Auditing And Ethical Practices For Independence Policy

Potential Threats

Discuss about the Auditing and Ethical Practices for Independence Policy.

Auditor’s independence means the independence of the internal and external auditors of the company. The auditor’s independence policy states that the internal and external auditors must not have any financial interest in the properties of the audited parties. Auditor’s independence requires honesty and integrity from the side of the auditors. The internal and external auditors must be independent of audit clients as per the Code of ethics as public interest is engaged in the process of audit engagement. It is desired that the auditors will be independent of mind as well as independent in appearance. Independent of mind refers to that the auditor will not be affected by any kind of influence to make his/her personal judgment. Independent in appearance refers to that the auditors will avoid the facts and circumstances that can influence the decision making process of them.

As per the above discussion, there should be absolute independence in the audit operations by the auditors. However, as per the case study given, it can be seen that there is a violation in the independence of the auditor of Fellowes and Associates. This process can contribute to severe kind of threats for the audit farm as per the guidelines of Auditing professional and Ethical Standards Board, APES 110 (Apesb.org.au 2016). The potential threats are discussed under as per the APES 110 norms:

• Severe thereat can be arrived when an audit team member has direct financial interest or material indirect financial interest in the property of the audited party or the audited client. This is one of the most significant threats and there is no safeguards created that can save the individual from this threat. In case of situation one, the audit associate owns shares in the audited firm. This situation implies that the audit associate has financial indirect material interest in the audited firm. Thus, the audit associate cam face the above discusses threat (Quick & Warming-Rasmussen, 2014).
•  Same as above, if an associate of the audit firm has a controlling financial interest in the audited firm and the  audit firm is material to the  audited client, then the audit associate can face severe threat that cannot be safeguarded by any kind of law as per the APES 110 (Tepalagul & Lin, 2015).
• An independence threat is created if an associate of the audit firm has close family member in the audited company or the audit client who has direct material interest. There are some factors that determine the level of the threat. The first factor is the nature of relationship between the audit associate and the family member. Another factor is the nature financial interest materiality (Blay & Geiger, 2013).
• Providing non audit services to the audit client by other partners or by the managerial employees who has direct financial material immaterial interest in the audited company or the audited client is a serious unavoidable threat. There is not any kind of safeguard that can save the employee from this threat (Kouakou, Boiral & Gendron, 2013).
• Independence threat can be created when there is a close relationship of business between the audit team or any associate of the audit team and the audited firm or any member of the audited firm. There are certain aspects of this kind of threats. This kind of threat can be arrived if there is a financial interest about a joint venture between the audit team and the audited firm. Another reason for this kind of threat is when the audit firm involves in the marketing or distribution of the products of the audited client (Dogui, Boiral & Heras?Saizarbitoria, 2014).
• The threat of independence can be formed when a team member or associate of the audit team or the audit firm has a close relationship with a person who is not his family member; but the person is an officer or an director or an manager of the audited entity and he/she has a significance amount of influence on the audited firm. There is some aspect of this kind of threat. The nature of this kind of threat depends on the nature of relationship between the team member of the audited firm and the director, officer and the manager of the audited company. This kind of threat also depends upon the nature of the position which the member of the audited company holds and the role of the audit associate in the audit team or in the audit firm (Bauer, 2014).
• The independence threat can be arrived if any audit team member or the audit firm violates the rules, regulations and policies of the audit company due to have any financial interest in the audited client or the audited company.

These are the potential threats that can be arrived due to occurrence of the situation 1 and 2 in the given case study. These are the threats that are arrived due to the violation of the policy of independence of the auditors.

The actions to avoid the above discussed threats are discussed below:

• In situation 1, as per the above discussion, there is a serious offense to break the rules, regulations and policies regarding the independence of the auditors. It has been seen that one of the associates of Fellowes and Associates has shares in the audited company that is Health Care Holding Group (HCHG). This situation implies that the member of the audit team has financial non material interest in the audit client. To avoid this threat, Fellowes and Associate need to remove that particular audit associate from the audit operation of HCHG. On the other hand, they can ask that team member to sell the shares of HCHG in order to avoid the self-interest threat (Chapple et al., 2014).
• In situation 2, it is the duty of the management to manage various kinds of assets of the organization including the tangible as well as the intangible assets. Sometime the management of the organization takes some steps which are unethical from the point of view of audit but they are taken for the betterment of the organization. It may happen that the amount of $ 30 million has entered as the value of intangible assets by mistake. Thus, the auditor needs to correct the mistake by showing the actual adjustment (Audits, 2013).

To avoid this kind of future incidents, certain safeguards are discussed below:

• Leadership in the audit process is needed in order to make the audit associates aware about the importance to comply with all the rules, regulations and fundamental principles of auditing.
• Various kinds of policies and procedures need to be implemented in order to monitor the quality and control on the audit process (Hossain et al., 2016).
• After that the policies need to be documented in order to indentify the threats of audits, to explain them to the audit team members, to apply the safeguards for these threats and to reduce the threats to the level of acceptance.
• There must be coordination and compliance between the audit policies and the fundamental principles of the audit (Ge, Simnett & Zhou, 2016).
• It is needed for the audit firms to timely communicate the various kind of policies and fundamental principles of audit to the members of the audit team. If there is any change among the rules and principles, they need to be communicated with the audit team members.
• The non assurance services of the audit work need to be reviewed by the member of the audit team who is not involved in the non assurance audit team.
• The audit team needs to keep the fact in mind that the audit client has the appropriate corporate governance structure and proper communication procedures regarding the various services of the firm.
• Another audit firm can be involved to re-perform the audit program performance.
• The members of the assurance team need to be rotated on a regular basis in order to maintain transparency in the whole audit process (Henderson et al., 2015).

These are safeguards that Fellowes and Associates can implement to avoid the future threats in audit independence.

Conclusion

From the above study it can be understood that independence of the auditors is an important aspect in the audit process. However, in the case of Fellows and Associates, it has been seen that the policies of auditor’s independence has been violated. Due to this violation, the audit firm can face a lot of severe threats like independence threat, self-interest threats and many others. In order to avoid these threats, Fellowes and Associates needs to take some steps like to remove the audit associate who has financial non material interests in the audit client’s business, to formulate various policies and principles and many others. On the other hand, APES 110 has provided some guidelines which needs to be followed by the audit firms to bring these threats in an acceptance level.

References

Audits, F. S. (2013). Quality Control Around Financial Statements Audits.

Bauer, T. D. (2014). The effects of client identity strength and professional identity salience on auditor judgments. The Accounting Review, 90(1), 95-114.

Blay, A. D., & Geiger, M. A. (2013). Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), 579-606.

Chapple, L., Crofts, P., Ferguson, C., & Hronsky, J. (2014). Professional independence and attachment bias: an exploratory study.

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

Ge, Q., Simnett, R., & Zhou, S. (2016). Ethical and Quality Control Requirements When Undertaking Assurance Engagements.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Hossain, S., Monroe, G. S., Wilson, M., & Jubb, C. (2016). The Effect of Networked Clients’ Economic Importance on Audit Quality. Auditing: A Journal of Practice and Theory.

Kouakou, D., Boiral, O., & Gendron, Y. (2013). ISO auditing and the construction of trust in auditor independence. Accounting, Auditing & Accountability Journal, 26(8), 1279-1305.

Quick, R., & Warming-Rasmussen, B. (2014). An experimental analysis of the effects of non-audit services and related independence threats on auditor independence in appearance. In 12th World Congress of Accounting Educators and Researchers.

Tepalagul, N., & Lin, L. (2015). Auditor Independence and Audit Quality A Literature Review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.

uploads/standards/apesb_standards/standard1.pdf. (2016). apesb.org.au. Retrieved 23 November 2016, from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf