The purpose of preparing this particular report is to provide with the explanations of main threats to auditors in their independence. This explanation is done concerning the audit firm Lynn and Co who is responsible for conducting the audit of a public limited liability company named Brien limited. Furthermore, the report also outlines the threat to independence that would arise in carrying out the audit of Brien limited for year ending 31st March, 2018. The threat impacting the auditor independence is also explained alongside the safeguard measures for mitigating the threats.
Explanation of main threats to independence:
A broad range of circumstances and relationship is responsible for creation of threats and such threat might affect compliance of auditors with any of the fundamental principles (Abdullah et al., 2015). There are different categories in which threat to auditor independence falls and they are listed below:
Self-review threat- It is the threat that would arise when the results of previous service or judgment made by another audit practitioners will not be appropriately evaluated by the assurance practitioners (xrb.govt.nz, 2018).
Self-interest threat- It is the threat where the judgment or behavior of the audit practitioner will be influenced in an inappropriate way due to financial or other forms of interest.
Intimidation threat- It is the threat where the perceived or actual pressure would deter auditors from acting objectively (Cziffra et al., 2018). Such pressure might include any attempts to exercise gratuitous influence over other practitioners of audit.
Advocacy threat- Under advocacy threat, there is possibility that the position of any audit client would be promoted by an assurance practitioner to the extent that their objectivity is compromised (Martínez & García, 2018).
Familiarity threat- Familiarity threat is the threat that arises due to close or long term relationship with the clients (Mechling et al., 2018). This would make audit practitioners to become sympathetic to the work of audit or to the client interests.
Five threats to independence in carrying out Brien limited:
Self interest threat- The threat of self interest emerges when a significant proportion of business is represented by one client (Abbott et al., 2016). In such case, auditors would be less likely to issue a qualified audit opinion that leads to threatening their independence. In the given case of Brien ltd where the audit is conducted by the audit partner Mr. Allan and Mr. Tua Allan, there exists threat of self interest. This is so because the daughter of Mr Allan has been appointed as finance director who might have self interest which would pressurize audit firm to produce an unqualified audit report.
Relationship threat- Relationship threats arise when it incorporates everything about auditors knowing the members, accounts, finance manager and finance director of audit clients on a personal level (Cuadrado et al., 2017). In this case, the finance director of Brien limited is Mellisa Allan who is the daughter of one of the audit partner in Lynn & Co.
Familiarity threat- Lynn and Co would face familiarity threat as they have close and long standing personal relationship with the finance director of Brien Ltd.
Advocacy threat- Lynn and Co might also face advocacy threat as there is a possibility that the partners to audit firm might serve as promoter to the securities of auditors.
Self review threat- Any decision made by the finance director of Brien limited reviewed by Mr. Allan being a partner of Lynn and Co might be evaluated with bias which leads to arising of self review threat.
Explanation of threats impacting independence:
Independence of auditors is impacted by different threats while conducting audit. Self review threat affects the auditor’s independence in appearance and of mind which would make it difficult to reach to conclusion without conflict or bias. In addition to this, the independence of auditor is compromised in event of material self interest as the other party would be significantly influenced by the audit. Familiarity threat would lead to auditors exercising considerable influence in forming audit opinion and verification of financial statements. Relationship threat also leads to exercising significant influence in conducting audit in accordance with the standard auditing principles and procedures (Hopkin, 2018).
Safeguard measure for threat mitigation:
Safeguard are the actions that is taken by audit firm to lower the audit risk to a level that can be accepted. Familiarity threats can be reduced to an acceptable level by rotating auditors on regular basis (Johnson & Neary, 2015).
The procedures and process of system of client should be safeguarded which requires firms performance engagement to be done by person other than management. There should be implementation of internal procedures ensuring objective choices in commitment of assurance that is non assured. An independent third party such as professional regulatory body and independent directors committee should be consulted (Bauer, 2014). Person charged with governance should be well communicated according to the provision of code and they should be informed adequately. Furthermore, there should be an effective process for identifying conflict. Quality control of engagement should be monitored and implemented by the adoption of appropriate policies and procedures.
Conclusion:
The code of ethics outlined in the revised professional and ethical standard different fundamental principles which an auditor or audit firm should complied with. From the analysis of the given scenario, it is seen that Lycc and Co is facing several threats to independence while conducting the audit of their client, Brien limited. The threats faced by Lycc and their audit partners have been identified as self review threat, self advocacy threat, familiarity threat, relationship threat and self review threat. In order to reduce such threats faced by the audit firm to an acceptable level, it is required to undertake appropriate safeguard measures.
References list:
Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40.
Abdullah, M., Abdul Shukor, Z., Mohamed, Z. M., & Ahmad, A. (2015). Risk management disclosure: A study on the effect of voluntary risk management disclosure toward firm value. Journal of Applied Accounting Research, 16(3), 400-432.
Bauer, T. D. (2014). The effects of client identity strength and professional identity salience on auditor judgments. The Accounting Review, 90(1), 95-114.
Cuadrado-Ballesteros, B., Martínez-Ferrero, J., & García-Sánchez, I. M. (2017). Mitigating information asymmetry through sustainability assurance: The role of accountants and levels of assurance. International Business Review, 26(6), 1141-1156.
Cziffra, J., Fortin, S., & Singer, Z. (2018). The Effects of Audit Market Concentration and Auditor Reputation on Audit Quality: Evidence from Government Auditors.
Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.
Johnson, C., & Neary, S. (2015). Enhancing professionalism–progressing the career development sector. Journal of the National Institute for Career Education and Counselling, 35(1), 57-62.
Martínez-Ferrero, J., & García-Sánchez, I. M. (2018). The level of sustainability assurance: The effects of brand reputation and industry specialisation of assurance providers. Journal of Business Ethics, 150(4), 971-990.
Mechling, L., Gast, D. L., & Lane, J. D. (2018). Ethical Principles and Practices in Research. In Single Case Research Methodology (pp. 27-42). Routledge.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download