Threats And Risks To Audit Essay

Questions:

1.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 audit.
2.For Each business risk identified in (a) describe a specific audit risk that could arise. Each responses should Include the Identification of Account Balances that are impacted directly by the audit risk ( 5 Marks).

Answers:

1.Introduction

In the recent past there have been cases relating to fraud covering as well as other issues in auditing. This has been as a result of various situations auditors pass through. These issues leading to poor auditing are identified as threats to audit independence. When an auditor is faced with the threats they tend to give reviews based on their own interest or the interest of other parties apart from that of the client firm. The content of this paper in relation to the case study provided identifies and discusses various threats to audit independence. This paper also states various safeguards or ways which can be put in place to secure the audit threats. Being that the content is divided in two sections, section two of the content covers various business risks in relation to the given case study. It also discusses inherent risk as the main audit risks revealed in the study case. Lastly, the content reveals various accounts which are likely to affect by 2015 audit.

Evaluation of audit independence threats

According to various experts it is revealed that for an audit review or administration to be of value, audit independence and freedom must be ensured where audit autonomy is perceived by Independence Standards Board (ISB) as the adaptability of an examiner or an auditor from those weights and distinctive fragments that exchange off, or can sensibly be required for immaculate surveys (Tang et.al 2017). Survey independence confines an auditor to settle on impartial review decisions. As showed by different authorities review versatility is separated from the perspective and approach of objectivity being fair-minded, sensible and besides being upright and wisely bona fide. With the observation and insurance of audit independence, auditors always make uncompromised decision and ensure validity in the financial records and reports.

Review autonomy can likewise be affected by different powers inside the review firm or from the customer firm. These factors are distinguished as threats to audit independence and always results into compromised audit decisions. From the various conversations in the case study one, from each of the given situation center one can find and see four threats by the approach of dangers and shields approach (Johari, Mohd?Sanusi and Chon 2017). As displayed by this risks and securities approach, the structures see four fundamental depictions of threats which can meddle with the outcome of traded off outcomes as takes after. The presence of the below discussed threats can lead to compromised audit when the 2015 audit is conducted by the same audit team in the case study one above.

Backing for customer risks

This sort of risk happens in circumstances where a person from the review group will offer reinforcement support to the customer. Review freedom is dependably on stake conditions where one of the customer's monetary managers is identified with individuals from the review assemble as on account of Michael and the father who is one of the cash related overseers (Abbott et.al 2016). In such cases the review of Michael is probably going to be traded off as he will safeguard the father regardless of misrepresentation.

Self-intrigue threat

This kind of audit threat occurs in a situation where an auditor is likely to be compromised by personal interests. In this case, customer firm is pondering to take the auditors from CJ looking over relationship to a 14 day occasion in Greek Isles covering every ones costs and expenses. In such a condition the affiliation won't be sensible to the surveying relationship since the insistence of blessings may incite stunning taking a gander amid auditing (Abbott et.al 2016). In such conditions where the head of audit team has been given token, they tend to conduct reviews affiliation budgetary records with a critical measure of self vitality concealing wrecks (Abbott et.al 2016). In this case since the administration of the audit team is likely to be compromised by the token it is clear that the results of the audit will also be compromised as they will react based on self interest.

Affirmation or trust dangers

This sort of risk comes in when reviewers are being over-impacted by the characteristics of their customers' and furthermore the organization identity along these lines twisting up detectably nonsensically, making it hard to intrigue the customer. Then again, evaluators of a given firm therefore of affirmation may grow excessively confide in the association portrayals in this way, inadequately comprehensive in their study testing (Bahrawe, Haron and Hasan 2016). This is clear from fourth condition the examination with Annette who avows that there will be no much review on the commitment records in perspective of nature and trust. Having worked in the LTH books of records earlier her autonomy of the review can be dealt in the way of trust and shared trademark or nature.

Performance of non-audit actions

The audit team leader is under pressure from the client firm to give a speech on behalf of the company. This results into an audit independence threat which is known as intimidation threat. According to the first conversation in the situation one, the CJ audit firm manager is forced by the client firm to give a speech of which failure to do so will result into termination of the contract between CJ and LTH (Commerford et.al 2016). In such cases based on the intimidation and embarrassment, the audit team is likely to perform the non audit administration which my compromise the audit independence. In order to secure the contract the audit team will review with interest leading to misquotes in the audits.

Safeguards to the Identified Threats

Safeguards to audit independence are various ways in which the above identified threats can be prevented or controlled. This section of the paper identifies three ways in which the above identified threats. These safeguards have been identified as below:

Observations of various audit rules and ethics

Auditing practice is guided by various rules and audit ethics. It is therefore important for CJ as an audit firm to operate within the specific rules in order to be free from the forces which are likely to compromise their practices. The company should refuse the free trip which has been offered to the top two official of CJ Company based on the audit rules. With the observation of the audit rules and independence the team should be able to perform their duties as required and cover any fraud that may be within the financial records. The manager of CJ is also able to refuse the non audit task being forced on him by the client firm.

Repression of auditors from offering non-audit associations

As uncovered by case the association of the CJ review firm masterminds limitation of the relationship from offering non review benefits, the request by the primary body of the customer affiliation (LTH) which requires the review firm make a beeline for give a discussion in light of a honest to goodness worry for the affiliation will be invalid permitting the CJ to perform uncompromised review without conditions (Berg and Mor? 2016).

Use of new audit team while performing every audit

As demonstrated by circumstances three and four, both Michael and Annette are probably going to be traded off in perspective of trust and shared trademark (Hurley, Mayhew and Obermire 2016). Clearly the two have been typical to the customer firm and are not sensible to play out a survey on the budgetary records of a relative affiliation. Annette foresees that not will organize huge diagram on the commitment budgetary books of records in light of past review where as Michael trusts the father who drives the money related assembling (Chiang and Chiang 2016). Study turn is along these lines the best protect to guarantee review freedom. For this situation both the two evaluators who are probably going to traded off by the review autonomy dangers ought to be supplanted or taken to another firm.

2.Business Risks to be considered amid audit planning

Transportation risks

The organization serves a bigger market with more clients situated in remote parts of the market. In such circumstances the organization needs to utilize more costs on transport with a specific end goal to achieve their clients (Chiang and Chiang 2016). They likewise experience the ill effects of transportation expenses giving systems for upkeeps mechanics in supplant repair effectively sold item. This is along these lines a business hazard to the organization as it results into diminished net revenue contrasted with the guessed overall revenue.

Operation business dangers

The period of accreditation is client intrigue fulfillment coming about into affiliation getting an amazing measure of support expenses. Subsequently, the apparatus occurs into operation dangers where Mining supplies LTD (MSL) necessities to pay for additional charges to the operations of the mechanics performing such structures for upkeeps (Guedes and Pereira 2017). Being that the majority of the clients are remotely found, the affiliation needs to cover for the long separation transportation costs for the mechanics, pay for the charging of their associations on a consistent rate in context of the time, cover for every one of the parts supplanted and in like manner the solace and normal costs of the authority.

Audit Risk

Inherent risks

For this situation, the particular review hazard might be assessed in light of the business dangers experienced by Mining supplies LTD (MSL) as an alliance. Amidst the change of the review coordinate beginning at now showed above and expert ought to diagram inborn hazard as one of the dangers at the money related illumination form or at budgetary report level (Bui and de 2017). The review investigator ought to along these lines relate the risk appraisal to different records changes and unmistakable exchange classes amidst the confirmation point (Lu, Wu and Yu 2017). Trademark hazards may happen in this way of operation dangers and transportation chance in that the cost of upkeep and transportation might be misquoted by the chiefs, heads, drivers even the mechanics. The affiliation pros responsible for the upkeep may allude to an inspiration than the real cost working out as expected into common risks.

Accounts likely to be affected by 2015 audits

At the level of exchange class affirmation and what's progressively the record level, the dangers might be found in the payable records including:

Purchases accounts

The purchases account is likely to be affected during the 2015 audit since most of the company operations involve purchasing sale of products (Lu, Wu and Yu 2017). In some cases that might be fraud mainly informs of misquotes which are likely to be identified during the audit.

Pay and wage account

From the given case study, the company operates with several workers including hired mechanics (Patriarca et.al 2017). In such cases where operational team is too extensive there is likelihood of misquotes within the salary and wage accounts.

Since the business dangers saw by and large identify with the payable records, the investigator ought to thusly be sincere that the payable records at the monetary articulation levels are probably going to be feeble to double dealings and distort (Patriarca et.al 2017) . This is obvious in that most by a wide margin of the payable records require likenesses with a more raised measure of estimations as a large portion of the operations identifying with support are continuers

References

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Johari, R.J., Mohd?Sanusi, Z. and Chong, V.K., 2017. Effects of Auditors' Ethical Orientation and Self?Interest Independence Threat on the Mediating Role of Moral Intensity and Ethical Decision?Making Process. International Journal of Auditing, 21(1), pp.38-58.

Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.

Bahrawe, S.H., Haron, H. and Hasan, A.N.B., 2016. Corporate Governance and Auditor Independence in Saudi Arabia: Literature Review and Proposed Conceptual Framework. International Business Research, 9(11), p.1.

Commerford, B.P., Hermanson, D.R., Houston, R.W. and Peters, M.F., 2016. Real Earnings Management: A Threat to Auditor Comfort?. Auditing: A Journal of Practice & Theory, 35(4), pp.39-56.

Berg, S. and Mor?, C., 2016. The Effect of Non-Audit Services on Auditor Independence: A study on 11 food retail-and wholesale companies in the United Kingdom.

Hurley, P.J., Mayhew, B.W. and Obermire, K., 2016. Realigning Auditors' Accountability: Experimental Evidence.

Chiang, C. and Chiang, C., 2016. Conceptualising the linkage between professional scepticism and auditor independence. Pacific Accounting Review, 28(2), pp.180-200.

Guedes, J.F. and Pereira, L., 2017. Proximity Offshoring Generating Considerable Savings with No Significant Increase of Risks or Losses in Quality—Nearshoring Playing a Key Role on a Business Transformation Program. In Financial Environment and Business Development (pp. 325-340). Springer International Publishing.

Bui, B. and de Villiers, C., 2017. Business strategies and management accounting in response to climate change risk exposure and regulatory uncertainty. The British Accounting Review, 49(1), pp.4-24.

Lu, L.Y., Wu, H. and Yu, Y., 2017. Investment-related Pressure and Audit Risk. Auditing: A Journal of Practice and Theory.

Patriarca, R., Di Gravio, G., Costantino, F. and Tronci, M., 2017. The Functional Resonance Analysis Method for a systemic risk based environmental auditing in a sinter plant: A semi-quantitative approach. Environmental Impact Assessment Review, 63, pp.72-86.

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