Audit Risk And Business Risk Essay

Questions:

1.Write the Threat of Independence
2.Identify the Issues, and under each Issue must include What the Business Risk, Audit Risk and Account Balance.

Answers:

1.Issues for Independence of Auditor

First Issue- Chris

The threat that has been identifies is the threat of Intimidation. The threat of intimidation can be defined as intentional behavior of the officers of company to create any kind of fear to auditor. In having conversation with CEO of the company, the CEO informed that company wants Geoff the audit team member to encourage the company business in a travel colloquium and if feels not to do so the audit engagement of the next year is not possible. The fear of losing the audit of next year has been created by the company in the auditor mind resulting in hurdle for independence in reporting. The threat can be assessed by the degree of financial insecurity felt by the auditor and he loses his objectivity (Edwin, 2015)

Second Issue- Chris

The threat in the given issue has been identifies is threat of Self Interest. Any personal interest of auditor in company business created by the company officers is known as Self Interest and the fear of such situation is called threat of Self Interest. The company has provided the free voucher to auditor for holiday with his family with the purview of having smooth audit means bias reporting from auditor. The threat can be evaluated by the biasness of auditor in reporting in regard of free holiday package provided by the company (Barizah, 2016).

Third Issue-Michael

The threat in the situation is threat of familiarity. This refers to the situation of fear create by the close personal relationship between audit team member and the employees of the client. The Finance Controller is the father of the Michael the audit team member and in this situation the auditor may not follow all the systematic audit procedures and have a sympathy grounds for the employee of the client and will not point out the mistakes of the employees of the company to whom it is related. The risk in this situation can ascertain by the fact that quantum of sympathy in the minds of the auditor for the employee of the company (UK, 2013).

Fourth Issue- Annette

The threat in this situation is threat of Self Review. The threat of self review refers as risk created for auditor when the auditor is asked to review or assess his own work done before the same client. In this situation the audit team member has done the accounting entries and taxation calculations for the LTH Company month ago and now the same member has to do the audit for the same year. The audit team member may not able to point out the mistakes from his judgment, assessment, opinion and work. The risk is assessing from the facts how much mistakes the audit team member is able to find in his work and correct the same (Parker, 2015).

Preservation to Auditor freedom

Measures taken by the auditor and auditor team to prevent the auditor from the undesirable reporting on the financial statements of the client are Safeguards available to auditor from the audit threats. The following are the protections available for the auditor:

  1. The disposal of interest in the client business by the assurance team member before the start of audit.
  2. The construction of responsibilities of the audit team member should be clear before engaging him in assurance team in case of family relationship with client employee.
  3. Regular change of the audit team member after the particular period of time or on year to year basis.
  4. Quality review of the work done by the audit team member from external outside auditor after audit.
  5. The assurance and accounting team members should be different and not related for particular client.
  6. Policies and procedures application which barred the audit team member making managerial decisions on behalf of auditor.
  7. The auditor should put stresses on the importance and application of ethical codes and standards laid down by the Australian Auditing Standard Board.
  8. The long pending fess should be treated a loan to client and should inform to government authorities and stakeholders of the company in order to maintain the Corporate Governance (Livine, 2015).

2.Business risks consideration by Crampton and Hasaad

Business Risks are the potential of incidence of more losses than probable and occurrence of lower profits than expected. The business risks in any company depends on various factors like the Capital composition of the company, Government Policies of the country in which company operates, business environment in which company words, its competitors, its employees, sales and purchases, and financial and non financial transactions done by company. The judgment of business risks present in any company can be done by the level of company capability to pay to its stakeholders according to their expectation. The business risks are generally of financial risk, compliance risk, strategic risk, operational risks. In the given circumstances under concern, the auditor has two consider the following two business risks in respect of Mining Supply Limited related to purchase of equipment and spare parts:

Operational Risk arises in the MSL Company due to its business process in respect of inventories of Raw Material. These risks arise on daily basis in the business of any company. In MSL, it is the risk related to the loss of goods in way of transferring the goods from the supplier locations to operational centers of the company and from operational centers to customers place. The operational strategy of transferring the goods from one place to another creates the liability of the company on loss of goods in transit as goods are transported with the label of warranty by MSL Company. So if the spares parts and equipment are damage while transferring them to supplier places that located in countries like Europe, China and UK to different operational warehouses of the company in Australia then the transit loss is borne by the company only. These results in huge losses if any of the methods to be followed on daisy basis is not follow by the company in any day to safe the risk of loss of stock in transit (Imrie, 2011).


Compliance risks arise in the company due Exchange Rate risk. These risks occur due to high complex nature of the company. In the given case of MSL Limited, the company is making purchases from different supplies located in different countries of the world. The currencies of the country of suppliers are different from home currency that is Australian dollar. While making payment to suppliers by company, the company has to made payment in the currency of respective country of supplier. The company has to take into consideration the exchange rate risk while converting the foreign currency into the functional currency of the company. This conversion process as well as the recording of purchases and payments to supplier involves the follow up of the provisions laid down by the different authorities, laws and regulations in which the company operates. And in the given case of MSL, the company has cleared about the procedures and policies related to comply with provisions and the degree of this risk is high (EY, 2016).

Particular Audit Risk that could take place in recognized business risk

A risk in audit reporting due to the presence of substantial misstatements and lapses is called Audit risk. Audit risks contain the identification of factors that create the danger situation in the reporting about the frauds and error in financial statements of the company by the auditor. Before doing any audit, the auditor has identify the factors of audit risks that is business risk present in the company and then identify the level of audit risks according to the business risks present in the company. In case of MSL Company, the two audit risks in respect of two identified business risks before consideration of auditor in his audit plan are as follow:

Control risk- These risks in audit has been arisen by the non control of the top level management on the operations of the company and the auditor in not able to identified the effectiveness on the internal control system of the company after applying all the compliance procedures of audit. The given case, where the loss of stock has not been properly taken into account by the company, the company has to recognize the provision of damages of stock in transit. It reduces the margin of the company as the expenses in relation to damages increases the cost to the company of supplies. Also, non clear agreement with supplier will increase the disclosure liability of the company.


Detection Risk- This risk is that has been arose with the fact that the auditor is not able to detect and final the frauds and error in the company after applying all the substantive procedures in audit. The gross negligence and exclusion from the audit procedures results in non detection of frauds and errors in financial statements of the company by the auditor. In case of MSL, purchases from different suppliers, the auditor has the risk whether the exchange rate for recording of purchases has been taken correctly according the provisions laid and market forces applicable. The audit has to consider whether the provisions of the pricing and foreign exchange gain or loss has been booked correctly and disclosed correctly in financial statements (Becker, 2015).

The accounts needs auditor attentions are Purchases, Sales, Inventory, and Loss in Transit, Provision for damages, Foreign Exchange Gain, Foreign Exchange Loss and Accounts payable.

References

Becker E, (2015), “Audit Risk vs. Business Risk”, available at accessed on 27/04/2017.

Barizah N, (2016), “Threats to Auditor Independence”, available at accessed on27/04/2017.

Edwin M, (2015), “Analysis of Threats to Auditor Independence and Available Safeguards against those threats”, available at accessed on 26/04/2017

EY, (2016), “Top 10 Business Risks”, available at accessed on 27/04/2017.

Imrie B, (2011), “Business Risks facing the Mining Industry”, available at accessed at 26/04/2017.

Livine G, (2015), “Threats to Auditor Independence and Possible Remedies”, available on accessed on 27/04/2017.

Long G, (2015), “Audit Risk and Business Risk”, available at accessed on 27/04/2017.

Parker A, (2015), “6 Key Threat to Auditor Independence”, available on accessed on 27/04/2017.

UK Essays, (2013), “Threat To Auditor Independence Accounting Essay.” Available at Accessed on 26/04/2017

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