Identification and Evaluation of Threats Free-Samples for Students

Questions: 1. For each Situation, Identify and Evaluate any threats in relation to Auditor Independence.2.Identify any Safeguards to those threats identified above Assignment 3.In relation to the purchasing of equipment and spare parts, describe two business risks to MSL that Crampton and Hasaad will consider in planning the 2015 audit4.For each Business risk Identified in (a) describe a Specific Audit Risk that could arise. Answers: 1.Auditor Independence Identification and Evaluation of Threats Chris, CEO Conversation As per the situation that has been detailed, it is implied that the threat of promotion exists in the true spirit. The threat of promotion admits that the occurrence will depend up on the nature if the service that is being asked by the auditee company from the audit firm. In the given situation, the CEO of the company Chris, asked the member of the audit team to convey to the audit partner Geoff of the audit firm Clarke and Johnson that he has to give speech in the seminar of the company about the goods that the company sell and the services that the company provides in order to promote the company. If he rejects to do the same then the audit engagement will not be provided to audit firm for the next year (Edwin, 2015). This type of message conveys that the auditor independence is total in threat because of the promotional activity. It will evaluate on the basis of the potential effect the audit firm will have. Chris, CEO Conversation Continuing with the threat of promotion at one place, in the second situation the threat of self interest in the form of financial has been observed. This type of threat usually occurs when the auditee company tries to give or in actual gives the gift or reward or any kind of financial or non financial benefit to the audit partner or his members or his family members (Barizah, 2016). In the given situation also, the CEO of the company informed the team member to convey to Geoff that in order to have smooth function of audit, company is ready to provide fourteen day package to Geoff along with his family members and the team members are also invited. This will direct effect the independence of the auditor as he will then have to do as per the wishes of the management. This type of threat will be evaluated on the degree of the materiality of the transactions of violations that the auditor notices and simultaneously overlooks it. Michael, Conversation While having the conversation with Michael, it has come to the notice that he has his father employed in the same company as Finance Controller. He has not apprised the audit firm before taking the assignment of the audit of the same company. Due to this the threat of familiarity or mutual trust begins to happen (UK, 2013). This threat may lead the audit team member, Michael, to overlooks some the mistakes committed by the personnel working in the department of the company in which his father works. The threat poses serious threat to the independence when the team member rectifies the material mistakes which otherwise shall not be reflected. The evaluation of this type of risk totally depends on the nature and type of transaction that has been observed while conducting the audit and how far it has affected the true and fair view of the financial statements Annette Conversation Further while having the conversation with the last member of the audit team Annette, it has come to notice of the audit firm that she had already worked in the company for the work relating to accounting, book keeping and the taxation. This situation implies that there is the threat of Self Review (Parker, 2015). Due to this type of threat, the auditor will never be able to find her mistakes despite of the fact that the mistakes were so material that will affect the financial statements of the company and thereby the users of the financial statements of the company. Thus, this form of threat is another serious threat which the audit firm usually faces. Te evaluation of this type of risk will be done on the premise that how much is the materiality of the transactions that has been overlooked by her during the audit and its potential effects on the financial statements. 2.Safeguards for Maintaining the Auditor Independence The safeguards shall be developed by all the companies whether small, medium or large enterprises. If there are no safeguards for maintaining the auditor independence then the financial statements will be prepared as per the requirements and needs of the auditee company. These have been developed and three different ways: Relevant Acts or laws or statutes of the Institute of Chartered Accountants of the specific country specifying the code of conducts for the auditors in different situations Formed and developed by the audit firm itself Formed and developed by the auditee company internally The above three ways are exhaustive and through the following measures the threat to independence can be safeguarded: The auditors of the company shall be appointed on the basis of the rotation every year and that too at every annual general meeting of the company. The same team member shall not be appointed for conducting the audit of the company who has caters the company with services which is different from auditing like accounting, book keeping and taxation. Every personnel of the audit firm shall inform the firm before taking up the assignment of audit if his or her any relative is working in the organization and there are adequate reasons to believe that such relationship will make him to ignore the mistakes committed by the company. The safeguard will be for Michael. There shall be restriction for the non audit services to be provided to the company. All the members of the audit team shall be trained enough and shall posses specialized as well as professionalized skills so as to have the understanding of the financial statements of the company along with the material misstatements if any. Also, the rotation of the members of the team shall also be done. For example, X and Y at first are doing the audit of the company. After completing the purchase and Sales, X is replaced by Z to continue the checking of the financial statements further and so on. Auditor shall immediately react to the situation after exercising the professional due diligence and care. This is because the silence may itself sometimes gives an impression of acceptance. The auditor shall resign from the appointment immediately if he is of the view that his independence is at risk (Livine, 2015). 3.Business Risks for planning the Audit Risks are the threats which may be posing due to entering into any particular transaction. Risks are covered under each head of business, under each head of transaction and in short every work has the risk. Every entrepreneur shall consider the risks while entering into any business transactions. It may be related to purchase or sale pr expenses or even the company now a day has listed the risks on recruiting the personnel. These risks shall be identified on the timely basis so that the corrective action to mitigate the effect of risk may be undertaken. In relation to the purchase of equipment and spare parts from the overseas supplier, the company Mining Supplies Limited have faced two types of risks: Customers Loss - Limited Warranty The company shall in order to earn profit shall give maximum benefits to the customers otherwise the company will tend to lose customer base on the daily basis and at the end the company will have the situation of zero business. Therefore, the customer satisfaction plays the very important role in the success of any company. The company is extending the two years warranty for spare parts and one year free service at any time. Thereafter the company will issue the billing normally. But the whole situation has not laid down the fact that the main equipment that the customers are purchasing from does not contain any warranty or replacement clause due to which the customers might tend not to purchase from the company. It is so because in case the manufacturing defects comes then the customers cannot go to company place to have the equipment replaced or corrected at free of cost. That is why the company will be in a situation of loss of customer base (Im rie, 2011). In case the company in order to retain the customers gets the equipment replaced at free of cost then the company will be in total loss. The cost of the new equipment will be his total cost without the revenue. Stock Loss In Transit and Change in Taste of Customer The Company has not specified in any manner that that will bear the cost of the loss of stock in case any uncertain or contingent event gets happened while in the course of shipment. In the given situation the company Mining Supplies Limited places the purchase order to its suppliers as per the requirement of the customer (EY, 2016). The company has no where mentioned the terms and conditions of shipment of equipment and spare parts. Second loss that the company may face is due to change in the perception of the customers or taste of the customer. If the customers reject to take the order then also the company will be in total loss and in such situation the company shall have entered into such an agreement with the suppliers so as to get the equipments modified as per the taste of the customer. But the same will not happen as the same has not been mentioned. Both of these situations will result in the loss of stock to the compa ny which poses the risk of having the stock loss and therefore the company shall keep the stock at bare minimum level. The auditor shall consider the above risks while planning for audit as the above risks poses the threat on going concern assumption of the company. 4.Audit Risk for Business Risks The business risks are considered by the entrepreneur as well as the auditor of the company but the audit risk shall be considered by the auditor only. It is because audit risk if any encountered during the audit then the auditor may issue the qualified report. Therefore, auditor shall consider the audit risks as defined in the Auditing and Assurance Standards while performing any kind of audits. The audit risks and the account balances that might be affected from the identified business risks are given below: Control Risk This risk implies that the companies do not have installed the proper system in place whereby the business risk can be controlled. The system include the proper internal control procedures clubbed with the policies and rules and regulations that the company shall follow and make whole of the organization from top to bottom to follow the same. This audit risk is in first situation because the company has not installed such system which can ensure that the purchases made are fully supported by the clause of warranty or replacement for the main equipment in case of manufacturing defect noticed in the upcoming period. In turn the company has to incur the losses if any comes due to the manufacturing defect. This type of risk is generally encountered and can lead the auditor to give the qualified report (Long, 2015). To further check it the accountant will reaffirm the risk by checking the relevant account balances of accounts receivable and accounts payables and stock in hand consisting of returned items. Inherent and Detection Risk These types of risks have been encountered from the event that has been listed in the second business risks. Inherent risk has majorly occurred due the inherent limitation that is present in the policies and procedures and system of the company. As the loss of stock in transit have not been considered by the company before, the presence of this type of risk will be high. Another type of risks that this event contains is the Detection risk. It has been come into notice because of the fact that the company will not be able to provide any documents which can support that fact that the loss in transit will be borne by the supplier company and also in case of the change in taste or fashion of the customers the supplier will modify the same at free of cost or at some nominal charges or will not reject the whole stock. The auditor will be checking the account balances to confirm its existence including the goods in transit as at that date and any stock that has been lost along with the value of trade payables. (Becker, 2015) References Becker E, (2015), Audit Risk vs. Business Risk, available at https://www.osyb.com/blog/small-business/audit-risk-vs-business-risk/ accessed on 18/04/2017. Barizah N, (2016), Threats to Auditor Independence, available at https://www.academia.edu/260449/Threats_to_Auditor_Independence accessed on 18/04/2017. Edwin M, (2015), Analysis of Threats to Auditor Independence and Available Safeguards against those threats, available at https://www.academia.edu/9406967/THREATS_TO_AUDITORS_INDEPENDENCE accessed on 18/04/2017 EY, (2016), Top 10 Business Risks, available at https://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf accessed on 18/04/2017. Imrie B, (2011), Business Risks facing the Mining Industry, available at https://www.in.kpmg.com/SecureData/ACI/Files/Top_20_Risks_the_Mining_Industry.pdf accessed at 18/04/2017. Livine G, (2015), Threats to Auditor Independence and Possible Remedies, available on https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full accessed on 18/04/2017. Long G, (2015), Audit Risk and Business Risk, available at https://www.cpaireland.ie/docs/default-source/Students/Study-Support/P2-Audit-Practice-Assurance-Services/audit-risk-and-business-risk.pdf?sfvrsn=0 accessed on 18/04/2017. Parker A, (2015), 6 Key Threat to Auditor Independence, available on https://www.intheblack.com/articles/2015/01/06/6-key-threats-to-auditor-independence accessed on 18/04/2017. UK Essays, (2013), Threat To Auditor Independence Accounting Essay. Available at https://www.uniassignment.com/essay-samples/accounting/threat-to-auditor-independence-accounting-essay.php?cref=1 Accessed on 18/04/201