Evaluation Of Audit Independence Threats

Question: Discuss about the Evaluation Of Audit Independence Threats. Answer: Introduction Auditors independent is a very important factor to be considered during an audit practice or process. Auditing as a practice in the business sector is one of the most valued services ensuring growth of any business institution like the one in the case study given. For any audit exercise to succeed auditors must be allowed with an opportunity to operate on their own will. Audit independence has therefore been distinguished by many researchers and scholars as the opportunity of an auditor to operate on his or her own will without any factor limiting his or her audit judgment. Apart from the researcher the ISB has defined audit independence as the ability of an auditor to operate freely without any factors on their way which can prevent them from being impartial, sensible and reasonably upright while conducting an audit review. The content of the paper therefore evaluates various threats to audit independence and other issues surrounding audit independence in relation to the two provide d case studies. Threats to audit independence Cover up for a client Audit independence being a very important factor while conducting an audit, it can sometimes be vulnerable to various factors such as covering or backing up the client firm by an auditor. As revealed within the conversation with Michael it is evident that the audit independence will be vulnerable based on the prevailing relationships. Michael from the conversation is likely to cover up for the father who is the top staff officer in charge of all the client firm records. In case of mistakes or misquotations, Michael is likely to cover up for the father leading to inappropriate audit judgment (Blay and Geiger 2013). This kind of threat also occurs when the client firm acts as a patron to the client firm. As revealed within the first conversation the management of the client firm wants chief auditor of the CJ audit to represent them through speech during an event. In such situations audit independence is likely not to apply as auditors operate without their will but that of the client. Self interest threat From the conversation in the situation one in the case study one, the audit independence is likely to be affected by a threat known as self interest threats. The client firm is planning on taking two of the top most officials in the CJ audit firm out. This kind of threat occurs when an auditor accepts a token from the client. The LTH Company which is the client firm is revealed to have a plan of taking the two officials to a 14 day occasion to Greek Isles covering every one of the costs. In such a circumstance the organization won't be reasonable to be the inspecting organization since the acknowledgment of blessings may prompt dishonorable examining (Cannon and Bedard 2016). In such circumstances where the head of review group has been given token, they tend to audit the organization budgetary records with a considerable measure of self enthusiasm covering botches. In this case the auditors will probably work hard to return a favor back to the client firm leading in valid audits. Safeguards to audit independence threats Even though the audit independence can be affected by various factors as the once mentioned above, the CJ as a firm can still put in place various steps in order to manage their independence. These factors which can be put in place for the management of audit independence are known as the safeguards to audit independence. Some of the safeguards which can be employed by the CJ audit firm include: Audit shifts According to the prevailing situations in the case study revealed through the conversations, one of the safeguards that can be employed is the audit turns. This can be employed to eradicate threats which may be within the firm such as familiarity and issue relating to trust. The issue of Michael and Annette as per the case study can be controlled and prevented through application of audit shifts. Annette has developed trust with client firm and mentioned that there will be no need for maximum audits in the taxation records since they had just conclude audits on the same months ago (Cohen et.al 2014). In such like circumstances the audit independence no longer apply since her audit judgments have been influenced by trust and familiarity. Michael on the other hand s likely to cover for his father during the audits as the father is the one recording and analysis financial records within the client firm. The relationship between him and the dad can be avoided during auditing when auditin g shift is introduced. Observation of audit rules and ethics Most of the threats highlighted and discussed above can be prevented with proper observation of the norms. The audit rules and ethics always cover for the audit independence. The issue of forcing the audit firm to give speech on the behalf of the client firm can be avoided with observations of rules set for auditors (DeFond and Zhang 2014). Operational risks Company in the case study two is involved with the sales of machinery and machinery spare parts, most of services are therefore operational. The firm also offers a periodic warranty for their clients the process in which mechanics from various organizations are hired to offer maintenances services which require transport as well as other costs (Dhaliwal et.al 2015). Transport risks The organization in the study offers services and sales to customers who operates locally thereby locate in the remote areas. The company offer transportation services to their customers as after sale services therefore increased cost (Quick and Warming 2015). The company also offers maintenance for their clients who are remotely located as already mentioned leading to more expenditure thereby reduced speculated profit margin. Inherent risk From the case the most audit risk to be noticed during the 2015 audits in the inherent risks which occur at the audit report level. Inherent risks occurs as a result of misquotes of figures during sales or maintenance services (Quick and Warming 2015). Most of the operations are conducted by external mechanics who may misquotes figures during their operation such accommodation cost among as other costs incurred. Accounts likely to be affected by the 2015 audits The company mostly operates with the payable accounts where they are involves with payments where they pay for the purchased stock from various manufactures. They also pay for labor which in most cases the company involves external workers. There the accounts likely to be effected are the payable accounts which may suffer from misquotes (Quick and Warming 2015). The most likely to be affected are purchases and salary and wages accounts. References Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), pp.579-606. Cannon, N. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review. Cohen, J.R., Krishnamoorthy, G. and Wright, A., 2014. Enterprise risk management and the financial reporting process: The experiences of audit committee members, CFOs, and external auditors. DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2), pp.275-326. Dhaliwal, D.S., Lamoreaux, P.T., Lennox, C.S. and Mauler, L.M., 2015. 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