Independence Auditing Assurance Services †MyAssignmenthelp.com

Question: Discuss about the Independence Auditing Assurance Services. Answer: Introduction: Chris acting in the capacity of LTHs CEO which is an existing client to the given audit company, expresses that board of the company is satisfied with the services provided by the audit company and intends to renew the audit contract subject to one favor which is that Geoff would need to give a speech at the upcoming seminar in a bid to enhance the overall investor interest in the company. Further, Chris also mentions that this is a little in deviation with the policies and conduct of the member firm but the same was insisted b the board to be a necessary condition for the obtaining of audit contract. The threat relevant to the conversation is highlighted in s. 200-6 and known as advocacy threat. As per this threat, the involvement of the audit partner in a promotional event would at large dilute the perceived independence especially in the modern day where instances of collusion between auditors and management have become sizable. While actual independence may not be impacted but with severe erosion of perceived independence, this threat poses a significant challenge to the auditor independence and hence adequate safeguards must be present to avoid Geoff from entertaining such a request (APES, 2010). With a view to continue a smooth relation between the client firm and audit team, Chris extends that LTH, the client intends to provide a voucher for a 14 day trip ti Greek Isles which would be completely sponsored by the client. Additionally, families can also be taken and this is for Geoff and myself. The threat relevant to the conversation is highlighted in s. 200-6 and known as familiarity threat. One of the key circumstances which lead to the onset of the above threat is when the members tend to accepts gifts of material value from the client firm. The threat to independence is significant as outsiders will question so as without reason why the client firm would incur such an expense. Further, even in terms of actual audit independence, failure in accepting this gift is pivotal for ensuring objectivity and considering the material nature of threat, requisite firm and client level safeguards are advisable (APES, 2010). In the new audit team being framed for LTH, one of the new additions is Michael who has been selected by Geoff. When Michael learns about this inclusion, he is obviously very elated and believes that his addition to the team would be quite useful as his father was employed in the capacity of financial controller at LTH. The threat relevant to the conversation is highlighted in s. 200-6 and known as familiarity threat. One of the conditions highlighted in this section relates to family member of one of the audit team members present in a position of significance at the end of the client firm. In this situation, if Michael is continued on the team, it is fair to foresee that conflict of interest would arise considering if any material fault with the financial statements is detected, it may jeopardize the career growth of Michaels father which would restrain him from either noticing any errors or reporting the same to his team. This would in turn lead to a higher audit risk and is counterproductive to the end objective of the audit process and requires to be addressed considering that this is material (CPA, 2013). In the new audit team being framed for LTH, one of the new additions is Annette who has been selected by Geoff. When Annette learns about this inclusion, she is obviously very elated and believes that the audit process would be over quickly considering her involvement in offering taxation and accounting services to LTH till recently (one month back). The threat relevant to the conversation is highlighted in s. 200-5 and known as self-review threat (APES, 2010). It is apparent that considering the nature of services extended to LTH, it is highly likely that during the audit process some of the records, ledgers and financial statements that would need to be scrutinized would have been prepared or checked by Annette during her tenure as employee with LTH. It is unlikely that the same would be critically analyzed in a detailed way using requisite technique as there is a tacit conclusion on her part even before the audit process has started that the books of the company are in order and hence the audit process would get over quickly. Approaching the audit process with such judgments adversely impacts the minimization of audit risk and hence adequate safeguards should be put in place to avoid inclusion of former employees in the audit team of the same company (CPA, 2013). Having identified the applicable threats based on the relevant facts of the conversation, the objective is to erect various barriers to resolve the threat using appropriate safeguards outlined below. A firm level safeguard is appropriate here. Such a safeguard should be based on having a model code of conduct and also the internal policy both of which need to endorse the conduct expected from members as per APES 110 guidelines. Thus, a clause would exist which would deter the audit partner along with any other member to indulge in any such activity which the firm believes would compromise either in terms of perceived or actual independence (Arens et. al., 2012). The appropriate safeguard for managing the auditor independence threat identified above would have to be implemented both at the level of audit firm and also on behalf of the client. As identified above, the model code of conduct and internal policy should derive sanctity from APES and thereby would comply with the practices identified therein. Hence, it would permit acceptance of any material gift from the client with indifference to the underlying intent on clients part. Further, the client firm considering the importance that shareholders and other stakeholders give to the auditor independence, the client must have a policy in place with regards to dealing with external auditors and which must clearly denounce the practices of extending any form of gift unless it has a token value only (Gay and Simnett, 2012). The appropriate safeguard has to be enacted at the level of audit firm. This would involve that all members of the audit firm need to offer a disclosure at the time of assuming employment with the firm. This disclosure should mention the employment details of all immediate members of the family. Additionally, annual disclosures afterwards would need to be submitted in case of any changes in employment status with regards to the employer or the position occupied. In order to further, plug any loopholes, undertaking has to be sought from each member of the audit team in relation to that no family member (close or distant) is occupying any position of significance in the client firm (Leung, Coram and Cooper, 2012). The appropriate safeguard has to be enacted at the level of audit firm. This would involve that all members of the audit firm need to offer a disclosure at the time of assuming employment with the firm. This disclosure should mention their employment details in the past which should include temporary or contractual employment as well. In order to further, plug any loopholes, undertaking has to be sought from each member of the audit team in relation to that they have not had any employment relation with the client firm ever in the past (Caanz, 2016). MSL is a supplier of various equipments and other services to the mining companies. The applicable business risks are discussed below. Demand estimation of spare parts may be inaccurate The company needs to fairly estimate the demand of spare parts as understocking and overstocking both would have negative impact on the overall profitability of the firm. If the firm is overstocked with spare parts, then there would be extra cost of inventory especially for carrying and maintaining the incremental inventory. Further, the suppliers are paid and essentially the money is blocked lying idle caught up in inventory resulting in opportunity costs (Caanz, 2016). On the other hand, if there is less stock of spare parts, then there would be incremental servicing costs coupled with inconvenience to the customers. This is because in accordance to the provided details, the mechanics in order to provide service have to sometimes go to remote locations to service the equipment which might be used at the mining site. It is pivotal that the mechanic must have all the common spare parts required so that there is no delay in providing services or extra logistics cost to ship the spare part to the site of the consumer. Also, the lead time in the process could be potentially high considering that these are imported from global manufacturers (Gay and Simnett, 2012). Incidence of spare parts fraud and related theft Fraud on account of spare parts is highly plausible in the business model of the company. Consider a situation whereby a mechanic goes to a remote location to service a client where the equipment is covered under warranty. The client also has another equipment of the same type which needs a spare part. The client and mechanic work out an understanding whereby the mechanic reports that the equipment under warranty required a replacement of spare part for which no charges were taken while in actuality the spare part is provided at a discounted rate to the client. Additionally, from the storage area, some thefts could also happen considering the value of these spare parts which then could be diverted to the existing clients for gains. Thus, this tends to adversely impact the business profitability especially when insurance cover is lacking in this regard (Arens et. al., 2012). The business risks outlined in section a impact s the audit risk and the associated accounts in the following manner. The components of audit risk related to incorrect estimation of spare part requirement would be detection risk and inherent risk. It is noteworthy that in the context of the spare parts essentially the contribution would be made to two separate accounts namely revenues and expense depending on the underlying situation (Arens et. al., 2013). For instance, any spare part replaced which is covered under warranty would be expense for the company while any spare part replacement for which payment is derived from the client would be categorized as revenues. Thus, distinguishing between the two needs to be done which can be complex especially because even under warranty certain spare parts may not be covered. Hence, an inherent risk exists with regards to recording these properly. Additionally, the auditor may also face a challenging job to figure out the exact schema of identification of spare part which potentially enhances detection risk. The two accounts obviously impacted through these audit risks would be the expense account and revenue account (Caanz, 2016). The possibility of fraud and thefts in relation to spare parts would tend to escalate the inherent risk and control risk. Inherent risk escalation tend to exist since the business practices are such that it provides potential for fraud as has been explained using the example of a client based in remote location. Control risk also exists since it seems that the company lacks the requisite measures to control the above risk which tends to aggravate the overall audit risk (Gay Simnett, 2012). Two accounts that could be materially misstated are the expense account and also the inventory account. Expense account is impacted because in cases of fraud, the mechanic would register the spare part as an expense when ideally it should have been contributed to the profit of the firm. Further, the inventory account misstatement could result on account of theft which go unreported and also there could be potential obsolescence and incremental maintenance cost which might not be reflected appropriately thus causing material misstatement (Leung, Coram and Cooper, 2012). References APES (2010), APES 110 Code of Ethics for Professional Accountants, APESB Website, [Online] Available at https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed April 28, 2017] Arens, A., Best, P., Shailer, G. Fiedler,I. (2013). Auditing, Assurance Services and Ethics in Australia, 2nd ed, Sydney: Pearson Australia Caanz, S. (2016), Auditing And Assurance Handbook 2016 Australia, 3rd ed., Sydney: John Wiley Sons CPA (2013), Independence Guide, CPA Website, [Online] Available at https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/auditing-assurance/independence-guide.pdf?la=en [Accessed April 28, 2017] Gay, G. Simnett, R. (2012), Auditing and Assurance Services in Australia, 5th ed., Sydney: McGraw-Hill Education Leung, P., Coram, P. Cooper, B.J. (2012), Modern Auditing and Assurance Services, 4th ed, New York: John Wiley and Sons