Auditing and Assurance Services: Threats to Independence and Implications

This article covers various threats to independence in auditing and their implications. It also discusses case studies related to auditing and assurance services, including the Peter Sung case, Auditor Jana case, Jack Dack case, Four Chartered Accountant firms case, Johan Geldens case, and Edith Bailey case. The article also discusses the importance of maintaining independence in auditing and providing true and fair information to investors and shareholders.

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AUDITING AND ASSURANCE SERVICES

Audit
a) Peter Sung Case
Section 260 of APES 110 is associated with a member in public practice taking gifts and
hospitality. This section is linked to the families accepting gifts and is likely to produce self-
interest threat. The nature of the threat is associated with nature, as well as the value of the
offer that is in the case of a 25% discount. If the auditor accepts this offer that is accepting
two concert tickets at 25% then at a later point of time, if the company makes a request of
unreasonable nature in tune to the financials then the auditor will not be able to refuse. If the
threat cannot be reduced to a certain extent then the auditor should not accept the offer
because such as offer can create a negative impact on the auditor’s judgement. It is upon the
auditor to provide a true and fair view of the state of affairs of the company (Hoffelder,
2012). In this scenario, the auditor should ensure that the auditor should not create a
familiarity level because it is the main factor that creates an obstacle in the process of
decision-making.
b) Auditor Jana
As per APES 110, the auditor of the company should be the sole audit and should not audit
further companies. It is due to the fact that the audit of different companies will lead to a
difference in the process of decision making. It is the responsibility of the auditor to project a
true a fair view of the state of affairs of the company and in this tune, the decision should not
be affected by the data of other companies (Geoffrey, Joleen, Kelli & David, 2016). Auditing
other companies will create a problem in terms of decision making process.
c) Jack Dack
A client requests the assistance of Jack Dack, a chartered accountant, in the installation of a
new computerised inventory system for maintaining production and inventory records.As
Dack has no experience in this type of work he engages a computer inventory consultant who
he has confidence in to carry out the review. Due to the highly technical nature of the work
and other time pressures, Dack is not able to review the computer consultant’s work and once
the client has agreed to Dack gives the go-ahead for the installation of the inventory system
This cannot be termed an auditing work by Jack Dack. As per the auditing standards, it is
permitted to appoint an external expert who is an individual or any organization that possess
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Audit
the desired level of skills, knowledge and expertise leaving aside accounting and auditing
used by the members in practice. As per the fundamental principle, the principles of
Professional competence and due care needs to be followed that mean the auditor needs to
ensure knowledge and skills so that the services are in tune with the standards. Therefore, the
duty of the auditor should be in tune with the code of conduct and there should be no
differences as the judgement is final and binding (Lapsley, 2012). Hence, considering the
scenario, it can be stated that Jack Dack needs to consider the work that is undertaken by the
consultant is binding upon the auditor. The client has the reliance on Jack Dack and Jack
Dack has not assessed the work that is done by the external expert and this is a violation of
the Code.
d) Four Chartered Accountant firms case
According to the conceptual framework of an organization, the confidentiality agreement
should always be present between the accountant and the client so that obligations of
principles can be maintained. This confidentiality agreement prevents the accountant to
discuss any details with outsiders without any legal or professional notice to the client
because if any type of information is read by him to the outside sources, the client can
penalize him for breaking the agreement (Lapsley, 2012). The accountant is only having the
authority to convey the information to the outsiders if and only if there is any legal obligation
that is required to be fulfilled or if the fundamental principles are not hampered. For this
particular case, it has been observed that the auditing principles have been violated as the
financial statements of the organization have been given to another member of the
organization for the assessment of data (Geoffrey, Joleen, Kelli & David, 2016). The
activities conducted by the auditors of the organization was not at all professional in conduct
because of which they should be penalized and also no information should be conveyed to
them from this particular time onwards. It is a General fact that the financial accounts of an
organization are not public documents and they contain much precious information that may
hamper the organizations business is leaked. Therefore, it is the sole duty of the auditors to
maintain the secrecy of the data that have been provided to them for assessment.
e) Johan Geldens case
It was observed in this case that the accountant was providing very crucial information in
relation to the customers and their review, which may help the business to earn huge amount
of money and thus become the leader in its field. The accountant was further trying to convey
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Audit
more information to the organization which can be used by it to improve the managerial
framework of the organization and may further be helpful to improvise the revenue earning a
statement of the company (Kaplan, 2011). Many basic fundamental principles of auditing
were hampered and violated by the Accountant of the organization. An evaluation should be
made by the auditor of the organization to find out the reasons for the uncertain profit that
have been generated by the organization. If the evaluation states that the revenue has been
earned from legal measures, strict action should be taken against the organization and its
managers. Under the section 340 of the Corporations Act, 2001 it has been clearly stated that
no auditor is having the authority to convey private information of an organization for
personal use or advantage. Hence, if it is observed in any way that the auditor is trying to
exploit the company details, he should be penalized.
f) Edith Bailey case
According to the basic principles of the auditing task, it has been clearly stated that the
Accountant and the auditor of the organization can never be the same. No matter how big the
volume of the business or what a reputation it holds in the market, this fundamental principle
remains the same. this principle helps to remove the vulnerability in the audit report of the
organization so that a clear view can be judged based on the accounts and the financial
statements of the organization without any personal benefit involved. It is a basic fact that no
one will find mistakes in his own work because of which a biased decision may be presented
in the audit report (Livne, 2015). The auditor should have an independent mind while making
an assessment of the financial statements of the organization show that an accurate
assessment of data is made, which will further help the organization to improve its
managerial functions and the shareholders to make decisions in relation to the investments.
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Audit
Question 2
Independence threats and implications to the same
First situation
A small public company named as Maitland Coal company. have got its financial statements
audited by auditor Andrew Capizzi Chartered Accounting firm. In order to improvise the
business, the company has tried to make new contracts with new people so that it can expand
its business, but it was noticed that the contractors why not having a good image in the media
which have been clearly assessed with the help of unfavourable articles published in relation
to their image. The major duty that is to be performed by the auditor is to state the fairness of
the financial statements of the organization so that decision-making process can be carried
out by the investors and shareholders in an appropriate way.
The auditor should be satisfied with the financial statements of the organization as long as all
the information recorded satisfies the prescribed accounting rules and regulations that have
been stated as the accounting principles. The major concern of the auditor while performing
the audit services for this company should be the services of the independent contractor
which have proved not to be very friendly in nature (Livne, 2015). The auditor is also
required to present and help the organization to deal with the toxic waste disposal program.
The auditor is yet to decide the effect of the waste disposal program and the independent
contractor.
Therefore, it is important for the auditor to prepare and present the financial statements of the
organization in the best possible manner so that true and fair information can be depicted to
the shareholders of the organization and further the decision making process can be carried
out in a sophisticated manner. The changes or the effects that will be made by the waste
disposal program are not likely to impact the financial statements but it should be kept in
mind by the auditors that the independent contractors may pose a threat, as they are not
having a good image in front of the industry (Gay & Simnet, 2015). Hence, if all these factors
are assessed properly, then the financial statements of the organization will be free from any
kind of material misstatement and can also be further used for proper decision making.
Second situation
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Audit
The major function carried out by the management of the organization is to prepare the
financial statements in the best possible manner so that true and fair information is being
presented by it. Whereas the job of auditors is to access this information in order to find any
kind of material misstatements present in them which may affect the decision-making process
carried out by the investors or the management itself. If a situation arises where the auditor
has noted a significant violation of accounting standard, he will be liable to report it to the
management of the organization so that it can be corrected before the data is presented to the
general public and the investors. If the company is not willing to change the financial
statements of the firm to make it in accordance with the accounting standards, then the
auditor should report it in the audit report of the organization.
In this particular case, it has been observed that violation of accounting standards have been
made by the Moonies in relation to the valuation of inventory. The deductions that are to be
made in the fair value of the inventory is not being assessed by the organization because of
which material impact can be noticed in the financial accounts of the organization (Fazal,
2013).
It has also been clearly noted that the payment of almost 20% of the audit fees has not been
made in the previous year. The company has started to clear the due amount in the current
year because of which it is the obligation of the auditor to conduct the audit process for this
particular year. This causes a violation of the independence of auditors as the auditors are
forced to work under the terms of the client. Revenue is being provided by the audit services
which cannot be compromised by the organization because of its significance (Matthew,
2015). Therefore, this is also a threat to the audit firm because of the involvement of the huge
sum of fees involved.
The conditions that have been stated by the organization in relation to the payment of the
audit fees can for the auditor to work as per the conditions of the client because of which the
independent auditing principal charging damaged. Another aspect that was noticed in relation
to the accounts of the company was to violate various principles and Standards while
preparation of the accounts of the organization (Baldwin, 2010). Therefore, it is the sole duty
of the auditor to provide professional data to the users of the financial statement so that all
these factors can be judged while making any decision in relation to the investments that are
to be made in the organization. It is very necessary for the auditor to stand with all the
principles and ethics so that true and fair data can be depicted to the investors and
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Audit
shareholders of the firm. The auditor shouldn't accept any such incentive provided to him by
the organization which may force him to act personally (Baldwin, 2010). After removal of all
the threats to Independence, the impacts that may be caused on the organizations business
should be clearly discussed in the audit report in relation to the violation of principles and
standards that have been made in the preparation of financial accounts.
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Audit
References
Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.
Fazal, H. (2013) What is Intimidation threat in auditing?.[online]. Available from:
http://pakaccountants.com/what-is-intimidation-threat-in-auditing/ [Accessed 21
September 2018]
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Geoffrey D. B, Joleen K, Kelli S. and David A. W. (2016) Attracting Applicants for In-House
and Outsourced Internal Audit Positions: Views from External Auditors. Accounting
Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309
[Accessed 21 September 2018]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011) Accounting scholarship that advances professional knowledge and
practice. The Accounting Review [online]. 86(2), pp. 367–383. Available from
https://doi.org/10.2308/accr.00000031
Lapsley, I. (2012) Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management. [online]. 9(3), pp. 291-292. Available from
https://doi.org/10.1111/1468-0408.00081
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies. [online] Available
from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full [Accessed 21 September 2018]
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from
https://doi.org/10.2308/accr-50871 [Accessed 21 September 2018]
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