Question:
Discuss about the Complete Guide to Business Risk Management.
Auditing is a strategic management approach that plays a key role in ensuring that a company is moving towards achieving its goals and objective as well as improving its performance standards. Auditing and assurance practices are outlined as the general and independent examination of statutory records, documents, asset, and books of accounts of a company to establish if the financial plan and also the non-financial disclosures square measure presenting a real and honest read of a company (Arens, et al., 2012). The main aim of conducting audit practices is to confirm that the book of accounts is correctly maintained as required by the international auditing and accounting bodies.
The external audit activities are explained as the examination and securitizing the organization book, documents, and asset, this activity are normally carried out by the external auditor who is in charge of proving audit opinion which is relevant to the company operation. The findings of an auditor will determine the actions to be taken by the organization management while striving to improve their operations (Elder, et al., 2011). Clarke & Johnson (CJI) is an organization that is projected to have provided excellence and brilliant services to Luxury Travel Holidays LTD (LTH), and a result, Luxury Travel Holidays LTD (LTH) has projected to give Clarke & Johnson (CJI) another year of business partnering. Despite the fact that the two companies have been partnering, Clarke & Johnson (CJI) independence will be affected to some extent, this implies that there are some threats that affect the independence of the external auditor (Eilifsen, et al., 2013).
Self-interest threat could be a fatal issue that affects the independence of an external auditor. This threat is perceived once the auditor is often providing audit services to only one client. Luxury Travel Holidays LTD (LTH) has re-engaged Clarke & Johnson (CJI) Company to supply their service just like the previous year (Johnstone, 2000). The aspect of self-interest forces the auditor to accept an offer to provide audit services, this is the perception of not losing the client, and this will affect the independence of external auditor since the client will provide different opinion which affects the opinions of the auditor (Jackson, 2016).
The issue relating to the referrals from the client affects the independence of the external auditor. According to the study, Clarke & Johnson (CJI) Company is an organization that has been providing audit services to Luxury Travel Holidays LTD (LTH); Luxury Travel Holidays LTD (LTH) could make many referrals to the auditor, and thus affecting the audit opinions of the Clarke & Johnson (CJI) Company. The organizational management has a great impact on the audit opinions to be made by the auditor, the top management could influence this opinions since they will force the auditor to utilize the referrals made (Kachelmeier, et al., 2014). Luxury Travel Holidays LTD (LTH) and Clarke & Johnson (CJI) Company have been partnering, the top management of the Luxury Travel Holidays LTD (LTH) could refer the accounting department to make some irrelevant changes to the books of accounts, these changes may affect the opinion to be given by the auditor (Knechel & Salterio, 2016).
The threats that affect the independence of external auditors are outlined to influence the activities and the conclusion to be made by an auditor. Multiple referrals from the top management, self-interest and the familiarity and complacency are the examples threats derived from the case study (Bell, et al., 2001). When an external auditor is hindered, the audit opinion which is used during the drafting of the could be appropriate to the findings of the auditor the audit opinion forms the basis of the audit report. Self-interest is a critical threat which implies self-consideration of an individual, the top management may decide to provide ideas to the auditors, these ideas could affect the conclusions of the external auditor (Knechel & Salterio, 2016). The Multiple referrals reflect those referrals that are made by departmental managers or the top managers of the organization, where these referrals comprise referring the auditor to use specific books of accounts or to use information from one of the organizational employees (William Jr, et al., 2016).
Self-interest issues affecting the independence of an auditor implies impact of making referrals and suggestions to the auditor, some of the managers in an organization may have messed up with the company policies, assets and books of accounts so they are compelled to make suggestions to the auditors (Ricchiute, 2001). On the other hand, some of them may want praises from board of directors so they are forced to make suggestions to the auditors, and thus affecting the drafted report. Clarke & Johnson Company is encouraged to reduce the interaction with the clients, they need to make opinion based on the immediate findings of the company operations.
Multiple referrals from Luxury Travel Holidays LTD (LTH) has a direct impact to the audit opinion to be provided by Clarke & Johnson Company. Luxury Travel Holidays LTD (LTH) has re-engaged Clarke & Johnson Company to continue providing audit services, Chris is the top manager of Luxury Travel Holidays LTD (LTH) (Gay & Simnett, 2000). Chris could make suggestions and recommendation to the auditor, this affects the independence of the auditor. Clarke & Johnson Company is required not to accept any suggestion or recommendation made by any member of the organization, auditor need to take caution of such issue so that they could provide appropriate audit opinion and report.
Audit planning is an important area of auditing practices, it primarily conducted at the beginning of the auditing process to ensure that the appropriate attention is conducted to the important areas of the company (Jackson, 2016). The audit is the risk which implies the financial record of the enterprise are devoted to being materially incorrect although the audit report provided by the auditors states that the financial statements of the company are free of any misstatement. The primary purpose of encouraging the auditors to have audit planning to so enhance that the important areas and documents of the company are critically scrutinized, by conducting the audit planning the auditors are able to identify the potential audit problems that could affect the audit process (Knechel, 2007).
Auditors are encouraged to ensure that they develop an audit plan and implement policies stated since it will allow them to expose their professionalism during the auditing process. During Audit planning, the Auditor is obligated to ensure that they are ready for audit planning risk that may affect their operations (Eilifsen, et al., 2001). Crampton and Hasaad is encouraged to develop the audit planning which will allow them to exhibit their professionalism during their auditing process.
Mining Supplies LTD (MSL) is a multinational corporation that operates in the international market. It operates in China, Europe, and U.S market. Mining Supplies LTD (MSL) is about to conduct its 2015 annual general meetings the meeting will allow the provisions of 2015 financial reporting. Mining Supplies LTD (MSL), Crampton and Hasaad are encouraged to develop the audit plan that will give the exhaustive approach of audit timing, extent and strategies that will ensure that the audit work is completed. Mining Supplies LTD (MSL) is a company that performs its services outside its market, operating in an international market is bounded with allot of risk (Kachelmeier, et al., 2014).
The international business affects the activities of multinational companies, the international business concepts are perceived to have the great impact on the auditing process. An organization that operates in an international market is encouraged to deliver their products and services in time, they are also mandated to implement the strategic chain management measure that will allow the company to operate easily in the international market (Eilifsen, et al., 2001). Mining Supplies LTD (MSL) is a company that operates its sales in the large market, Crampton and Hasaad Company on other hand is an audit company that provides its services to international companies including the Mining Supplies LTD (MSL). While mitigating the logical risk that affects the audit planning of an auditor, the companies are encouraged to implement on the supply chain mythologies, this will reduce the negative factors relating to political unrest and other fatal factors. However, the companies are encouraged to provide exclusive license which is guided by the substantial agreement between the two companies (Lyon & Maher, 2005).
Mining Supplies LTD (MSL) is an international corporation that is involved in producing the engineering equipment to its clients, the company products are internationally recognized. Declining in producing the equipment affects the activities of the company; reduction of equipment produced will definitely affect the profitability making of the company. Demand risk implies the reduction in the demand for the product, the declining demand for the engineering equipment may be because of stiff competition and high pricing of the equipment (Arens, et al., 2012). While mitigating the risk associated with the products and demand risk, the company is encouraged to ensure that conducts market research in order to determine the aspects that affect their business operations.
Mining Supplies LTD (MSL) and Crampton and Hasaad are the business organization that operates in international business market. The legal risk reflects the impacts of the regulations and rules that are drafted by the existing governments, the companies that operates their business activities above the existing rules and regulation are encouraged to observe the law of the land (Messier, 2014). Legal risk affect the operation of Mining Supplies LTD (MSL) and Crampton and Hasaad since they operate in different markets, rules and regulations in the different market keep own changing and thus affecting the business activities of an organization. For instance, both companies are perceived to work in US and Europe markets, U.S Common Laws provides some policies that need to be observed by the companies operating in that particular market, on the other hand, European Civil Laws provide regulatory measures to the companies operating in the European market (Eilifsen, et al., 2001).
Financial risk is those factor that affects the financial operations of an organization. Companies that operates in the international market are faced with many risks including the financial risk. Crampton and Hasaad Company and Mining Supplies LTD (MSL) are operating companies they have diverse their business activities. The diversification of the business activities will bound the companies into financial risk, economic factor is the concepts, which affects the financial operation of an international company. For instance, the US dollar is a currency that is used in the international market, the down-turning of this currency affect the business activities of operating companies.
The inherent risk are the risk that involves material misstatement in the financial records and asset document of the business company, the risk arises as a result of errors and emission made by the company accountings. The inherent risk is perceived to affect the organizations that operate in the international market, these companies involves themselves with the inherent risks when they failed to make relevant estimation as well as when they need to make complex transactions (Eilifsen, et al., 2001).
The control audit risk implies the risks that relate to the material misstatement in the financial statement, this misstatement is arising due to failure to implement the control measures of the company. Crampton and Hasaad Company and Mining Supplies LTD (MSL) are encouraged to adequately advised to have the relevant internal control system that will prevent and detect the potential errors and frauds. The control risk are perceived to be high, especially when the business entity is not having the internal control measures (Jackson, 2016).
The detection risk is that risk that arises when the auditor fails to detect the material misstatement in the financial records, and asset of the company. In order to operate with less limiting factors, Crampton and Hasaad Company is encouraged to apply the audit process measures this will allow the company to automatically detect material misstatements in the financial statements and asset documents of Mining Supplies LTD (MSL). While mitigating the detection risk, the audit firm is advised to increase the number of the sample transaction taken during the audit process (Sadgrove, 2016).
References
Arens, A. A., Elder, R. J. & Mark, B., 2012. Auditing and assurance services: an integrated approach:. Boston: Prentice Hall..
Bell, T. B., Landsman, W. R. & Shackelford, D. A., 2001. Auditors’ perceived business risk and audit fees: Analysis and evidence.. Journal of Accounting research,, 39(1), pp. 35-43.
Eilifsen, A., Messier, W. F., Glover, S. M. & Praw, 2013. Auditing and assurance services.. s.l.:McGraw-Hill..
Eilifsen, A., Knechel, W. R. & Wallage, P., 2001. Application of the business risk audit model: A field study. Accounting Horizons. s.l.:s.n.
Elder, R. J., Beasley, M. S. & Arens, A., 2011. Auditing and Assurance services. s.l.:Pearson Higher Ed..
Gay, G. E. & Simnett, R., 2000. Auditing and assurance services in Australia.. Sydney: Mcgraw-hill.
Jackson, R. A., 2016. Business at risk: keynote speakers for this year’s IIA International Conference identify emerging risks facing organizations. Internal Auditor,. In: s.l.:s.n., pp. 40-46.
Johnstone, K., 2000. Client-acceptance decisions: Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation. Auditing:. A Journal of Practice & Theory, 19(1), pp. 1-25..
Kachelmeier, S. J., Majors, T. & Williamson, M. G., 2014. Does Intent Modify Risk-Based Auditing?. The Accounting Review. s.l.:s.n.
Knechel, W., 2007. The business risk audit: Origins, obstacles and opportunities.. In: s.l.:s.n., pp. 383-408.
Knechel, W. R. & Salterio, S. E., 2016. Auditing: assurance and risk. s.l.:Routledge.
Lyon, J. D. & Maher, M. W., 2005. The importance of business risk in setting audit fees: Evidence from cases of client misconduct.. Journal of Accounting Research, 43(1), pp. 133-151.
Messier, w. f., 2014. An approach to learning risk-based auditing.. Journal of Accounting Education, 32(3), pp. 276-287.
Ricchiute, D. N., 2001. Auditing and assurance services.. s.l.:South Western Educational Publishing..
Sadgrove, K., 2016. The complete guide to business risk management.. s.l.:Routledge.
William Jr, M., Glover, S. & Prawitt, D., 2016. Auditing and assurance services: A systematic approach.. s.l.:McGraw-Hill Education.
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