Threat – In accordance with APES standards, the above conduct on behalf of the audit partner would result in the threat of advocacy. In accordance with s. 200(6) of this code, members in practice should not promote the shares to the investors and should also not engage on the behalf of the audit client in case of any litigation. The significance of this threat would not be very high provided no false claims would be made in the seminar (APES, 2010).
Mitigation – Safeguards could exist at the firm level and also at the level of client’s firm. The firm level safeguard would be in the form of a model code of conduct in line with APES norms which would forbid the participation of any member in any promotional event directed at enhancing the investors interest. Also, an appropriate safeguard from the side of the client could be the appointment process of the auditor which would be typically carried out at the board level and hence the CEO alone cannot decide on the matter (Arens et. al., 2012).
Relevant Fact: Chris, the CEO of the client firm is happy with the services offered by the firm and expects to maintain healthy professional relationships going ahead. The client company wants to extend a fully paid 14 day holiday trip to the audit partner and me along with our respective families. All the expenses for this to Greek Isles would be borne by the client firm only.
Threat - In accordance with APES standards, the above conduct on behalf of the audit partner would result in the threat of familiarity. In accordance with s. 200(7) of this code, no member is expected to take material gifts from the client as these may result in compromised independence going ahead due to increasing familiarity with the client extending into personal domain. However, it is permissible for the members to accept token gifts from the clients for appreciation of the services offered. Clearly, this threat is significant as it may adversely impact both actual as well as perceived independence (APES, 2010).
Mitigation – Safeguards could exist at the firm level and also at the level of client’s firm. The firm level safeguard would be in the form of a model code of conduct in line with APES norms which would forbid the members from accepting any material gifts from the audit clients. Also, an appropriate safeguard from the side of the client could be in the form of corporate governance norms which may not allow for such extension of material gifts (Gay and Simnett, 2012).
Relevant Fact: While talking to Michael, it came to light that the financial controller of the client firm was infact his father. His father was the person responsible for the preparation of the financial statements at the end of the client.
Threat- The relevant threat in the given case would be related to familiarity in line with the s. 200(7) of APES (APES, 2010). This is because, Michael was chosen to be on the audit team and he direct relative happens to be the finance controller which results in conflict of interest. Also, his father may exert pressure on Michael to alter the scope and judgment of the audit besides divulging confidential information during the audit process. Apparently, this threat is quite significant as it materially would alter the underlying objectivity and independence of the audit team (CPA, 2013).
Mitigation: The relevant safeguard in the given case would be firm specific. The audit firm must have relevant internal policy in place which requires mandatory disclosures at the time of joining with regards to the profession of the direct relatives especially if engaged in any corporate at middle to senior level positions. Also, while becoming a member of the particular audit team, a mandatory undertaking may be taken from each member regarding absence of any relative or family member in the assigned client company. Instances of any false undertakings should be dealt with utmost severity and zero tolerance must be exhibited by the company in this regard (Caanz, 2016).
Relevant Fact: While carrying on conversation with Annette, it has been disclosed that till recently (a month ago) she was employed with the client helping the company with accounting entries and taxation computations. Also, she knows the various staff at the client’s office and is excited to be part of the client audit team.
Threat: The relevant threat that is applicable to the given situation is the self-review threat (APES, 2010). This would be applicable since as part of the audit exercise, Annette would be required to audit the very same information that she has provided the client with on the basis of various transactions. Hence, in such it is possible that Annette may be casual since she assumes that things have been done correctly or would not be constructively critical about the information provided thus leading to increased audit risk and lower audit quality. Clearly, since independence would be severely compromised both in appearance and also actuality, hence the threat is significant and cannot be ignored (CPA, 2013).
Mitigation: The relevant safeguard in the given case would be firm specific. The audit firm must have relevant internal policy in place which requires mandatory disclosures at the time of joining with regards to the previous employment engagement of the concerned individual along with the underlying capacity. Also, while becoming a member of the particular audit team, a mandatory undertaking may be taken from each member stating that the member has not been associated with the client firm in any form of employment relation for any length of time. Instances of any false undertakings should be dealt with utmost severity and zero tolerance must be exhibited by the company in this regard (Leung, Coram and Cooper, 2012).
It is apparent that the client MSL is involved in providing mining equipment and related spare parts to the mining companies besides them maintenance services as well which are chargeable after the 2 year free service period expires. Two key business risks have been identified below.
Economic Climate - Due to the current slowdown in the mining industry which is currently being witnessed due to a fall in the commodity prices, the mining firms have deferred their expansion plans and also are not able to utilize 100% of the current capacity available. In such a trading environment, the demand for new equipments would be quite low. Also, the demand for maintenance and spare parts would adversely be impacted as the companies may defer availing the same at the present moment (Arens et. al., 2012).
Liquidity woes – The company may also face significant drop in profits as some of the cost related to the operational centers are fixed and hence cannot be reduced. Further, it is likely that since the company has long term purchase contracts, hence it would be required to place orders which might lead to higher inventory, cash crunch due to lower cash recovery from the customers and also obsolescence of the inventory (Gay and Simnett, 2012).
With regards to the business risk arising on account of adverse economic climate, the audit risk component that may be affected is the detection risk which is particularly applicable on the revenue account and also the various expenses account. This is critical so as to ensure that there is no material misstatement in the financial statements in order to present a higher profit in order to provide support to the valuations of the company (Caanz, 2016).
With regards to the liquidity issues, the audit risk component that may be affected is the control risk as it is possible that the obsolescence of inventory along with accounts payable may not be adequately monitored by the company. The two accounts that are relevant for the given risk are the inventory account and the accounts payable (Arens et. al., 2012). It is imperative that inventory account should be thoroughly reviewed by the auditor so as to determine any potential obsolescence in available equipment inventory, spare parts and expenses on maintaining inventory in working state. Further, the accounts payable is also a critical account in the given case as sustained slowdown may raise issues related to going concern assumption for the firm which needs to be reflected in the auditors’ report (Leung, Coram and Cooper, 2012).
APES (2010), APES 110 Code of Ethics for Professional Accountants, APESB Website, [Online] Available at https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed April 17, 2017]
Arens, A., Best, P., Shailer, G. and Fiedler,I. (2013). Auditing, Assurance Services and Ethics in Australia, 2nd ed., Sydney: Pearson Australia
Caanz, S. (2016), Auditing And Assurance Handbook 2016 Australia, 3rd ed.,Sydney:John Wiley &Sons
CPA (2013), Independence Guide, CPA Website, [Online] Available at https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/auditing-assurance/independence-guide.pdf?la=en [Accessed April 17, 2017]
Gay, G. And Simnett, R. (2012), Auditing and Assurance Services in Australia, 5th ed., Sydney: McGraw-Hill Education
Leung, P., Coram, P. and Cooper, B.J. (2012), Modern Auditing and Assurance Services.4th ed., New York: John Wiley and Sons
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