This article discusses self-interest and intimidation threats in auditing theory and practice. It also covers maintaining confidentiality and avoiding management responsibility. The recommended actions for each issue are also provided.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Running head: AUDITING THEORY AND PRACTICE Auditing Theory and Practice Name of the Student Name of the University Authors Note Course ID
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
1AUDITING THEORY AND PRACTICE Table of Contents Answer to question 1:.................................................................................................................2 Answer to case A:..................................................................................................................2 Answer to case B:...................................................................................................................2 Answer to case C:...................................................................................................................3 Answer to question B:................................................................................................................3 References:.................................................................................................................................5
2AUDITING THEORY AND PRACTICE Answer to question 1: Answer to case A: When it is noticed that the total fees from the audit client constitute a large portion of the total fees of the firm stating their audit opinion, the reliance on that client and concerns relating to losing the client results in self-interest or intimidation threat. The significance relating to such threat should be assessed and safeguarded when it becomes necessary to eliminate the threat at the acceptable level (Hayes, Gortemaker and Wallage 2014). A self- interest or intimidation threat is created by Simpson Co when it refused to agree with the increase in the audit fees in spite of the increase in the size of firm. This is because the audit fees produced from the audit client constitute a large portion of the revenue for the Zara Co. Evidences suggest that Simpson Co ignored the materiality level and did not carried out the reviewprocedure.ThisconcludesthatSimpsonCodidnotcompliedwithlawsand regulationsandtheauditorshoulddocumentaswellasdiscussthefindingswith management. Simson Co did not included the sample of non-current assets for physical verification which results in the materiality of the financial interest (De Paula 2016). As only part of population was sampled, it restricts the ability of the audit team towards physical verification of the assets and ultimately limiting the scope of audit. Answer to case B: Outsourcing the work of Simpson Co to overseas office of Zara might require the third party to make decision on behalf of the client or might create a perception which would require the service provider to act in capacity of the management (Kumar and Sharma 2015). If the Zara & Co were to assume this kind of responsibility for the auditing client, then it would result in threat to objectivity. To avoid the risk of assuming the management responsibility, Simpson & Co should make sure that Zara & Co has the appropriate procedure
3AUDITING THEORY AND PRACTICE to make sure that the management takes all the judgement and decisions together. Zara & Co should designate a person that has appropriate skill, knowledge and experience to be accountable for the Simpson & Co decisions and to oversee the services that are provided. Answer to case C: Confidentiality of the information must be maintained relating to business and professional relationships by not disclosing any information to the third party without any sufficient information unless there is any legal or professional right of disclosing (Cohen and Simnett 2014). The former finance director of Simpson joined Zara as the audit partner and passed on confidential business information that took place at Simpson. Reporting the business development to Lester resulted in breach of client confidentiality (Louwers et al. 2015).Insuchsituationslegalorregulatoryresponsibilitywouldhaveoutweighthe requirement of confidentiality. Currently, it appears to be uncertain whether Russel Gerrard is aware of the confidentiality practices. Given the conflict with IESBA code of ethics for Zara Co, the company must seek lawful advice prior to minimising the risk of lawful dispute with their customers or legal actions from the regulatory because of breach in confidential information. Answer to question B: The recommended actions for each of the issues identified above is stated below; a.Simpson & Co should reduce the dependency on the client and review the external quality control. Simpson & Co should review the significance of the threat and applying the safeguard principles when it becomes necessary to eliminate the threat or reduce the same to the acceptable limit. b.Simpson & Co must ensure that confidentiality of the information is maintained as the outcome of professional and business relations. Simpson & Co must clearly seek the
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
4AUDITING THEORY AND PRACTICE reason from Lester for disclosing the information to Zara & Co. If Lester fails to provide any sufficient reason, then Simpson should seek legal advice or legal action because of the breach of confidential information (Knechel and Salterio 2016). Zara & Co should communicate the management of Simpson & Co by obtaining a written statement from the client that they understand the outsourced audit works and accept this. c.In order to avoid the risk of assuming management responsibility, Simpson and Co shouldexercisetheobjectivityandprofessionalscepticismtooverridethe professional or business judgements. If Zara & Co determines that Simpson & Co has breached the confidential information, then they must obtain a satisfactory conclusion and in prudent circumstances Simpson & Co should politely decline further audit engagement with the Zara & Co.
5AUDITING THEORY AND PRACTICE References: Cohen,J.R.andSimnett,R.,2014.CSRandassuranceservices:Aresearch agenda.Auditing: A Journal of Practice & Theory,34(1), pp.59-74. De Paula, F.R.M., 2016.The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919). Hayes, R.S., Gortemaker, H. and Wallage, P., 2014.Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times. Knechel, W.R. and Salterio, S.E., 2016.Auditing: Assurance and risk. Routledge. Kumar, R. and Sharma, V., 2015.Auditing: Principles and practice. PHI Learning Pvt. Ltd.. Louwers,T.J.,Ramsay,R.J.,Sinason,D.H.,Strawser,J.R.andThibodeau,J.C., 2015.Auditing & assurance services. McGraw-Hill Education.