|
Situation |
a) Threat |
Justification |
b) Safeguard |
c) Assessment of audit independence |
|
Preparation of financial accounts and conducting the audit for the listed client named as Red Ribbon Limited |
Self-Review threat |
In this particular situation, self-review threat has been identified that occur when the auditor prepares for some of the accounting for the fund. It has been considered that vast majority of independence breaches gets related with the self-review threats. In the given firm (Red Rose Limited), this threat need to be addressed by separating the accounting as well as auditing work between two of the partners that will be operating individually or independently of each other. It is difficult to make such distinction in case of small firms as there is close relationship between the staff as well as partners and impossible for a sole practitioner to achieve independence at the same time (Porter, Simon and Hatherly 2014). |
According to APES 110 Code of Ethics for Professional accountants, the auditor in this case needs to be handling the client with integrity. Likewise, they should be straightforward as well as honest in their professional and maintaining business relationships (Zadek, Evans and Pruzan 2013). |
In the given situation, the Audit Committee need to monitor the integrity of the financial statements as well as conduct formal announcement in relation to the financial performance of Red Ribbon Limited through review of significant financial reporting and the judgments contained in them (William, Glover and Prawitt 2016). |
|
After 2 weeks of his working with Jupiter Limited, he informed that he has been offered a job for that company |
Ex-staff and partners threat |
In this particular scenario, ex-staff and partners threat has been identified as the threat occur when staff member or partner leaves for joining other firm or starting their own business as well as performs audits for the former employer (Miller and Power 2013) |
According to APES 110 Code of Ethics for Professional accountants, professional competence and due care explains that the auditor should not have been advised to maintain professional knowledge as well as skill at the level that is needed to ensure where the client or employer receives for giving competent professional services based upon the current development in practice. It is thereby understood the having the same roles, accounting and audit separately cannot be termed as independent situation by the auditor It is necessary to look at the other important aspects of independence that takes into consideration familiarity between the people in the accounting firm as well as audit firm at the same time. |
The main purpose of the auditor is to offer professional advice to the client who seeks help from them. In this case, the client has been working with other firm as well that was not communicated before to the current accounting firm where he was performing an audit (Messier 2016). |
|
Fruity Juices Limited is interested in reviewing the adequacy of the quality control over the production of its fruit juices. But, Managing director is of the opinion that the auditor will be asking unnecessary questions from the staff members that is time consuming |
Intimidation Threat |
In this case, the Managing Director was not happy with the fact that auditor will be asking too many questions from the staff members (Knechel and Salterio 2016). Hence, intimidation threat takes place when members of the audit team may be deterred from acting impartially as well as exercising specialized skepticism by intimidation from the Managing Directors (in this case). |
Effective safeguards are important for attainment of success of the framework approach. In this case, the auditor should be given freedom to act upon the role that is assigned to them without any interference from any Managing director (in this case). |
In relation to any engagement undertaken, the auditor needs to be in a position to articulate the threats that are identified from the given case. It is thereby impractical as well as inappropriate to comment on any list of threats that are identified in the case. It is of vital importance to get judgment of the auditor as well as audit committee for solving the particular situation. |
|
Eric Lay is the new finance director of Apex Limited who is long-time friend of the audit manager Bruce Li |
Familiarity Threat |
In this given case, familiarity threat has been identified that occur when or by virtue if close relationship with the audit client that may be directors, officers, employees where the audit team becomes too sympathetic to the interest of the client. Here, it is the same case as new finance director is close friend of the audit manager as it can influence over the subject matter of the audit engagement (Kim et al. 2013) |
Even though, the finance director and audit manger is long-time friend, it is needed for them to act ethically in actions and not to reveal any confidential information that should not be otherwise known to each other. |
The key requirement of the ethical guidance reveals the situation that safeguards to put in place where it is needed to guard against familiarity threat to independence. It is needed to safeguard these types of threats by way of rotation of partners as well as staff members, third-party review and independent oversight. Therefore, it is applicable to all the audit clients as well as particular considerations need to be taken for senior audit staff members. |
|
Super Trooper Limited is one of the audit clients that is a large superannuation fund where ATO has advised STL for where it rejected the taxation treatment. The matter has been referred to the Superannuation Complaints Tribunal as well as STL requested that the audit member represent them at the Superannuation Complaints Tribunal |
Self-Review threat |
STL here faces self-review threat from the ATO as they are rejecting the taxation treatment that is not right in any way (Kim, Liu and Zheng 2012). |
The quality of the engagement team depends upon the external auditor who is involved in auditing STL audit in the most appropriate way. |
In accordance to the APES 110 Code of Ethics for Professional Accountants, the auditor need to show professional behavior where they will comply with relevant laws as well as regulations that avoids any action and discredits the profession. |
As mentioned in International Standard on Auditing 240, the standard deals with auditor errands in relation to deception while auditing the financial statements. It is the accountability of the examiner to guarantee that all material frauds instances are detected in a proper way. Though fraud is a wide lawful thought, assessor needs to look at the fraud that reason material misstatement in the fiscal statements (Henderson et al. 2015).
As mentioned in International Standard on Auditing 240, auditor needs to maintain professional skepticism throughout the process of audit and it comes under auditor responsibilities. At the time of obtaining reasonable assurance, it is responsibility of the auditor to maintain professional skepticism. These requirements are properly mentioned in the ISA that is designed for assisting the auditor for identifying as well as evaluate the risks of material misstatement due to fraud at the time of detecting the material misstatement in the financial statement.
As mentioned in International Standard on Auditing 240, it is the responsibility of the auditor is to react suitably to fraud or suspecting fraud that is recognized at the time of auditing.
ISA 315 defines a argument among the appointment team members as well as resolve of the appointment partner that matters and it does not come under the responsibility of auditor and not a part of ISA 240.
It is responsibility of the auditor to make inquiries with the management as well as others that are present within an entity whether they have information of any definite supposed or suspected fraud that affects the unit (Hayes, Wallage and Gortemaker 2014).
The main purpose of the assessor is to obtain adequate appropriate audit evidence that is related to assess risks of material misstatement that arises due to fraud after looking at the implementation the given responses in the most appropriate way.
It is the responsibility of an assessor to test the suitability of journal entries that is recorded in the general ledger as well as other adjustments that are made at the time of preparing the financial statements. At the time of designing as well as performing such types of tests, the auditor need to make inquiries of individuals who are involved in the financial reporting process on matters relating to any inappropriate or unusual activity at the time of processing of journal entries or any other types of adjusting entries.
It is the accountability of the auditor to inquire whether administration has the required skills that is needed for preventing any types of fraud and then preventing them.
It is the responsibility of the auditor to obtain a copy of client code of ethics documents as well as employees to have access to it.
The auditor shall evaluate whether the assortment as well as submission of secretarial policy through an unit in relative to subjective measurements as well as complex transactions that is indicative of fraudulent fiscal coverage that results from the effort of management for managing earnings (Harrison and Van der Laan Smith 2015).
The risk of material misstatement refers to the risk where the monetary statements are materially misstated and fails to give true and fair representation of data. At the time of preparing the audit report of Amistad Furniture Manufacturers Pty Ltd, risk is assessed by the auditors at two levels that are assertion levels as well as financial statement level. Amistad Furniture Manufacturers Pty Ltd faces difficulty in managing with the material negative purchase price variances at the time of purchasing timber for a given period of time. The two assets accounts tha are at risk for Amistad Furniture Manufacturers Pty Ltd is insufficient current assets and so the current ratio is 1.24 for the year 2016, where the ideal current ratio is 2:1. The total assets needs to be maintained as after comparing it with shareholders funds, it is less in amount for the company named as Amistad Furniture Manufacturers Pty Ltd (Gaynor et al. 2014).
From the prior year figures as shown in the financial statement of Amistad Furniture Manufacturers Pty Ltd, it can be noted that the company faces drop in gross profit and net profit where losses are being incurred and proper attention need to be given to reduce the issue as misstated in the financial statements (Furnham and Gunter 2015).
Going concern is a basic underlying assumption that is present in accounting. Addition to that, the assumptions is that an Amistad Furniture Manufacturers Pty Ltd will be able to carry on in commission for a given period of time so that they can sufficiently carry out their promise, obligations as well as intention. These three factors need to be taken into consideration as they are the going concern assumptions made by Amistad Furniture Manufacturers Pty Ltd. The going concern assumptions takes into consideration regarding the fact where financial statements are prepared assuming the fact that Amistad Furniture Manufacturers Pty Ltd will continue to operate in the foreseeable future (Eilifsen et al. 2014).
As mentioned in AU Section 341, it reveals the fact on auditor consideration of an entity to look at the ability for continuing the business as a going concern. In this case, auditor found out that Amistad Furniture Manufacturers Pty Ltd faces huge misstated figures in the fiscal declaration. It is the responsibility of the assessor to evaluate with the fact whether there is substantial doubt regarding Amistad Furniture Manufacturers Pty Ltd ability so that they can persist as going concern for specified period. In case the auditor finds out any substantial doubt in the entity such as Amistad Furniture Manufacturers Pty Ltd whether they have the ability to continue as going concern for given period of time. The assessor is not accountable for predicting prospect conditions or proceedings. Addition to that, the fact that the unit may cease to survive as a going concern succeeding to receiving a account from the assessor that does not submit to considerable uncertainty, even within particular year subsequent the date of the monetary declaration, does not, in itself, designate insufficient presentation by the assessor. Therefore, the deficiency of orientation to considerable doubt in an auditor’s statement should not be viewed as supply declaration as to an entity’s capability to carry on as a going concern (Doxey et al. 2012).
It is not essential to intend audit procedures exclusively to recognize conditions and proceedings that, when measured in the collective, specify there could be extensive doubt about the entity’s capacity to continue as a going concern for a rational period of time. In addition, the results of auditing events intended and performed to attain other examination objectives should be enough for that reason (DeFond and Zhang 2014). Below is the example of events that may recognize such circumstances and proceedings:
At Amistad Furniture Manufacturers Pty Ltd, the internal control issue found is in the trial balance. After using a double-entry secretarial scheme add value to dependability by guarantee that the books are always unbiased. In addition, it is still probable for errors to bring a double-entry system out of stability for a period of time (Abernathy et al. 2015). It requires calculating either daily or weekly trial balances can offer usual approaching into the condition of the scheme that allows for find out and examine discrepancies as and when required. To explain each in detail, internal controls are strategy as well as events put in place to guarantee the sustained consistency of secretarial scheme. Addition to that, the two factors named as Accuracy and reliability are dominant in the secretarial plan. Without exact accounting records, executive cannot make fully knowledgeable monetary pronouncement as well as fiscal information can hold errors. Therefore, internal control procedures in secretarial can be broken into seven category, each intended to avert fraud and recognize errors after identifying the errors as and when required (Deegan 2013).
A trade can lose an important amount of assets due to fraud. At a tremendous level, the effect of fraud can even shut down a company. As a result, a trade owner should make continuing efforts to create surroundings where fraud needs to be detected. The two fraud risk factors identified in the case are nature of items as well as nature of control environment. These two factors are faced by the company in the case that needs proper attention by the auditor at the time of conducting the audit (Deegan 2012).
Separation of duties.Separation of duties is one of the fraud risks that are identified by the auditors. Addition to that, the risk of fraud decline radically if numerous human resources are concerned in unusual phase of a business, when fraud need the collusion of at least two group. Therefore, poorly-defined job images and endorsement process nearby a clear occasion for deception.
Safeguards- It is other fraud risk factors that need to be handled by the auditor. When assets are actually protected, they are much less likely to be stolen. Addition to that, this takes into consideration that involve fencing around the stock storage area, a locked bin for preservation provisions and tools, safety guard stations, an worker badge scheme, and alike solution (Bebbington, Unerman and O’Dwyer 2014).
Identification of account balance risk and two assertions at risk those results of the fraud risk factors
Describing two audit procedures that address potential misstatements that arises from fraudulent financial reporting
It is necessary for the auditor of Amistad Furniture Manufacturers Pty Ltd for attempting to get additional audit confirmation to decide whether material fraud has taken place or is likely to have happen and, if so, its effect on the fiscal declaration as well as inspector account and that comes under audit procedures in given form of actions (Chen et al.2013).
It is necessary for the auditor of Amistad Furniture Manufacturers Pty Ltd for considering the implications for other feature of the audit. The auditor of Amistad Furniture Manufacturers Pty Ltd for need to discuss the matter and the approach for additional examination with a suitable level of administration that is at least one level above those concerned, and with senior administration and those emotional with supremacy (Chen et al. 2013).
Reference List
Aasb.gov.au. 2016. Australian Accounting Standards Board AASB – Home. [online] Available at: https://www.aasb.gov.au [Accessed 9 Sep. 2016].
Abernathy, J., Hackenbrack, K.E., Joe, J.R., Pevzner, M. and Wu, Y.J., 2015. Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Staff Consultation Paper, Auditing Accounting Estimates and Fair Value Measurements: Participating Committee Members. Current Issues in Auditing, 9(1), pp.C1-C11.
Bebbington, J., Unerman, J. and O’Dwyer, B., 2014. Sustainability accounting and accountability. Routledge.
Bonin, H., 2013. Generational accounting: theory and application. Springer Science & Business Media.
Chen, L.H., Folsom, D.M., Paek, W. and Sami, H., 2013. Accounting conservatism, earnings persistence, and pricing multiples on earnings. Accounting Horizons, 28(2), pp.233-260.
Crawford, E.R. and Lepine, J.A., 2013. A configural theory of team processes: Accounting for the structure of taskwork and teamwork. Academy of Management Review, 38(1), pp.32-48.
Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2), pp.275-326.
Doxey, Marcus M., Marshall A. Geiger, Karl E. Hackenbrack, and Sarah E. Stein. (2012) “Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form: Participating Committee Members.” Current Issues in Auditing 10, no. 1 (2015): C1-C10.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.
Furnham, A. and Gunter, B., 2015. Corporate Assessment (Routledge Revivals): Auditing a Company’s Personality. Routledge.
Gaynor, L.M., Hackenbrack, K., Lisic, L. and Wu, Y.J., 2014. The Auditing Standards Committee of the Auditing Section of the American Accounting Association is pleased to provide comments on the PCAOB Rulemaking Docket Matter No. 029; PCAOB Release No. 2031-009: Proposed Rule on Improving the Transparency of Audit: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit.
Harrison, J.S. and Van der Laan Smith, J., 2015. Responsible accounting for stakeholders. Journal of Management Studies, 52(7), pp.935-960.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Kim, J.B., Liu, X. and Zheng, L., 2012. The impact of mandatory IFRS adoption on audit fees: Theory and evidence. The Accounting Review, 87(6), pp.2061-2094.
Kim, Y., Li, S., Pan, C. and Zuo, L., 2013. The role of accounting conservatism in the equity market: Evidence from seasoned equity offerings. The Accounting Review, 88(4), pp.1327-1356.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.
Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.
Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting accounting research and organization theory. The Academy of Management Annals, 7(1), pp.557-605.
Porter, B., Simon, J. and Hatherly, D., 2014. Principles of external auditing. John Wiley & Sons.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.
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