Internal Audit Independence And Objectivity

Identification and Evaluation of Various Audit Independence Threats

Discuss about the Internal Audit Independence and Objectivity.

The content of this paper analyses various aspects of auditing and insurance based on various case analysis. The content of this paper is organized into two main parts where part one of the paper identify, evaluate and analyses various threats in relation to audit independence. The evaluation of these audit independence threats in based on various situations in the case provided. This section of the paper also identifies and discusses various safeguards that can be put in place to safeguard identified threats in the situations in case study one.  The second section of the content of this paper analyses a case of Crampton and Hasaad in relation to various risks involve in purchase of equipment and spare parts for the firm.  This part describes two main risks Crampton and Hasaad as a firm should consider while planning for the end of 2015 auditing.  From the identified risks, content in this section of paper also extends into finding specific audit risks related to the already identified purchasing risks. The paper concludes by giving various responses to the specific risks identified including identification of the account balances that have may be under the direct impact of the audit risks.

Audit independence is identified by various scholars as the freedom of an auditors mind as well as the physical freedom or independence. The Independence Standards Board (ISB) describes audit independence as the flexibility of an auditor from those weights and different elements that trade off, or can sensibly be required to bargain, the capacity an auditor to settle on unprejudiced auditing choices’ (Stewart and Subramaniam 2010). As per other scholars audit freedom is compared to the state of mind and approach of objectivity being unprejudiced, reasonable and fair-minded as well as being upright and mentally legitimate.

Review autonomy is in this way portrayed by reviewer’s flexibility and nonappearance of interests that makes inadmissible peril of material slant with respect to the steady nature of budgetary clarifications. Thus the evaluator’s self-sufficiency will be considerably lessened in quality, quality, or utility if his own focal points showing a peril of hindered objectivity with likelihood so high that the interest can be sensibly acknowledged to impact the aftereffect of the audit (Stewart and Subramaniam 2010). As indicated by different reviews it is clear that, the significance of review autonomy does not require an inspector to be thoroughly free of the extensive number of factors that impact the ability to settle on fair-minded review decisions, however simply free from those that rising to the level of dealing the limit a review.

Backing for client threat

Evaluating is central examination of a game plan of records, both money related and non fiscal related, to ensure that they can be relied on to the extent exactness and satisfaction. An inspector other hand is a qualified person who finishes the survey undertaking and reports on the ‘honest to goodness and sensible view’ of the client substance’s cash related clarifications so that the customers of budgetary declarations can rely on upon the constancy and legitimacy of the financial enunciations (Ye, Carson and Simnett 2011). The objective of investigating has been given by International Standards of Auditing (ISA). Autonomous of an evaluator and lead of an inspector as indicated by the International Standards on Auditing ISA is questioned deal with the general commitments of an examiner while coordinating a survey of cash related declarations according to ISAs. Specifically, it sets out the general focuses of the independent examiner, and clears up the nature and degree of a survey expected to engage the free review to meet the correct review on different records.

From the conversation in the case study one can deduce and distinguish five dangers by the approach of dangers and shields approach (Ye, Carson and Simnett 2011). As indicated by this dangers and protections approach, the structures distinguish five essential classifications of dangers which can interfere with the outcome of compromised results as follows.

The threat to auditors’ independence resulting from a financial or other self-interest conflict is one of the main threats resulting from all the situations in the case study. From situation one, the conversation with Chris in situation two of the case vividly indicates the threat of self interest. Within the conversation the audit independence in this situation is like to be compromised as a result of favors and gifts the company is willing to offer to various members of CJ auditing firm (Ashbaugh, LaFond and Mayhew 2013). In order to maintain the good relationship with the client company that is the LTH, the client firm is contemplating to take the members of CJ auditing company to a 14 day holiday to Greek Isles covering all the expenses. In such a situation the company will not be suitable to be the auditing company since the acceptance of gifts may lead to improper auditing. In such situations where the head of audit team has been given token, they tend to review the company financial records with a lot of self interest covering mistakes.

Safeguards to the Identified Threats

 From the conversation with Michael it is evident that he will be acting as an advocate for the father who is the head of the financial records in the client company (Ashbaugh, LaFond and Mayhew 2013). The danger to reviewers’ objectivity coming about because of evaluators getting to be backers for their customer’s position in this case is therefore high. Auditors’ independence is always on stake in situations where one of the company financial managers is related to members of the audit team as in the case of Michael and the dad who is one of the financial managers.

The possibility that auditors may be intimidated by threat, from a dominating personality, or by other pressures, by a director or manager of their LTH or by some other party is evident. From the first situation a conversation held with Chris there are lots of pressure from the management of client firm where the firm demands that the head of CJ Mr. Geoff should do them a favor of which the failure to do so will lead to the termination of the contract and CJ as an audit firm will have no any other opportunity to review the financial record of the LTH company (Goodwin and Yeo 2011).

 This kind of threat comes as a result auditors being over-influenced by the qualities of their clients’ as well as the director’s personality consequently becoming too sympathetic to the interest the client. Alternatively, auditors of a given firm due to familiarity may develop too much trust in the management representations thus, insufficiently rigorous in their audit testing (Sharma and Sidhu 2011). This is evident from fourth situation the conversation with Annette who claims that there will be no much audit on the tax records due to familiarity and trust. Having worked in the LTH books of records prior the independence of the audit can e compromised as a result of trust familiarity.

Safeguards are some of the measures which should be put in place to ensure that the audit is not compromised from lack of audit freedom (Sharma and Sidhu 2011). With regards to the above discussion of the audit threats from the resulting from the client company the following measures should be put in place.

Restriction of CJ to offer other services apart from auditing; in case the management of the CJ audit firm formulates restriction of the company from offering non audit services, the demand by the board of the client company (LTH) which requires the audit firm manager Geoff to give a speech on behalf of the company will be invalid allowing the CJ to perform uncompromised audit without conditions (Porter, Simon and Hatherly 2014).

Rotation of auditors; from situation three and four both Michael and Annette are likely to be compromised due to trust and familiarity as well as by other factors. It is evident that the two have been familiar to the client firm and are not suitable to perform a review on the financial records of the same company (Porter, Simon and Hatherly 2014). Annette intends not to conduct deep review on the tax financial books of records due to previous audit where as Michael trusts the dad who leads the financial team. Audit rotation is therefore the best safeguard to ensure audit independence.

The tern business risk refers to the situation that the business may not have profits as speculated. In the case of the company in the case of study it evident that the company may experience some of the business risks (Arens, Elder and Mark 2012). These kinds of business risks should be considered during audit planning by the audit firm responsible for the auditing of company. Business risks are coursed by a number of factors ranging from sales volume in relation to the prevailing market per unit price, the cost of input in relation to the cost of output among other factors. From the study above two factors which may lead to obtaining of lower profit than speculated includes transportation and operation (Arens, Elder and Mark 2012).

Based on the location of various consumers of the goods and services provided by the Mining supplies LTD (MSL), the company is likely to suffer from a reduced profit than the speculated (Arens, Elder and Mark 2012).  The company from the basis of operations provides or cover transportation costs leading to reduce income compared to the situation where the cost of transportation is shared. Based on the remote location of various company customers in the remote mining sites, the company suffers from increased cost of transportation thus reduced rates of profit. The auditing firm or the auditor in charge of the company financial review should therefore take into consideration of various risks resulting from transportation of goods and services from various company sites to customer mining sites (William, Glover and Prawitt 2016).

The company provides warranty on the services and goods purchased by the customer. The period of warranty is customer interest oriented resulting into company incurring a lot of maintenance costs (Elder, Beasley and Arens 2011). The labor warranty allowed on the equipment results into operation risks where Mining supplies LTD (MSL) has to pay for extra charges to the operations of the mechanics performing such maintenances. Being that most of the customers are remotely located, the company has to cover for the long distance transportation costs for the mechanics, pay for the billing of their services on a daily rate based on the time, cover for all the parts replaced as well as the accommodation and living expenses of the mechanic (Ainapure and Ainapure 2009). As a result of the operations performed by the contracted mechanics the company receives a lower profit than the one speculated and the audit team should take in to consideration the risks from operation costs while making audit plans.

At the preliminaries of developing audit plan and audit pan an auditor should an approach that allows prior an assessment to control the risks. An audit risk is a type of risks which can be identified at the financial stage levels within a given company (Ainapure and Ainapure 2009). At this stage an auditor should therefore develop an appropriate model to determine various risks which may be also as a result of other business risks as in the case of Mining supplies LTD (MSL).

In this case the specific audit risk may be speculated as a result of the business risks encountered by Mining supplies LTD (MSL) as an organization.  During the development of the audit plan as already mentioned above and auditor should assess inherent risks as one of the risks at the financial statement stage (Elder, Beasley and Arens 2011). The audit team or the auditor should therefore relate the risk assessment to various accounts balance and various transaction classes during the assertion point. Inherent risks may occur as a result of operation risks and transportation risks in that the cost of maintenance and transportation may be misquoted by the supervisors, managers, drivers even the mechanics. The company officials in charge of the maintenance may quote a value than the actual cost resulting into inherent risks (Messier and Austen 2010).

At the level of transaction class determination as well as the account level, the risks may be witnessed in the payable accounts. Since the business risks identified mostly relate to the payable accounts, the auditor should therefore be assertive that the payable accounts at the financial statement levels are likely to be susceptible to misquotes and misstatement. This s evident in that most of the payable accounts requires adjustments with a higher degree of estimations as most of the operations relating to maintenance are continuers (Messier and Austen 2010). Other account which is likely to affect by the audit risk includes the assets accounts which may be as a result of mismanagement and loss of assets during the cause of maintenance by the mechanics contractors. In conclusion auditors should keenly review payable accounts as they are prone to misstatements during maintenance.

Reference

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