Identification And Evaluation Of Threats To Auditor Independence And Safeguards, And Business Risk Identification For Mining Supplies Ltd (MSL) Audit Planning

Identification and evaluation of threats to the auditor independence for each of the situation

In order to conduct auditing process for a company, external auditor is required to perform examination and assessment of various business aspects. Accordingly, it is important to conduct the audit process by considering the auditor independence that implies the capability of the auditor to indentify the deficiency range within the business organization. The deficiency range involves the relevant aspects of internal control, adoption of accounting policies and review of misleading or misstatement reporting (Blay and Geiger 2013). However, there are certain threats that may be faced for auditor independence that relates to the specific business situations. Considering the situations in the present case, certain threats with respect to the auditor independence have been identified.

Considering the first situation, self- interest threat to the independence of Geoff has been identified that may affect the objectiveness of Geoff as an auditor. In the present situation, the client company LTH offered Geoff to present a speech for promoting the organizational business to attract potential investors. The present situation involves an activity outside the scope of audit process because providing a speech to promote the business of the client company is not considered as audit work as per the auditing standards (Craft 2013).

The second situation involves presentation of complimentary holiday package voucher for 14 days to Geoff and his family. The situation further states that the expenses related to the holiday would be borne by LTH with respect to the accommodation and travelling. It can be observed that the auditor would face audit independence threat in terms of social- bonding since the audit engagement for long- term involves friendship and social relationship in the workplace. On the contrary, such social- bonding affects the professional norms as well as code of ethics required to be followed while performing audit procedures (Soltani and Maupetit 2015). The holiday package and related expenses from the client company is considered against the code of ethics of audit process as well as against the standards on audit engagement.

As per the third situation, it has been noted that the audit assistant of the audit firm has been closely related to the client company’s financial controller who was assumed to be responsible for the preparation of LTH’s financial report. Accordingly, the present situation involves relationship threat to the independence of the auditor since the relationship with the company’s member would affect the auditor’s independence (Tahinakis and Samarinas 2016). It may happen that the relationship between the member of the company and audit firm may reflect the difference in material misstatement or error in financial statements.

Similarly, fourth situation involves self- review threat to the independence of audit since involvement of Annette was on a temporary basis with respect to the tax calculations as well as preparing accounting entries. It has been mentioned that the accounting entries have been prepared for the year 30 June 2015 while the motive of Annette was to form meeting with everybody that reflects a hint of social event. Such action is against the standards of auditing, as the intention to form social event does not include in the standards and principles of audit work (Kassem and Higson 2016). Therefore, the present situation involves self- review threat to the independence of CJ auditor for considering the intention of forming social relations.

Identification of safeguards to the identified threats

According to the threats identified with respect to the independence of the auditor, it can be said that the self- interest threat is the most critical threat that affects the integrity, code of ethics and objectivity of the auditor. As per the auditing standards and principles, it is essential to maintain the professional ethics while performing the audit principles that involves objectivity, integrity, professional competence and skills (Strickett and Hay 2015). Accordingly, it is essential to incorporate safeguards for the audit independence threats in accordance with the principles of auditing standards. One of the safeguards that the auditor in the present case can consider is the safeguard with respect to the external reviewer so that the relevant data of the organization can be verified. Safeguard with respect to external review involves examination and verification of organization’s business and activities (Bampton and Cowton 2013). Moreover, it can be said that the Geoff should ensure the offer of speech in the first situation is not acceptable by any of the member of the audit firm as it is against the standards on audit process.

In view of the audit independence threat for second situation, it is essential to review and monitor the package offered by the CEO of LTH since the offer is out of the scope of audit procedures. The safeguard for threat to audit independence in the second situation involves review of independence issues with the audit committee to ensure that the audit performance does not affect the objectivity of the auditor. In addition, the auditor is required to review the company’s policies and processes for performing the audit process in accordance with the objectivity.

Moreover, the third situation involves relationship threat since the financial controller of the company has been a father of the audit assistant of the firm. It can be said that the auditor is required to review and monitor the financial statements appropriately for authoring the transactions and approving the transactions. The auditor is required to consider safeguard by reviewing the journal entries, classifications of business transactions, reporting of transactions in the financial statements and material disclosures for the benefit of the stakeholders. Further, the safeguard for audit independence threat involves self- review threat, which consider safeguard by reviewing the previous year’s financial statements and disclosures to ensure the correct carry forward amount (Chouhan, Soral and Chandra 2017). The safeguard to the self- review threat involves assessment of source data used for the accounting entries as well as underlying assumptions required to prepare the financial statements to measure the company’s performance and financial position.

(a) Identification and description of two business risks to MSL in planning for 2015 audit

Organizations involve several business risks that affect the organization to achieve the desired goals and business targets. It is essential to monitor and assess the present and potential business risk of the organization so that it does not affect the going concern and the activities does not contribute for business failure (DeZoort and Harrison 2016). Certain common business risk involves loss to the consumers, increase in the cost of production, cash flow issues, decline in profitability and such other adverse business actions (Gallizo and Saladrigues 2016). Therefore, while planning the audit procedures it is essential to consider the business risk involved within the company. Accordingly, in the present case of Mining Supplies Ltd (MSL), certain business risk involved that has been identified while performing the audit planning for the year ended 30 June 2015.

Identification and description of two business risks to MSL in planning for 2015 audit

Considering the business activities of the company, the first risk involves is carrying on the equipment for mining along with sacrificing the elements to the companies engaged in mining business across the region of Australia. It has been noted that the company (MSL) owned detailed operational centers in several regions that is Newcastle, Mt. Isa and Perth. All the centres incorporate warehouses for equipment and spare parts together with the offer for services on sales and maintenance for the business operations. Accordingly, it can be said that Crampton and Hasaad would consider the business risk on operational centers in different regions with respect to the high cost of service and finding potential consumers.

In addition, another business risk that Mining Supplies Ltd might experience was establishment of its head organization in the location of Melbourne from which the company provides finance, IT service and other corporate services. It can be said that the services with respect to the finances, IT and corporate activities involves primary function for business operation hence, business risk in terms of material misstatements and erroneous activities may occur (Goh, Joos and Soonawalla 2016). Moreover, the company associates with a purchase order contract for equipment with several companies engaged in the production based in US, China and Europe. Involvement of the organization in the purchasing order contract might lead to the risk due to increase in foreign exchange rates, inflation in monetary value in other regions and consequently would lead in higher purchasing cost lowering the profitability (Han Fan, Woodbine and Cheng 2013). The two business risks associates with the production and formation of specialized equipment as well as sacrifice of related elements for transferred to the company’s operational centres. The identified business risks involves guarantee for the consumers in terms of only one free post service on product maintenance in each of the financial year until the expiry of guarantee period. Accordingly, Crampton and Hasaad are required to consider the above mentioned business risks while planning the audit for the year 2015 since it affects the customer relationship and business operations.

(b) Description of specific audit risk with respect to the identified business risk along with the identification of account balances that directly impact by the audit risk

The primary elements of audit risk involve inherent risk, control risk and detection risk that are required to be considered while planning the audit process. Inherent risk refers to the risk related to the material misstatements in the financial statements of the company occur due to errors. The factors for such omission involve higher estimation and judgments while measuring the value of complex business transactions and do not involve the internal control failure (Mishra 2016). Control risk refers to the material misstatement risks in the statement of income or financial position due to the failure in internal controls of the organization related to the business operations. On the contrary, detection risk refers to the risk that detects the failure of occurrence of material emissions in the financial statements of the company. Accordingly, auditor is required to perform appropriate audit processes to detect the potential errors or frauds in the financial statements that affect the true and fair view.

Accordingly, in case of present situation, considering the first business risk of the MSL, it can be said that the specific audit risk that could arise would be inherent risk that involves a risk of material misstatements in company’s financial statements. As the first business risk involves carrying on business operations from different operational centre locations, it involved the risk of higher production and service cost. Hence, it can be said that the audit risk might involve for manipulation of product prices affecting the financial results as well as financial results for other related centres may also reflect manipulated values affecting the true and fair view of the company’s profitability (Zimmerman 2016). As a result, the account balances with respect to the cost of providing services, equipment and other corporate activities would be directly affected.

In view of the second business risk of Mining supplies Limited, it can be said that the control audit risk could arise affecting the material misstatements in the financial statements of the company. The second business risk associates with the services in terms of finances, IT and other business services that are directly related to the internal controls of the company’s business operation. Therefore, the audit risk related to the sales revenue recognition based on the estimates might reflect misstated values affecting the values of overall profit of the company during the reported financial year (Cohen et al. 2013). Additionally, the estimation of the valuation of business transactions would not be based on the realistic assumption to measure the cost of service and sales revenue which would represent the misstated performance values. As the control risk involves checks on internal controls and account balances for preventing the risk of fraud and error, it is essential to consider the verification of specific business activities (Bills, Jeter and Stein 2014). Consequently, the account balances that would be directly impacted by the audit risk are cost of business operations and sales revenue since; it may incorporate the value of fraud and error. 

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