While conducting the audit, the auditors need to act in accordance to the generally accepted auditing standards. Such standards must ensure that auditors need to conduct audit technique with care along with mind’s objective status. Independence term is a conceptual aspect and is quite complex to define (Abbott and Lawrence, 2015). Additionally, auditor needs to maintain objectivity, integrity along with dealing with bias and making true and fair representation of their viewpoint.
Situation 1:
The Services those are offered to its consumers by auditors in consideration to audit scope is termed as non-audit service. This might encompass management service, consumer business promotion and tax based advice. Non-audit services are offered in exchange with added income or non-financial benefit (Al Momana & Obeidat, 2013). Moreover, providing non-audit services results in independence impairment of auditor along with offering accurate services to consumers. The likely impact on non-audit based services is a major concern.
Situation 2:
Auditor’s independence is threatened once the audit firm or auditor gains any monetary and non-monetary advantages in certain form other than fees considered for audit services. This might take place from attaining other advantages from the audit engagement contract (Blay, Allen & Marshall Geiger, 2016). For example, in the provided scenario, the consumer provided holiday package voucher for the audit firm members. If the auditors accept this offer, them the question concerning his independency might take place. Moreover, the threat amount to independency enhances with the benefit amount attained.
Situation 3:
Spouse, parent, dependent, non-dependent child and siblings of an auditor is deemed to be their close family members. Such financial interest is associated with debt guarantee, ownership, short or long term securities that is directly associated with an individual, along with other individuals by means of an intermediary, if the individual takes part or supervises within the investment decision or controls certain intermediary (Church and Bryan 2017). In the provided scenario, the main person associated with the accountant is the financial controller of the business of consumers. If Michael accepts the offer of the audit team member, it will cause danger to the auditor’s independency.
Situation 4:
In consideration to the close association with the consumer, the officers, directors and the employees, an influence risk is related with the consumer’s business environment. There is an increased occasion that the auditors representation will get impacted as she already has certain important information of the consumer because of her prior assignment with LTH just before a month (Cohen, Jeffrey, Ganesh Krishnamoorthy, & Arnold Wright, 2017). She was conducting the services associated with the tax calculations and generation of accounting entries at the year-end 30th June 2015. Moreover, the auditor is not supposed to conduct the audit of this individual work.
There must be a list of restricted services, which are offered to consumers by the auditors. The auditor might not offer a service that can compensate their independence. Certain other measures that might be used for improving the auditor’s independence are:
a) Risks involved with the spare-parts inventory
Risk management can serve as important aspect for spare-parts inventory management. Conversely, in most of the ways it is poorly implemented. Several organizations realise that risk management factor and go wide extent is vital for risk evaluation (Feng & Mei, 2014). Steps should be taken to address such risks in their organizations and these evaluations are generally confined to reputational risk, safety, health risk, and commercial risk. Moreover, two-business risk related with spare-parts purchasing and equipment that Crampton and Hasaad needs o consider while audit planning for strategic and operational risk.
b) Types of audit risk and impact on account balance
Risks are deemed to be of two types such as detection and operational risk. It serves as risk that there exists a probability that auditors might not be able to reveal material misstatement that is linked with an organization’s financial statement by means of analysis and considerable test procedures. Detection risk serves as a risk that the auditor considers as no significant error were observed during the audit process (Dhaliwal & Dan S, 2015). Detection risk can be termed as a risk that the auditor expects not to implement on the suitable processes or procedures are not employed correctly.
Reference List:
Abbott and Lawrence J., (2015). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research 54(1), 3-40.
Al Momani, M. A. & Obeidat, M. I., (2013). The effect of auditors’ ethics on their detection of creative accounting practices: A field study. International Journal of Business and Management, 8(13), 118.
Blay, Allen D., & Marshall A. Geiger, (2016). Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research 30(2), 44-54.
Church and Bryan K., (2017). Auditor independence in fact: Research, regulatory, and practice implications drawn from experimental and archival research. Accounting Horizons, 29(1), 217-238.
Cohen, Jeffrey, Ganesh Krishnamoorthy, & Arnold Wright, (2017). Enterprise risk management and the financial reporting process: The experiences of audit committee members, CFOs, and external auditors. Contemporary Accounting Research, 9(1), 77-88.
Dhaliwal & Dan S., et al., (2015). Management Influence on Auditor Selection and Subsequent Impairments of Auditor Independence during the Post?SOX Period. Contemporary Accounting Research 32(2), 575-607.
Dogui, Kouakou, Olivier Boiral, & Iñaki Heras?Saizarbitoria, (2014). Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18 (1), 14-26.
Feng & Mei, (2014). Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management. The Accounting Review 90(2), 529-557.
Knechel, W. Robert, and Steven E. Salterio, 2016. Auditing: assurance and risk. Routledge.
Li and Chan, 2017. The effect of ambiguity in an auditing standard on auditor independence: Evidence from nonaudit fees and SOX 404 opinions.” Journal of Contemporary Accounting & Economics 13(1), pp. 37-51.
Porter, Brenda, Jon Simon, and David Hatherly, 2014. Principles of external auditing. John Wiley & Sons.
Sadgrove, Kit, 2016. The complete guide to business risk management. Routledge.
Tepalagul, Nopmanee, and Ling Lin, 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance 30(1), pp. 89-91.
Yoon, Kyunghee, Lucas Hoogduin, and Li Zhang, 2015. Big data as complementary audit evidence. Accounting Horizons 29(2), pp. 431-438.
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