Audit Assurance And Compliance For Clark And Johnson

Threats to Audit Independence

Discuss about the Audit Assurance and Compliance for Clark and Johnson.

The study is focuses on determining the independence of auditor, which is considered as the most important aspects of auditor at the time of executing duty. The audit manager of Clark and Johnson (CJI) is under obligation to check the professional aspects of audit concerning the audit engagement of Luxury Travel Holidays. Based on the conversation from the case study it is evident that the audit manager is necessarily required to take into the considerations the professional code of conduct in order to maintain the integrity and audit independence for preserving the quality of audit (Abbott et al. 2016). In accordance with the conceptual framework 21 threats to auditor, independence refers to pressure or any other factors, which impairs the auditor from their objectives. With reference to, the case study below stated are the threat to audit independence that are as follows;

Threat of self-interest: This threat may arise if the auditors Annette and Michael act in their own interest. Self-interest comprises of auditors emotional, financial or other personal interest. Auditors might favour consciously or subconsciously, those kinds of self-interest over their interest at the time of executing auditing work (Ojo 2013). For instance, auditors association with auditees establishes financial self-interest since the auditees pay the auditor fees.

Threats of self-review: Threats might originates from auditors Annette and Michael is reviewing the work done by or the work, which is performed by others. As evident Annette was earlier associated with, the company in computation of tax and Michael is the son of financial controller of LTH (Dogui, Boiral and Heras 2014). Threat may arise in evaluating the work without bias one’s own work or the work of someone else. Therefore, the threat of self-review may arise at the time when the auditors review their judgements and decisions, which they or others in LTH have made.

Threat of advocacy: Another threat that might arise from the auditors or from others in their firm is promoting or advocating for or against an auditee along with their opinion instead of serving in the form of unbiased attestors of auditees monetary information. Threat may arise if the auditors and others in the auditing firm serves in the form of promoters for LTH securities (Iwasaki 2013).

Threat of familiarity: This threat might arise from the auditors Annette and Michael for being influenced by a close relationship with an auditee. These kinds of threats arises when the auditors may not be appropriately sceptical from the assertion of an auditee. Furthermore, the auditee might readily accept the viewpoint of an auditee in LTH due to their familiarity with or trust with the auditee (Zadek, Evans and Pruzan 2013). For instance, a familiarity threat might arise for her familiarity with tax and accounting entries with the auditor since she has the professional relationship with the auditee.

Safeguarding Measures

The above stated criterion denotes the significance of threat that is dependent upon several factors along with the nature of activity or relationship creating that threat for Michael and Annette.

The conceptual framework also lays down the techniques of categorizing and safeguarding in relation to the threats identified above for Michael and Annette. The conceptual framework clearly identifies the four level of responses that is available to safeguard the auditors and helps in setting the standard as well (Geisler and Wickramasinghe 2015).

Absolute prohibition: Barring the auditors from establishing any kind of direct financial investment in any auditees.

Restricting the activity or relationship: The auditors should be provided with necessary permission of performing the activity but a restriction should be imposed to certain extent or form. For instance, a restriction can be imposed on Micheal and Annette by barring them from having any material indirect financial interest in auditees.

Establishing policies and procedures: Permitting any kind of activity or relationship requires policies and relationship that will help in eliminating or mitigating any kind of existence threat. For instance, an obligatory replacement of engagement with partner after the audit partner has spent certain amount of time on performing specific audit engagement in order to mitigate the threat of familiarity (Beach 2014).

Mandatory disclosure of information: The auditors Micheal and Annette may be permitted to certain activity or relationship but they should be required to disclose all the audit engagement information to the management of the audited client, audit committee or board of LTH (Krishnan and Wang 2014). For instance, disclosure must include the nature of service provided by the auditor to the auditee along with the fees received for such kind of services.

Under the current scenario as the senior auditor of Crampton and Hasaad the company is involved in the business of selling equipment and spare parts by importing it from different nations. The equipment and spare parts imported by the company is largely customized according to the demands of the consumers. The company also provides its users with warranty for each of the spare parts and equipment sold to its customers and charges in accordance with the contract quality when the period of warranty is outdated (Vinnari and Skærbæk 2014). The questions requires identifying two-business risk that forms the part of the equipment purchasing method that is set by the organisation. Being engaged in the import of equipment and spare parts the company is exposed several kinds of business risk.

Business Risks in Equipment Purchasing Method

One such risk that is identified for the company is the risk of currency exchange. Due to the growth in competition business firms are exposed to bunch of risk recognised by the international exchange rate. Business genrally overlooks this kinds of exchange risk however, they forms the essential part in the business functions. Obtaining an administration expert holds the obligations concerning the supply chains from which merchandise, management and works reaches into their association or precisely to the customers (Gould et al. 2014). Better practice of acquiring and supplying helps in incorporating the administration by creating an understanding for the providers in the areas of operations. Hence, an organisation at the time of importing goods from other nations results in making the purchase systems very complex and also requires due compliance with several business rules and regulations. Therefore, the administration procedures in the business system should be sufficiently designed in order to avoid the business risk.

Another risk possessed by the business is the risk of fraud and error that may arise during the business administration process while making or receiving payment. The purchasing system might not be effective and economical to provide information on the sufficient level of stock so that they could meet the ongoing demand from the present set of customers along with the potential customers (Colquhoun et al. 2014). The account balance of the customers must be thoroughly verified during the audit procedure so that it can provide true and fair view of the financial statements of the company. It is recommended that the auditing functions of the companies must be reviewed in detail concerning the purchase of equipment and spare parts from several different nations.

MSL necessarily requires frameworks and techniques, which may appropriately bolster the conferred consumptions along with the presentation of probable irreconcilable situations with controls being established to protect misrepresentation of database. For the above stated business, risk below stated are the auditing risk that required appropriate evaluation;

In the first business risk identified, the system of purchase might run into several financial risk. The company faces the risk of internal control since the system of purchase management might not be regarded as sufficient. This might create an impact on the accounts payable oabsolf the business because the auditor is required to keep a check on the bank account balance along with the vendor account balance in order to determine that the vendor appropriately receives whether the payments made (Byrnes et al. 2015). This is regarded as the manual or mechanised systems, which regularly works in the business procedure level and is applicable in handling the exchanges through an individual application. Application of control procedure helps in protecting the business since they are guaranteed to provide trustworthiness of the secretarial record keeping.

Audit Procedures to Mitigate Business Risks

Another audit risk, which the business could face, is the efficiency and effectiveness of the purchase systems of MSL. At a certain point when the purchasers raises the request to purchase the company must implement the practice of specific spending code as this could empower the holder in adjusting the remaining balance. The auditor is under the obligation to verify and determine the effectiveness of the economic system. This will help in identifying the true and fair view of the statements and opinion stated on the financial statement is whether justifiable or authentically verified (Beach 2014). The organisation is bound to provide assurance by stating that it is working under the prescribed set of rules that legally binds on the limit and well within the prerequisites forced by the controller. This can be achieved by utilising the information, which is accessible in the record payable capacity. Hence, prior to arriving at any kind of decision in audit procedure it is recommended that auditor must verify in detail the system of purchase.

Reference List:

Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.

Beach, L.R., 2014. Decision making in the workplace: A unified perspective. Psychology Press.

Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. and Vasarhelyi, M., 2015. Evolution of Auditing: From the Traditional Approach to the Future Audit. Audit Analytics, p.71.

Colquhoun, H.L., Brehaut, J.C., Sales, A., Ivers, N., Grimshaw, J., Michie, S., Carroll, K., Chalifoux, M. and Eva, K.W., 2013. A systematic review of the use of theory in randomized controlled trials of audit and feedback. Implementation Science, 8(1), p.66.

Dogui, K., Boiral, O. and Heras?Saizarbitoria, I., 2014. Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18(1), pp.14-26.

Geisler, E. and Wickramasinghe, N., 2015. Principles of knowledge management: Theory, practice, and cases. Routledge.

Gould, N.J., Lorencatto, F., Stanworth, S.J., Michie, S., Prior, M.E., Glidewell, L., Grimshaw, J.M. and Francis, J.J., 2014. Application of theory to enhance audit and feedback interventions to increase the uptake of evidence-based transfusion practice: an intervention development protocol. Implementation Science, 9(1), p.92.

Iwasaki, I., 2013. What determines audit independence and expertise in Russia? firm-level evidence.

Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.

Ojo, M., 2013. Audits, audit quality and signalling mechanisms: concentrated ownership structures.

Vinnari, E. and Skærbæk, P., 2014. The uncertainties of risk management: A field study on risk management internal audit practices in a Finnish municipality. Accounting, Auditing & Accountability Journal, 27(3), pp.489-526.

Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.