1.a.Identification and Evaluation of Threats in Auditor’s Independence
It is the responsibility of the auditors to follow the general principles and guidelines of generally accepted standards of auditing at the time of conducting the audit operations. As per the principles of auditor independence, the internal or external auditors of the organization must not have any kind of financial interests in the properties of the audit clients (Guénin-Paracini, Malsch & Tremblay, 2014). In addition, integrity and honesty to the audit professions is another aspect of auditor’s independence. The audit opinion of the auditors must not be influenced by any kinds of relation between the auditors and the audit clients. It is expected that the auditors will provide an unbiased and honest financial opinion (Cook & Omer, 2013).
First Situation: Non-audit services refer to those services that are provided by the auditors to their clients from out of scope. Some of the non-audit services are tax consultation, management related services, the promotion of the client’s businesses and others (Tagesson & Öhman, 2015). The main objective is to render these kinds of services are some additional non-monetary advantages. On the other hand, it must be noted that to provide non- audit services leads to the impairment of auditor’s independence. The impact of non- audit services is a crucial aspect that needs to be considered at the time of audit operations. One crucial aspect must be considered that the quality of audit is a major issue and often this faces criticism from the stakeholders and the regulators. In these kinds of situation, the threat of advocacy must be taken into consideration. Threat of advocacy happens when the users of the financial report feels that the auditors have compromised the quality of the audit report (Tang et al., 2017). At the time of advocacy threat, ethics in the audit profession is also compromised. Hence, advocacy threat affects the threat of auditor’s independence.
Second Situation: In this particular situation, it can be seen that the auditor’s independence largely threatened when an auditor takes any kinds of monetary or non-monetary benefiters other than the priory fixed fees for audit services (Hoos, Kochetova?Kozloski & d'Arcy, 2015). It affects the process of auditor’s independence when an auditor taken any kind of monetary or non-monetary benefits that are not mentioned in the audit agreement. As per the provided case study, the audit client offered a holiday package to the auditors of the company. If the auditor accepts this holiday package, the issue in auditor’s independence arises as the auditor tries to take non-monetary advantage from the client. The threat of auditor’s independence will increase in case the auditor continues to receive non-monetary advantages from the client.
Third Situation: In this particular situation, the auditor has many family members like spouse, children, parents and siblings. Financial interest considers long-term and short-term securities, debt guarantee as well as ownership (William Jr, Glover & Prawitt, 2016). All these aspects are directly associated to the persons at the time of making various kinds of investment decisions. As per this condition, the accountant’s father is the financial controller of the business. Hence, as per this scenario, Michael will create the threat of auditor’s independence by accepting the offer to be a part of the audit firm.
Fourth Situation: In this particular situation, it must be noted that a close relationship can be seen among the employees, clients, officers and directors of the organization as they are connected by the risk factors of the organization that align the whole organization together (Zadek, Evans & Pruzan, 2013). In most of the cases, it can be seen that the auditors become sympathetic with the client organization. The close relationship between the auditors and clients leads to the generation of high level of trust and the representation of all the data and information in the accurate way. On the other hand, it can be happened the auditors of the organization already has the necessary information as she had in case of LTH just a month ago. It was the responsibility of the auditors to make the tax calculations in a proper way after making all the necessary financial entries for the business organization for the year ended 30 June 2015. Hence, it can be said that it is not convenient for the auditors to audit their own work.
b.Various forbidden services that the clients offer to the auditors that create the threat of auditor’s independence. However, there are various safeguards for the threat of auditor’s independence. They are discussed below:
- One of the major safeguards to avoid the threat of auditor’s independence is to rotate the audit partners of the organizations. The process of the rotation of the audit partners diminishes the danger over knowledge and diminishes the threat of self-centeredness as this process encourage the independence of the auditors without any kind of cost. In addition, institutional and historical knowledge will be available to the team members of the company to assist the auditors (Knechel, 2016).).
- In order to maintain high level of transparency, it is essential to form an effective and efficient audit committee. This process will help to maintain the auditor’s independence in the proper way. For the smooth running of the audit operations, it is needed the audit committee is well qualified and they have all the necessary audit resources so that the audit objectivity can be easily accessed.
- An independent auditor should always aim to contribute towards the maintenance of audit quality and the independence in the audit profession at the same time. One of the major characteristics of efficient auditors is that he/she should have the ability to take into consideration the auditor’s independence from political as well as audit professional point of view. It is the responsibility of the auditors to maintain transparency; this transparency will ensure the true and fair representation of confidential audit data.
- It is the utmost priority of the auditors to follow the ethical standards at the time of conducting the audit operations such as Code of Ethics and Auditing Standards. In order to reduce the different kinds of complexities in the process of accounting, the auditors need to follow the international set of principles and standards about auditor’s independence (Knechel & Salterio, 2016).
2.a.Risks Involvement with the Spare-Parts Inventory: In this particular part, the management is explained as that it is an important element that is used for managing the inventory of the spare parts. However, in most of the cases it can be seen that the execution of management of stock is very poor (Dobler, 2014). In addition, the business organizations use the risk management process for identification and reduction of the various kinds of risks as far as possible. Some of the major risks identified by the business organizations are commercial risks, reputational risks, health and safety risks and many others. Downtime risks of the business organizations leads to the financial losses of the business organizations; this happens as the business organizations fail to cope up with the adoption of latest technologies in relation to the risk management factors of the spare parts. Apart from this, there is two more types of business risks associated with the spare parts and equipments at the time of planning of the audit operations. These two risks are operational risks and strategic risks that need to take into consideration at the time of audit process.
Strategic risk is the kind of risk that has no relation to the trade approaches of the organizations and the busies sections that decide about the right and wrong products for the organization. The main objective of the strategic risks is to take into consideration the process of inventory management of the spare parts in the most appropriate way (Reding et al., 2013). The business organizations use to select ad-hoc facilities; with the help of this facility, the business organizations identify the products for purchases in the formal way. In this process, the business organizations use to appoint experienced managers who will provide their valuable judgments on the process of daily procedurals. It is essential for the business organizations to select aspects for the effective management of spare parts in such a way that the financial management activities can be standardized. It is essential for the business organizations to focus more on financial investments in order to manage the risks and potential losses in various business levels. The business need to apply their valuable downtime business experiences as well as losses in order to get associated with the effective management of risks in the spare parts of the organizations. After that, it is needed for the business organizations to apply the strategy of ad-hoc that must be appropriate in nature. When a business organization fails to afford the downtown and extended stock investment, it is necessary for that organization to find another appropriate strategy for the management of spare parts. Hence, it is needed to evaluate the alternatives in order to avoid probable losses.
Operational risks of the organizations are associated with operational downtime. Apart from this, various risks are related with the execution level of the strategies. It is important for the organizations to develop strategic management approach if they fail in the effective execution (Christensen, Glover & Wood, 2012). At the time of taking the decisions about standardization, the business organizations need to adopt the policy of stocking. It is the responsibility of the organizations to manage operational risks and to assure proper implementation of the adopted approaches in order to manage the inventory. It is necessary for the business organizations to manage the risks they use to face at the time of identification of the suitable approaches of spare part management. Hence, from the above discussion, it can be seen that there are two types of risks and they are strategic risks and operational risks.
b.Audit Risk and Its Effect on Account Balance: In this particular section, the associated risk is considered as inherent risks. Inherent risks take place due to the omission or error of the financial data and information in the financial statement sue to the lack of internal control. On the other hand, this type of risks takes place due to the complex financial transactions and due to the high level of financial judgments. Various kinds of risks are there that have a large impact on both the stock balance and accounts receivable. On the other hand, there are instances of some accounts that are highly associated with the inherent risks like the risks associated with the management of stock. Hence, it largely affects the various kinds of balances in accounting (Wang, Li, & Li, 2014).
There are different kinds of associated risks; two of them are operational risks and detection risks. One cannot ignore the possibility that the sometimes the auditors will not be able to detect the misstated financial figures in the financial statements. In this kinds of situation, the business organizations use to conduct various kinds of analysis and substantive tests procedure for the future purposes. In needs to be noted that detection risk is the kind of risks where the auditors conclude that not significant type of error is found at the time of the implementation of the audit report. In case of detection risk, the expectation of the auditors is to implement different accounts balances and to assess the accountants. Moreover, this risk affects the account balances that have a dependency on the financial transactions as well as the involved amount in the transaction (Arens, Elder & Mark, 2012). Thus, as per the above discussion, it can be understood that most of the accountants are susceptible in nature that has the alignment with various kinds of risks associated with the purchase account, revenue account, sales account and inventory account. Hence, from the above discussion, it can be seen that there are various kinds of risks associated with the process of auditing that have a significant effect on the process of auditing.
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