|
Situation |
a) Threat |
Justification |
b) Safeguards |
c) Assessment of Audit Independence |
|
Preparation of Financial account and conduct audit under same firm |
Self Review Threat present in financial statements as the amount of audit and non audit services are disclosed. (Barizah,2016), |
In the given situation, the two divisions of the same audit firm are doing accounting and auditing services. The firm has presented the financial statements of one of his listed client Red Ribbon Limited and also done the financial accounts preparation. The client bas approved the all the adjustments and assumptions made by the accounting division of the audit firm. Although, the staff is different but the ultimate responsible person is one for both accounting and auditing. |
· Disclose the interest of the auditor before the taking engagement to the stakeholders of the company · All the assumptions taken in preparation of accounts should be enumerated to in the financial statements to adhere with corporate governance |
· Level of Objectivity lost by auditor. |
|
Job Offer by management of Jupiter Limited to the audit team member |
Threat of Self Interest of auditor independence as the audit team member may have personal interest in Jupiter Ltd. (Edwin, 2015) |
In the given situation, the audit team member Daniel Jackson is working from two weeks to the client place Jupiter Limited for conducting audit. And the management of the client assurance him an offer of job after audit finalization. This assurance will create the personal financial interest of Daniel in the client business and his reporting can be hampered. |
· The auditor should restrict the responsibilities of the audit member or remove that team member from audit assignment after getting the knowledge of the financial interest of the audit team member. |
· Level of Financial and Personal Interest in the Client Business. |
|
Offer of consultancy engagement for next year by the managing director of the company |
Threat of Intimidation as there is fear of losing financial revenue in the mind of the auditor. Some existence of Self Interest threat is also present in this situation. (Livine,2015) |
In the given situation, the managing director of Fruit Juices limited gossip to auditor about his engagement for having the complete review about the quality controls of the company only if he does not ask so many questions about the audit queries to staff member. The managing director inadvertently creates dominance on the auditor and his team by making him lucrative offers to the auditor. |
· Involvement of new Professional member to review the work done by the member of audit team. · Discussion of same issue to the stakeholders of the company and to the regulatory bodies those charged with corporate governance. · Decrease the extent of the relationship with the client and employees of the client. |
· Level of Dominance created by the client on the reporting of auditor |
|
Relationship with the New Finance Director of the Apex Limited |
Threat of Familiarity as risk of high mutual trust which can hamper auditor independence (Parker,2015), |
In the given case, the finance director of the company is retired and new finance director Eric Lay has been appointed by the company Apex Limited. The Eric has long lasting personal relationship with audit manager Bruce Li who was the best man in his marriage and can affect the reporting of the audit manager. This personal relationship can create the sympathetic ground in the heart of audit manager and he will not point out the mistakes of the employee of the company. |
· Rotation of senior audit manger over a period of term by the audit firm · Decrease the responsibilities of the audit member and may be remove the same from this assignment. · Appointment quality appraisal by the audit firm |
· Level of Sympathy in the mind of audit team member · Degree of hiding the mistake of related employee of the company |
|
Presentation of the taxation matter of client at the Superannuation Complaints Tribunal |
Threat of Advocacy as the auditor has a fear that reporting done by him may has legal implications (UK Essays, 2013) |
In the case under study, the client Super Trooper Limited maintain retirement fund and is superannuation company and the taxation treatment in relation to tax on income from investments has been rejected by the assessing officer and he also said that the taxation policies are wrong as adopted by the company. The company approach to the audit firm for presenting the case in tribunal and the assist the company in representing the case may lead to creating the threat to the objectivity level of the auditor. |
· Taking an advice from the independent qualified professional in relation to taxation matter litigation · Restriction of audit firm member in providing legal service · Disclosure of fees charges for legal services simultaneously with those charged to corporate governance |
· Level of Objectivity lost by the Auditor · Level of Integrity hurt by the company |
International Auditing Standard 240 defines that the primary responsibilities towards the preparation and presentation of financial statements are of the management of the company which are free from the material frauds and the responsibilities of the auditor are giving opinion of these financial statements whether they depict true and fair view. The detection risk is majorly present as audit risk in situation of frauds and the inherent limitations of audit deploys the auditor from detection of frauds. The material misstatement from frauds are full planned and sophisticated and auditor has to take professional sue and care in identifies this type of material misstatements in financial statements of client. The auditing standard establishes the responsibilities of auditor in not only identifying the frauds but also fraud factors so that the frauds cannot be taken place in future as well. The requirements of the ISA 240 for auditor’s responsibilities for detection of frauds listed according the audit procedures followed by the auditor.
1. The auditor should examine the irregularity in the management of the company before making the engagement
2. The auditor has maintain the due professional care and professional uncertainty while doing the audit
3. Discuss and train the audit team member about the level material misstatement and area where the marital misstatements can be found in the financial statements
4. Evaluate the nature , timing and extent of evaluation of risk by the management of the company
5. Management responses to the frauds identifies in past and their actions and disclosures of the same in books of account and board report by the management
6. The auditor should perform the detailed procedures for detection of frauds that contains checking of journal entries, reviewing the accounting estimates and checking new policies adopted apart from the policies of normal business
7. The auditor shall to do the testing of internal control systems of the client and maintain the documentation for the same.
8. Make certain that the management have the knowledge of the frauds guess in the company
9. Make sure that those charged with Governance have the knowledge of the actual and frauds that guess in the company.
10. Ensuring have the those charged with Governance have overriding effect over management of the company in relation to frauds
1. The implementation of internal control system in the company in relation of finding of frauds
2. Ensuring the effectiveness of the internal control systems in detection frauds
3. The opportunity of hidden frauds in the financial statements to the minimum level
4. Application of the Risk assessment and corporate governance procedures in the company
5. Ensuring the effectiveness of the corporate governance procedures with methods of risk of frauds assessment
6. The assessment of the possibility of the of frauds
7. The board of the company is responsible for the assessment of the effect of the frauds identified in the company
8. The preventive actions of the future to avoid the detected frauds in the company. ( IFAC, 2017)
Stock of Clocks– First asset account which is at the risk of the material misstatement is the stock. It is because in the case study it is mentioned that the retail distributors of the company have been offered to transact the sale of clock on sale or return basis. The benefit that has been extended to the retail distributors is in the way that payment terms are allowed for 90 days credit and the return can be made any time within 60 days and shall be at least 30 days before the payment became due. It imposes the risk of having the defective stock at the quarter end or the year end higher which may tend the managers to indulge in the practice which may lead to variation in stock items and thus leading to material misstatement.
Accounts Receivable – Second asset account which is at the risk of the material misstatement is accounts receivable. It is in the sense that due to increase in the valuation of Australian dollar and labor prices the customers are not willing to buy the clocks which in turn will induce the manager to create wrong sale and thus inflating the value of accounts receivable and thus leading to material misstatement.
b. Prior Years Figures– As per the given case study, the prior year figure will be the sale which will be booked at the yearend but the payment of which will be received within 90 days provided the goods are not returned and also goods can be returned before the 30 days of expiry of Ninety days. Hence, the goods which have been sold and at the year end and is retuned on the next year will be treated as prior year figures.
On the basis of the facts of the case, it has been observed that the company might tend to manipulate the account balances in order to have bank finance which may affect or audit plan. These are listed in these ways:
2a. Internal Control Issue– All the power has been delegated to the Marketing Manager who himself receives the 20% bonus in case the targets are achieved. Thus, there shall be formal hierarchy which shall be followed by everyone and the delegation or particular work shall not be given to those officers who are already in receipt of the benefits out of that work.
b. Fraud Risk Factors –There are two fraud risk factors. One is sale bonuses which will induce the marketing manager and staff to increase the sales in view of having high bonuses and second issue in low level of internal control system which has not ensured the smooth and proper functioning of the operating system.
c. Account Balance at Risk –The risk will be relating to the Sales Account. The assertion that follows with the identified risk balance are
Both of the above audit procedures are regarded as additional audit procedures.
References
Barizah N, (2016), “Threats to Auditor Independence”, available at
https://www.academia.edu/260449/Threats_to_Auditor_Independence accessed on 04/05/2017
Edwin M, (2015), “Analysis of Threats to Auditor Independence and Available Safeguards against those threats”, available at
https://www.academia.edu/9406967/THREATS_TO_AUDITORS_INDEPENDENCE accessed on 04/05/2017
IFAC Official Website, (2017), “Inetrnational Standard on Auditing 240-The auditor Responsibilities relating to fraud in Auditing of
Financial Staments”, available at https://www.ifac.org/system/files/downloads/a012-2010-iaasb-handbook-isa-240.pdf accessed on 04/05/2017
Livine G, (2015), “Threats to Auditor Independence and Possible Remedies”, available on
https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full accessed on 04/05/2017
Parker A, (2015), “6 Key Threat to Auditor Independence”, available on https://www.intheblack.com/articles/2015/01/06/6-key
threats-to-auditor-independence accessed on 04/05/2017
UK Essays, (2013), “Threat To Auditor Independence Accounting Essay.” Available at https://www.uniassignment.com/essay
samples/accounting/threat-to-auditor-independence-accounting-essay.php?cref=1 Accessed on 04/05/2017
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