue which has to be verified by the auditor is the substantial cost and the maintenance cost. Substantial cost should be in accordance with the general accounting principal which is required to be followed.

Inherent Risk implies the attempts that should be made by the auditor for assessing misstatements in the most and least areas of financial segments. The main assessment is done during the planning phase, and it continues at the audit progresses. The other risk i.e. Detection risk is dependent of two variants which are: inherent and control risk. It can be said that it is having an inverse relation with them. The substantial elements which are required by an auditor for mitigating risk are known through detection risk.

The account balance which would be impacted directly by the audit risk is equipment and spare and the maintenance accounts. It is necessary to ascertain whether the accounting of equipment and spare is done appropriately or not. As a large amount of money is evolved in this account; thus the same belonged to crucial part of the financial statement and required to be assessed in detail (Bragg, 2010). Maintenance account is also required to be assessed appropriately as a variety of transactions is available in one account.  Inherent risk is relating to control of management on various procedures available in the organisation. The same is assessed by the auditor for ascertaining the extent to which he can rely on management.

Bragg, M. S., 2010. Wiley Practitioner's Guide to GAAS 2011: Covering all SASs, SSAEs, SSARSs, and Interpretations. John Wiley & Sons.

Chiang, C., 2016. Conceptualising the linkage between professional scepticism and auditor independence.Pacific Accounting Review, 28(2), pp.180-200.

Hay, D., Knehcel, R. and Willekens, M., 2014. The Routledge Companion to Auditing. Routledge.

Nicol?escu, E., 2013. Understanding risk factors for weaknesses in internal controls over financial reporting. Journal of Self-Governance and Management Economics, 1(3), pp.38-43.

Oringel, J., 2012. Effective Auditing For Corporates: Key Developments in Practice and Procedures.A& C Black.

Romero, S., 2010. Auditor independence: third party hiring and paying auditors. EuroMed Journal of Business, 5(3), pp.298-314.

Samsonova-Taddei, A. and Siddiqui, J., 2016. Regulation and the Promotion of Audit Ethics: Analysis of the Content of the EU’s Policy. Journal of Business Ethics, 139(1), pp.183-195.

Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.