Audit, Assurance And Compliance For Financial Interest

Threats to Auditor Independence

Discuss about the Audit, Assurance and Compliance for Financial Interest.

When the audit evaluation is conducted, the auditors are liable to follow the generally accepted auditing standards. The independence of the auditor denotes the freedom of internal or external auditor from parties possessing financial interest in the organisation, which is audited in fair methods (Andon, Free and O’Dwyer 2015). In addition, independence denotes integrity along with an objective approach to the process of audit. The auditor needs to be independent from the client firm, in which the audit opinion would not be affected on the part of any relationship between them. Furthermore, the auditors are expected to provide unbiased opinion in relation to the financial statements to the stakeholders of an organisation.

The non-audit services are rendered on the part of the auditors to their clients beyond scope. Such type of services comprises of management and tax-related services along with business promotion of the client. These services are offered for earning additional income or any sort of non-monetary gain (Birkey et al. 2016). Moreover, it is noteworthy that contribution of non-audit services results in independence loss at the time of providing services to the potential clients. The quality of audit is a critical issue, as it often draws criticism stakeholders and regulators. Advocacy, on the contrary, is a threat to the independence of the auditor that requires to be considered in the specific situation. Advocacy denotes the situation, in which an auditor provides an opinion; however, the people feel that there has been compromise in audit quality. In this case, the threat of advocacy is the major risk to the auditor independence. This occurs when the auditor is engaged to promote the client’s business. Thus, provision of auditory services might violate the ethical code, which could affect the auditor independence.

The independence of the auditor could be in risk, in case; the gathers benefits along with the prescribed fees related to audit services. This might occur from obtaining other advantages out of agreement associated with the engagement of audit. In the given case study, the audit firm members have been provided with a holiday package. In case, there is an acceptance of the offer, the independence of the auditor could be questioned. Thus, it would lead to threat of independence with the rise in benefits (Cohen and Simnett 2014).

The siblings, spouse, parent, dependent and non-dependent child of an auditor are considered as the close family members of the auditor. The financial interest comprises of guarantee of debt ownership and individual securities concerning intermediary or other individual, if the individual is associated with the control of intermediary or investment decision. The financial controller in the client’s business is the father of the accountant. Under such scenario, if the auditor accepts the offer, it might endanger the auditor independence. Hence, if the offer is accepted, the auditor independence is lost (Kend, Houghton and Jubb 2014).

Safeguards to the Identified Threats

With the intention of associating close association with the client, staffs, directors and officers, there is presence of influential risk within the business environment of the client. According to the provided scenario, the auditor might be sympathetic and the person could develop close association with the client. This might have direct effect on the auditor’s representation, as the individual has valuable client information due to involvement in a previous assignment with LTH. The auditor has offered services to the client through tax calculation and entry of accounting transactions. Hence, the auditor could not carry out analysis of self-audit services.

The measures that could be implemented to strengthen the auditor independence of the auditor are described as follows:

The system of rotation associated with the main partners reduces the over-familiarity threat along with self-interest and thus, it would promote the objectivity aspect without considerable cost. In addition, the institutional and historical firm knowledge would be present to all the staffs for maintaining audit quality (Knechel and Salterio 2016).

The auditors are needed to be provided with adequate amount of resources and the organisation needs to appoint independent and qualified audit members. Hence, it is crucial for the audit team to analyse independence and objectivity along with ensuring the availability of outcomes to the stakeholders of the organisation.

The independence of the auditor could be enhanced with the help of effective and robust standards of ethics. Thus, an international group of greater quality independence and ethical standards would reduce the complexities related to the auditing procedures (Ojala et al. 2016).

The major features of oversight of the auditor associates independence from the political interference and audit profession. Thus, they are needed to give transparency, true and fair depiction coupled with cooperating and sharing confidential data with another with utmost care.

The two business risks associated with the buying of spare parts and equipment are demonstrated as follows:

This risk is not involved with the approaches of business and the choosing of the firm for accurate market and products. The strategic risk involved with inventory management is associated with the spare parts management. At one point, the organisation might select ad-hoc, which implies spending items on buying, utilising formal policies and associating the experienced professionals to provide judgement on issues of procedures. At another point, the firm might select to standardise the aspects of management for spare parts in an identical manner like financial management standardisation (Schmidt, Wood and Grabski 2016). The relevant approach for the firm is dependent on the financial investment related to inventory and risk associated with the probable loss.

Business Risks Related to Purchasing of Spare Parts and Equipment

This kind of risk is related to executing the chosen approach. The firm might introduce a policy associated with stocking to undertake decisions related to standardisation. However, it has been found that the policy is not adequate or the management approach is not in line with the introduced policy. Thus, about the inventory management of spare parts, risk management signifies detecting the effective stuffs and conducting them rightfully (Srivastava, Rao and Mock 2013).

The risk associated with the strategic risk could be termed as inherent risk. This risk occurs due to error in financial reports or omission rather than the contributory factor related to control failure. Moreover, the complex nature of the transaction or the circumstances requiring higher level of judgement for financial projections is liable for inherent risk (William Jr, Glover and Prawitt 2016). The risk has an effect on the account receivables and inventory balance. Certain accounts and transactions are associated with inherent risk, which has severe impact on the balances of accounts depending on transaction losses.

The risks related to operations are termed as detection risk. This risk takes place at the time the auditor is not able to detect the material misstatement associated with the material misstatement. This has been involved with the financial statement of the organisation with the help of substantive tests and evaluation procedures. The detection risks are expected when the auditor fails in implementing the relevant processes (Wong and Millington 2014). As a result, it has severe influence on the balance of accounts, since it is beyond the evaluation of the accountant. The accounts, which are prone greatly to this risk, take into account revenue account, sales account, purchase account and inventory account.

References:

Andon, P., Free, C. and O’Dwyer, B., 2015. Annexing new audit spaces: challenges and adaptations. Accounting, Auditing & Accountability Journal, 28(8), pp.1400-1430.

Birkey, R.N., Michelon, G., Patten, D.M. and Sankara, J., 2016, September. Does assurance on CSR reporting enhance environmental reputation? An examination in the US context. In Accounting Forum (Vol. 40, No. 3, pp. 143-152). Elsevier.

Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

Kend, M., Houghton, K.A. and Jubb, C., 2014. Competition issues in the market for audit and assurance services: are the concerns justified?. Australian Accounting Review, 4(24), pp.313-320.

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

Ojala, H., Collis, J., Kinnunen, J., Niemi, L. and Troberg, P., 2016. The Demand for Voluntary Audit in Micro?Companies: Evidence from Finland. International Journal of Auditing, 20(3), pp.267-277.

Schmidt, P.J., Wood, J.T. and Grabski, S.V., 2016. Business in the Cloud: Research Questions on Governance, Audit, and Assurance. Journal of Information Systems, 30(3), pp.173-189.

Srivastava, R.P., Rao, S.S. and Mock, T.J., 2013. Planning and evaluation of assurance services for sustainability reporting: An evidential reasoning approach. Journal of Information Systems, 27(2), pp.107-126.

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

Wong, R. and Millington, A., 2014. Corporate social disclosures: a user perspective on assurance. Accounting, Auditing & Accountability Journal, 27(5), pp.863-887.