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Threats Affecting the Independence of the Auditor

The success of any operating business enterprise is defined by conducting auditing practices. Auditing is simply defined as the examination of the financial report of a business organization as presented in the organization annual report, an independent person and organization normally perform the audit practices (Arens, et al., 2012). It is also outlined as the systemic and impartial examination of books, accounts, statutory information, documents and vouchers of an organization to visualize how far the financial statements in addition to non-financial disclosures present true and fair view of the business enterprise. Auditing practices try to make certain that financial books of the company are correctly maintained as required by the international auditing standard board, and if they are bounded by the existing laws (Ricchiute, 2001).

Auditing independence explains as the independence of the internal or the external auditor from any other party that may have the financial interest in the business organization that is being audited, the auditor independence requires integrity as well as the audit approach to the auditing process. Some factors may affect the auditor integrity while they perform the auditing practices (Ricchiute, 2001).

Auditor is an individual who performs the audit practices to a business enterprise, normally many business enterprises are encourage to look for an external auditor since they are perceived to give quality and familiar audit services that reflects the operations of a business firm. Clarke & Johnson (CJI) is an external auditor to Luxury Travel Holidays LTD (LTH) travelling company. An auditor needs to have independence in their work .This is to allow them give the significant audit opinion that reflects the audit findings. According to Nasution 2013, there are some threats that affect the independence of an external auditor.

According to ICPAK ANALYSIS OF THE PUBLIC AUDIT ACT 2015 SECTION 10, self-interest is a fatal threat that affects the independence of the external auditor. This threat is perceived as soon as the auditor is frequently providing audit services to only one client. Luxury Travel Holidays LTD (LTH) has re-engaged Clarke & Johnson (CJI) Company to deliver their provider similar to the preceding financial year (William Jr, et al., 2016). The self-interest threat could affect the company since Michael dad could be having self-interest about the operations of the LTH Company (ICPAK, 2015).

ICPAK ANALYSIS OF THE PUBLIC AUDIT ACT 2015  CAP 20 states that, the advising threats affect the independence of an auditor, this threat sublimes when the auditor provides the financial advice to the client. Michael father is the financial controller of Luxury Travel Holidays LTD (LTH); the financial controller may not want his son to find any negative deflection of the financial operations of the Luxury Travel Holidays LTD (LTH). Michael could provide advice to his father about how to omit any negative deflections. An auditor has to make opinions based on the findings from the audit practices (ICPAK, 2015). Luxury Travel Holidays LTD (LTH) has confirmed that Clarke & Johnson (CJI) Company to provide audit services, the client could have been receiving financial advises from the auditor (Johnstone, 2000).

Safeguards to the Threats Affecting the Auditors’ Independence

According to Australian Auditing and Assurance Standard Board Corporation ACT 2001, CAP 200, the independence of an external auditor is affected by multiple referrals from the clients to the auditor. Making multiple referrals to the auditor or the organization department is not ethical and it affects the independence of the auditor. Clarke & Johnson (CJI) Company is an organization that has been supplying audit services to Luxury Travel Holidays LTD (LTH); Luxury Travel Holidays LTD (LTH) could make many referrals to the auditor, and thus affecting the audit reviews of the Clarke & Johnson (CJI) Company (AGAASB, 2001).

Self-interest problems affecting the independence of an auditor implies effect of making referrals and pointers to the auditor, a number of the managers in an organization might also have messed up with the organization regulations, assets and financial  statement, and so they are compelled to make recommendations to the auditors (Johnstone, 2000). On the other hand, a number of them may also want praises from board of directors so they make hints to the auditors, and as a result affecting the drafted report. Clarke & Johnson Company is endorsed to lessen the interplay with the clients, they need to make opinion based on the immediate findings of Luxury Travel Holidays LTD (LTH).

Advising threats is a critical factor that affects the independence of an auditor. The relevant audit opinion to be used by an auditor should be based on the immediate findings. According to ICPAK ANALYSIS OF THE PUBLIC AUDIT ACT 2015 Section 10, auditors are encouraged not to provide financial advised to the clients since their findings after their advised will affect the audit opinion and (ICPAK, 2015).

Multiple referrals from Luxury Travel Holidays LTD (LTH) have impact on the audit opinion to be supplied with the aid of Clarke & Johnson Company. Luxury Travel Holidays LTD (LTH) has re-engaged Clarke & Johnson Company to preserve providing audit offerings; Chris is the top manager of Luxury Travel Holidays LTD (LTH). Chris could make suggestions and recommendation to Clarke & Johnson Company, and thus affecting its independence while making opinions. Clarke & Johnson Company is required not to simply accept any thought or advice made by any member of the Luxury Travel Holidays LTD (LTH), auditor want to take warning of such issue in order that they may offer suitable audit opinion and report. 

Auditing planning is the strategic management measure for auditing, it conducted at the beginning of the audit process this is to ensure that the appropriate attention is fermented to important areas. The audit planning ascertain that the potential problems are promptly identified and possible solution are generated to reduce the impact, to ensure that the work is completed and coordinated (Kachelmeier, et al., 2014). While trying to implement the auditing planning, the audit firm may experience some sabotage due to some risks that may affect the audit practices. On the other hand, business risks comprise those factors that affect the business activities to be carried by an organization (Knechel, 2007).

Audit Planning Risk and Business Risk

Crampton and Hasaad and MSL are now considered to operate in new markets. New markets are bounded and guided by legal legislations that are passed by the federal governments. Consequently, the companies that operates outside their local market are affected by the legal procedures which are used to guide the business organizations in relation to their business activities. U.S Common Laws and European Civil Laws are the examples of the legal regulation which are used to guide business activities in U.S and European market (Knechel & Salterio, 2016). MSL have decided to diversify its business activities, legal risk and the related factor could affect it operations of selling the mining equipment. Copyright and Patent Issues are fatal and critical factors that extensively affecting the operations of the organization, patent and copyright are different with regard to the comparison of various countries. Contract policies and procedures affects the business activities of MSL a mining company that has diversify its reflection

Declining in product demand is a marketing aspect that originates from diversification and market segmentation. Operating in a larger market area create a room for more companies to create products and services which resemble those produced by the existing companies. MSL is an international corporation that   could focus to diversify business activities, Crampton and Hasaad provides audit services to MSL, which is its main client (Messier, 2014). Operating in a large market could allow other companies to jeep in and provide better audit and assurance services.  (Bell, et al., 2001). Europe, Us and China are regions which have sensible business environment for the existing and new entering business organizations, the favorable business environment allows encourages stiff competitions between the business organizations in the market. MSL and Crampton and Hasaad are considered to segment their business operations, stiff competition allows other business organizations to create products which are more sophisticates that the one produced by the MSL company. On the other hand, Crampton and Hasaad could face high risk especially when they enter into a market where existing companies are offering audit services that are guided by rules and regulations of a particular region, these audit services are considered functional in specific regions (Elder, et al., 2011). Both MSL and Crampton and Hasaad services and products demand could decline since clients could consider the service and products relevancy of the existing companies in the market.

Inherent risk comprises the material misstatement in the organizational financial records and asset documents, these risks are perceived to arise as a result of large error margins and emission revealed by the organizational accounting department. The inherent danger is relied on to have an effect on the corporations that perform within the international marketplace, those companies entails themselves with the inherent dangers after they did not make applicable estimation in addition to when they want to make complicated transactions (Eilifsen, et al., 2001). Crampton and Hasaad is an audit company that is considered to provide functional audit and assurance services which are relevant to the companies operating in the international market, this company should consider working closely with the client financial management and accounting department in estimating relevant cost and prices for the products and services to be used by the company.

The control audit chance implicates the risks that relate to the fabric misstatement within the financial reporting of the company, this misstatement is springing up due to failure to put into effect the manage measures within the organization. International businesses organizational are endorsed to recommend to have the applicable internal control policies in order to prevent errors and frauds originating from the internal business activities (Lyon & Maher, 2005).  MSL is a company that sales mining equipment to diverse market, in order to reduce the control risks they are advocated to create measures that are relevant in reducing the errors and frauds that might affect the audit planning of an auditor.

Detection risk is that threat that arises when the auditor fails to come across the cloth misstatement inside the financial information, and asset of the organization. In order to function with less restricting factors, business organization is encouraged to use the audit measures that will reduce the fabric misstatements in the financial statements and asset documents of an enterprise to be audited. While mitigating the detection risk, the audit firm is recommended to growth the wide variety of the sample transaction taken all through the audit procedure (Sadgrove, 2016). Crampton and Hasaad is an audit firm which should consider taking variety of samples of from the MSL company, this is to ensure that it obtain relevant findings which are used while drafting the audit report which is the basic element of making the organization  decisions.   

References

AGAASB, 2001. Auditing, Standards Australian. Auditing Standards Made Under Section 336 of the Corporations Act. s.l.:s.n.

Arens, A. A., Elder, R. J. & Mark, B., 2012. Auditing and assurance services: an integrated approach:. Boston: Prentice Hall..

Bell, T. B., Landsman, W. R. & Shackelford, D. A., 2001. Auditors' perceived business risk and audit fees: Analysis and evidence.. Journal of Accounting research,, 39(1), pp. 35-43.

Eilifsen, A., Messier, W. F., Glover, S. M. & Praw, 2013. Auditing and assurance services.. s.l.:McGraw-Hill..

Eilifsen, A., Knechel, W. R. & Wallage, P., 2001. Application of the business risk audit model: A field study. Accounting Horizons. s.l.:s.n.

Elder, R. J., Beasley, M. S. & Arens, A., 2011. Auditing and Assurance services. s.l.:Pearson Higher Ed..

Gay, G. E. & Simnett, R., 2000. Auditing and assurance services in Australia.. Sydney: Mcgraw-hill.

ICPAK, 2015. ICPAK ANALYSIS OF THE PUBLIC AUDIT ACT. s.l.:s.n.

Jackson, R. A., 2016. Business at risk: keynote speakers for this year's IIA International Conference identify emerging risks facing organizations. Internal Auditor,. In: s.l.:s.n., pp. 40-46.

Johnstone, K., 2000. Client-acceptance decisions: Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation. Auditing:. A Journal of Practice & Theory, 19(1), pp. 1-25..

Kachelmeier, S. J., Majors, T. & Williamson, M. G., 2014. Does Intent Modify Risk-Based Auditing?. The Accounting Review. s.l.:s.n.

Knechel, W., 2007. The business risk audit: Origins, obstacles and opportunities.. In: s.l.:s.n., pp. 383-408.

Knechel, W. R. & Salterio, S. E., 2016. Auditing: assurance and risk. s.l.:Routledge.

Lyon, J. D. & Maher, M. W., 2005. The importance of business risk in setting audit fees: Evidence from cases of client misconduct.. Journal of Accounting Research, 43(1), pp. 133-151.

Messier, w. f., 2014. An approach to learning risk-based auditing.. Journal of Accounting Education, 32(3), pp. 276-287.

Ricchiute, D. N., 2001. Auditing and assurance services.. s.l.:South Western Educational Publishing..

Sadgrove, K., 2016. The complete guide to business risk management.. s.l.:Routledge.

William Jr, M., Glover, S. & Prawitt, D., 2016. Auditing and assurance services: A systematic approach.. s.l.:McGraw-Hill Education.

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