Threats To Auditing Independence: A Discussion Of The Sustainability Governance Characteristics Essay.

Identifying and Evaluating Threats to Auditing Independence

Discuss about the Sustainability Governance Characteristics Method.

There are certain threats to auditing independence, which is why audit evaluation follows Generally Accepted Auditing Standards.  Auditor independence meaning states that freedom of conducting ethical auditing without any interference from external or internal parties. Arens, Elder and Beasley (2014) stated that auditors during 2008 crisis were forced to comply with the unethical ways of an organisation. Moreover, audit independence is an essential feature, which is enjoyed by auditors while conducting an evaluation on the company.  This mainly allows the auditor to portray an unbiased opinion of the company’s current financial status.  On the other hand, Arens et al. (2015) argue that auditors audit report is influenced by unethical monetary gains provided by the company.

There are certain services both Audit and non-audit are conducted, which are provided by auditors to their customers.  These non-audit services could be identified as major source of economic promotional services and tax related services. Moreover, non-audit services mainly raise chance of auditors to increase their income from the same client.  Birkey et al. (2016) stated that due to the non-audit services provided auditors mainly hamper audit independence hampered which increases the chance of unethical activities between the auditor and the organisation. On the other hand, Byrnes et al. (2015) argued that audit quality is often dealt with precision, as auditors tend to portray wrong valuation of company due to lucrative offers provided by the organisation. One of the major threats is Advocacy is identified, which could hamper independence of auditors in conducting the audit report. In the current situation, advocacy is mainly identified, as the major threat to auditor independence. The advocacy threat mainly refers to quality of audit, which is been provided by the auditor for certain organisation.  The stakeholders do not trust the audit report and think this been compromised, which depicts the advocacy threat.  Auditor is rendering advocacy services to organisation mainly compromises with auditor’s independence deduce actual financial condition of an organisation.

The second situation mainly states that Audit Independence is highly threatened if the auditor takes non-monetary and monetary benefits from the organisation, which is being audited.  Cohen and Simnett (2014) stated that use of non-monetary benefits allows companies to influence the auditors and in turn shape the audit report according to the needs.  According to the audit rules, auditors could not take any other benefits other than that mentioned in the audit agreement. In the current situation, there is a holiday package route, which is being presented to the auditing firm members.  Acceptance of the non-monetary benefit could eventually affect the overall auditor independence, which could be stated as an unethical approach of the organisation.  As depicted in the second situation the audit firm should stop receiving non-monetary gains from the organisation to reduce threat of audit independence.

Non-Monetary Benefits as a Threat to Auditing Independence

Furthermore, improving the Audit Independence Organisations is not allowed to use auditors who are related to the companies personally. The accommodation of relative in the audit report might increase the influence of the organisation on audit independence.  According to the Australian audit law, auditors related to organisations, employees or owner is not allowed to conduct the audit report.  This prevention is only implemented to reduce unethical audit procedures and improve viability of the audit report. The current situation states that father of the accountant auditor is a financial control of the business and if Michael accepts the offer for being a part of audit report then it might and hamper independence of the auditor (DeFond and Zhang 2014).  This could nullify the audit report and increase doubt regarding the activities of the organisation.

For protecting the audit, Independence auditors are mainly barred from associating with organisations employees, and directors.  This restriction is mainly imposed to reduce the unethical influence, which might be posted on auditor and hamper the audit report. Auditors are mainly barred from contacting with organisations employees as they could develop a sympathetic side, which might hamper audit independence. This sympathy might directly affect auditor’s report and reduce its viability while increasing doubt among stakeholders. Duncan and Whittington (2014) stated that auditors are responsible for delivering the adequate valuation of the company and is the expected to provide the report without any emotional, unethical and influence. In this situation, the auditor has many offer services to the company in context to tax calculation and accounting transactions.  This could lead to self-audit evaluation of the auditor, which is an unethical activity conducted by the auditor.

Changing the audit partner good mainly help in reducing the over familiarity threat and by any chance of manipulation in audit independence.  Changing audit partner could not influence the effectiveness of the audit quality both historical and new data will be provided to the new audit partner.  This could help in improving the audit quality and reducing any chance of unethical activities (Eilifsen et al. 2013).

The main motive for the audit committee will only be to ensure transparency assurance in the audit report, which could only be attend if the  audit Independence is not hampered.  Thus, the audit committee’s main motive will be to ensure availability of relative information and reduction of unethical measures.

The international auditing and ethical standards could be employed in the organisation for reducing the complexity and improving the audit procedures. This could eventually help in enhancing the audit report and reduced any unethical activities hampering audit independence (Hayes, Wallage and Gortemaker 2014).

Relation Between Auditors and the Company

The independence of auditors could be monitored and checked whether any political or professional influence is been implemented on the auditor's.  This evaluation could mainly help in providing the relevant transparency to the audit report and help in confining the confidential data of the organisation.

Moreover, auditor needs to follow ethical standards while conducting the audit report, which is depicted in the code of ethics. This auditing standards many allow the auditor to make adequate judgements during the audit procedure and reduce any kind of unethical activities in the organisation.  The code of conduct mainly states the minimum measures, which must be taken by the auditor while conducting the audit report (Junior, Best and Cotter 2014).

The use of above mentioned ethical standards and measures could mainly allow the auditor to reduce any influence on independent auditing.  This reduction in influencing the independent auditing could eventually help the auditor to portray the adequate financial condition to stakeholders of the company.

There is relevant organisation who considers management factors to help take adequate steps in reducing the risk factor hindering the progress of the organisation.  Some of the major risk, which could be identified for the organisation, is commercial risk, health and safety risk, and reputation risk.  The violations of these could lead to declining in revenues and reduced its profitability. Louwers et al. (2013) stated that use of adequate risk evaluation techniques could help organisation to develop a strategic plan for confronting the future risk.  On the other hand, Marques, Santo and Santos (2013) argued that without adequate research and valuation strategic plan could backfire and increase the damages, which could have been dealt by the risk.

There are certain operational risks also with the spare parts inventory system, which might hamper the overall capability of the company to support its production activities. Thus, for reducing the operational risk companies are needed to implement policies for stocking the current inventory system. The organisation is mainly responsible for managing the overall operational risk my assuring adequate implementation of approaches, which could manage inventory in an adequate way. Ojala et al. (2016) stated that reduction in operational risk mainly allows organisation to improve their productivity and fulfil demands of their customers.  On the other hand, Peter and Romi (2014) argued that lack in adequate inventory control could increase expenses of the company and in turn reduce the projected profits and block essential capital.

Strategic risk could be considered as one of the risk, which accommodates inventory management of spare parts. Inventory management of spare parts is one of the major risks, which is faced by an organisation. Increment in spare parts could lead to blockage of capital, and reduction in Inventory of spare parts could delay or halt production activity. Thus, it is necessary for the organisation to use an effective financial management activity for spare part inventory.  Businesses mainly need to focus on both finance and stocks for reducing the risk level, which might increase the chance of loss. Srivastava, Rao and Mock (2013) stated that large quantity purchases could mainly increase chance of capital blockage, which could lead to reduction in production. Therefore, if a company is not able to comply with large stock purchase and extended downtime, it could use an effective inventory system, which replenishes stock according to the use of the organisation. On the other hand, Schmidt, Wood and Grabski (2016) argued that not only spare part inventory system, the whole inventory method need to be revaluated to increase efficiency and minimise capital blockage of the organisation. According to the scenario, it is essential for the company to find an effective strategy, which might help in managing the spare parts effectively and reduce the risk associated with inventory system.

Barriers to Associations with Organizations Employees and Directors

There is relevant audit risk and it has an impact on a account balance, which could reduce viability of the audit report. In the current selection, inherent risk is many identified as the risk, which is affecting the financial report.  Inherent risk is mainly considered an error omission in the financial report. So the more complexity of the transactions mainly increases the chance of inherent risk, which might hamper liability of the audit report and negatively affect companies reputation. This type of risk mainly has an effect on inventory balance and accounts receivable.  In addition, the inherent risk also affects certain transactions and accounts where actual transaction loss or profit could not be detected.  William, Glover and Prawitt (2016) mainly stated that inherent risk effectively reduces by implementing different auditing procedures.  However, the occurrence of inheritance risk mainly increases the chance of manipulation, which might be conducted within the organisation.

There are certain risks, which could be related to operations and are termed as detection risk. This type of detection risk is mainly conducted when auditor is unable to identify or detect a material misstatement associated with the organisation.  This type of risk mainly appears when auditors fail in implementing relevant processes in the audit procedure. The state of detection is mainly considered to be beyond the capability of an accountant and thus it might influence balance of accounts.  Thus, it could be considered that accounts are prone to greater risk if adequate detection risk is not reduced.  There are three different types of accounts, which portray higher risk to revenue account, sales account and inventory account. Within these accounts does a chance of detection risk, which could hamper viability of the audit report. Wong and Millington (2014) stated operational risk only be reduced if auditors are able to back calculate all the relevant activities and detect the material misstatement.

Reference:

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