Threats And Safeguards In Auditing And Risk Management

Auditor’s independence and non-audit services

Identification and evaluation of Threats in Relation to Auditor Independence

At the time of continuing the audit operation of the businesses, it is the priority cum responsibility of the auditors to comply with all the generally accepted standards of auditing. At the same time, it is also the responsibility of the auditors to stay honest to their work and to maintain the aspects of integrity in the audit profession. Auditor’s independence is another important aspect in the audit profession (Arens, Elder & Beasley 2014). The concept of auditor’s independence states that the auditors need to be independent from any kind of financial or non-financial interests from the auditee. It is expected from the auditors that they will provide an unbiased audit opinion and any relationship between the auditors or auuditees will not influence the audit decisions.

1^st Situation: There are instances where the auditors of the companies are found providing some extra services to the audit clients and these services are out of the audit scope. These types of services are called Non-Audit Services. Some of the major non-audit services are tax advice, management advice, advice regarding the promotion of businesses and others. These types of services are mainly non-financial services. A negative relation is there between auditor’s independence and non-audit services as non-audit service lead to the impairment of the responsibility of the auditors. Auditing is such a kind of profession that receives criticism from the accountants, stakeholders and financial regulators. Hence, in this kind of situation, the auditors need to be careful about the aspect of auditor’s independence. There are some instances where people raise questions about the quality of the audit reports. This kind of situation leads to Advocacy Threat. The concept of ethics is compromised at the time of advocacy threat. In addition, at the time of advocacy threat of the auditors, the independence of the auditors is also compromised that is not good for any organization (Arens et al., 2015).

2^nd Situation: As per the earlier discussion, it can be observed that at the time of the providence of non-audit services by the auditors, the independence of the auditors get threatened. These non-audit services are not mentioned in the audit agreement, as they are some extra benefits that the auditors and auditee both enjoy. The non-audit services many be the in the form of financial or non-financial. In the provided case study, the company has offered a holiday package voucher for the audit members of the company. The auditor will accept a form of non-monetary service in case he accepts the proposal of the company for the holiday package. Hence, this process will affect the independence of the auditors. In case the auditor keep taking this kind of non-audit service from the organization, there will be a significant increase in the threat of auditor’s independence (Cohen & Simnett, 2014).

Threats to auditor’s independence

3^rd Situation: An auditor may have some family members like parents, wife, children, siblings, close friends and others. Some of the major aspects of the financial interests are guarantee of debts, short-term as well long-term securities and ownerships. As per APES 110, an auditor must not have any family member or close friend working in the company of the audit client. However, as per the provided case study, the father of the audit accountant is in the chair of financial controller of the company. In this situation, in case the audit accountant accepts the job offer, he will make the auditor’s independence fall in danger (Duncan & Whittington, 2014).

4^th Situation: In most of the business organizations, a close relationship of trust can be seen among the employees clients and management of the company. The main factor that is binding all these three aspects together is the organizational risk factor. People blame the auditors to be sympathetic at the audit clients and they are associated with the audit client. However, a major factor in this regard is that the close relationship between the auditors and the audit client assures the smooth flow of business information that is needed for the audit operations. Sometime it can be seen that the auditors already have the necessary information for auditing. In the provided case study, it was the responsibility of the auditors to make the necessary tax calculations for the year ended 30 June 2015. Hence, as per the self-review threat of auditor’s responsibility, the auditors cannot audit their own work (Hayes, Wallage & Gortemaker, 2014).

Safeguards of the Identified Threats

From the above discussion, it can be said that there are some major threats in the process of auditing. However, along with the presence of threats, there are some specific safeguards. They are discussed below:

• The rotation of the audit staffs or the audit partners of the organization can effectively reduce the risks of auditor’s independence. The rotation policy of the audit staffs weakens the possibility of danger over knowledge and it eliminates the threat of self-centeredness. This process demands no costs and it encourage in the process of auditor’s independence. In addition, this policy will make all the information available for the audit team members (Junior, Best & Cotter, 2014).
• One cannot ignore the importance of having an effective audit committee in the business organizations. The presence of highly experienced audit committee will bring transparency in the organization’s operations. In addition, this process will ensure that the auditor’s independence is retained in the auditing process. The high qualification and experience of the auditor’s are needed for the wise use of all the necessary audit resources (Marques, Santos & Santos, 2013).
• An independent auditor must exercise their power to maintain the aspect of auditor’s independence and auditor’s responsibility at a continuous basis. In this regard, the organizations demand the efficient oversight of the auditor. Due to the presence of efficient oversight, the auditors are able to spate various aspects of auditing life financial aspect, policitical aspects and others. The auditors should bring transparency in the financial system for the preparation of financial statements (Peters & Romi, 2014).
• Most importantly, it is the duty cum responsibility of the auditors to follow all the required ethical standards of the auditing profession. In this regard, two of the most important aspects that the auditors need to be complied with are the Auditing Standards and Code of Ethics. At the time of conducting the audit operations, it is the utmost priority of the auditors to follow the set of international audit standards. This process helps to retain the high quality of the audit profession. On the other hand, honesty and integrity will be retained in the profession. These major safeguards can be applied against the threats identified in the earlier section (Soh & Martinov-Bennie, 2015).

Description of Two Business Risks

Management of risk is always important for every kind of business organizations. There is not any exception of this fact in case of the spare part industry. Some of the major business risks are reputational risks, commercial risks, health and safety risks. There are instances of downtime risks that lead to the loss in the business. Two of the major risks in this regard are Strategic risk and Operational Risk (Wong & Millington, 2014).

Strategic Risk: Strategic risk is one of the major risks in the organizations that are associated with the selection of the right and wrong products of the organization. Inventory management is an important part of the strategic risks that involves in the proper management of the spare parts of the business. At the time of selecting the right products for the business, the organizations take the help of ad-hoc facilities (Frigo and Anderson 2012). At the time of managing the risk factors, the business organizations use to hire highly qualified and experienced organizational managers. One of the major activities of the managers of the organization is the standardization of the financial manager’s activities. It is the priority of the business organizations to focus more on the financing and investing activities of the business organizations. At the time of mitigating the risk factors of the organization, it is needed to consider all the necessary alternatives (McNeil, Frey 7 Embrechts, 2015).

Safeguards to auditor’s independence

Operational Risk: The main association of operational risk is with the operational downtime. Apart from this, the execution level of various approaches also involves the various risk factors. Hence, the setting up of the strategic management approaches is an important aspect for the organizations that fail in the efficient execution (Fiordelisi, Soana and Schwizer 2014). It is the duty of the business organizations to adopt the policy of stocking at the time of making the decisions regarding the standardization of the businesses. The management of the operational risks is solely lies on the management of the company. This process will be helpful to the effective management of inventory of the organization. In case the business organizations fail to manage the business risks, the organizations have to face many difficulties that include reduction in revenues, reduction in profits and others (Tazelaar & Snijders, 2013).

Audit Risk and their Impacts on Account Balances

In the management of business organizations, two of the major factors are strategic risk and inherent risk. A significant association can be seen between the strategic risk and inherent risk. A major reason behind the taking place of the inherent risk is the omissions or errors in the financial statements of the business organizations. Another major factor of the occurrence of inherent risk is the lack of internal control of the business organizations. Strategic risk takes place at the time of complex business entries. This factor has its impact on the inventory management of the business organizations. Business organizations are highly related with the inherent risks and for this reason, they have large impact on the various account balances of the business organizations (Vona, 2012).

Two of the major factors that are associated with the risk factors of the organization are operational risk and detection risks. There are instances where the auditors are not able to detect the misstated figures in the financial statements of the organizations. In case, the auditors are not able to detect the frauds or omissions in the financial statements of the organization, then the organizations need to carry on the procedures of substantive tests in the near future. In this regard, detection risk is one of the major risks. In the process of detection risk, the auditors conclude that there is not any kind of significant error in the financial report of the organizations. In this process, the auditors of the companies assess the different kinds of account balances. It can be seen that different kinds of risks affect the account balances of the organizations on a large basis. In this process, it is the responsibility of the auditors to take into considerations all the necessary aspects of risk management at the time of conducting the audit operations. The inclusion of the various kinds of risk factors makes the audit opinion more specific and more objective centric. Different kinds of risks are associated with different kinds of account balances; they are sales account, purchase account, revenue account, inventory account and many others. Hence, it is the responsibility of the auditors to take into account all the risk factors (Ashley-Smith, 2013).

References

Arens, A., Elder, R. & Beasley, M., (2014). Auditing and assurance services-An integrated approach; includes coverage of international standards and global auditing issues, in addition to coverage of. Boston: Aufl.

Arens, A.A., Elder, R.J., Beasley, M.S. & Jones, J., (2015). Auditing: The Art and Science of Assurance Engagements. Pearson Canada.

Ashley-Smith, J., (2013). Risk assessment for object conservation. Routledge.

Cohen, J.R. & Simnett, R., (2014). CSR and assurance services: A research agenda. Auditing: A Journal

Duncan, B. & Whittington, M., (2014), September. Compliance with standards, assurance and audit: does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.

Fiordelisi, F., Soana, M.G. & Schwizer, P., (2014). Reputational losses and operational risk in banking. The European Journal of Finance, 20(2), pp.105-124.

Frigo, M. & Anderson, R.J., (2012). Strategic Risk Mangement: The New Core Competency. John Wiley & Sons Limited.

Hayes, R., Wallage, P. & Gortemaker, H., (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Junior, R.M., Best, P.J. & Cotter, J., (2014). Sustainability reporting and assurance: a historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.

Marques, R.P., Santos, H. & Santos, C., (2013). A conceptual model for evaluating systems with continuous assurance services. Procedia Technology, 9, pp.304-309.

McNeil, A.J., Frey, R. & Embrechts, P., (2015). Quantitative risk management: Concepts, techniques and tools. Princeton university press.

Peters, G.F. & Romi, A.M., (2014). The association between sustainability governance characteristics and the assurance of corporate sustainability reports. Auditing: A Journal of Practice & Theory, 34(1), pp.163-198.

Soh, D.S. & Martinov-Bennie, N., (2015). Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.

Tazelaar, F. & Snijders, C., (2013). Operational risk assessments by supply chain professionals: Process and performance. Journal of Operations Management, 31(1), pp.37-51.

Vona, L.W., (2012). Fraud risk assessment: building a fraud audit program. John Wiley & Sons.

Wong, R. & Millington, A., (2014). Corporate social disclosures: a user perspective on assurance. Accounting, Auditing & Accountability Journal, 27(5), pp.863-887.