Factors influencing auditor's quality and threats to objectivity

QUESTIONS

Table of Contents
INTRODUCTION...........................................................................................................................3
Question:1....................................................................................................................................3
Question:2....................................................................................................................................6
Question:3....................................................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
Auditing refers to the examination of the financial statements and verifying the same by
following the established principles of auditing to ensure that the accountant and client has
followed ethical conduct while preparing final accounts. This leads to the revelation of true and
just picture of the financial status of the concern. The present report is based on various ethical
principles to be followed by auditors in various circumstances, along with procedures, risks and
response for auditors while doing inspection of financial statements.
Question:1
a) Factors influencing auditor's quality
The factors which influence an auditor's quality other than independence are:
Source: The source from where auditor is evaluating depends on the provider's independence to
give the original documents, it may happen sometimes that the documents which have been
provided to the auditor are not complete. The documents which have mistakes are sometimes not
disclosed and are filed separately to avoid penalties. The objectivity of the provider is the second
thing which can affect the number of files provided for verification.
Verifiability: The verifiability of documents containing all invoices, order numbers, official
receipts, the date on which order had been registered and company name or client name with
which business was done have to be present to check on all the transactions and avoidance of
errors in totalling income and expenses. It may happen that the deals of the business are done on
bills which are only used internally. This is done to help show less taxable income (Oussii and
Taktak, 2018).
Technical Procedures: The procedures used by auditor for financial audit like sampling has to
be accurate and showing completion of account balances in the financial statements. It is
necessary to perform audit sampling when there are large account transactions. The auditor has
to judge from various types of sampling which would suit best according to the type of business
audit is being done for like random, judgement, block or systematic sampling.
Auditor's knowledge: It also depends on the auditor's know how of things and the experience
possessed by him. If an auditor has worked for a number of companies, it will make for him to
identify the loop holes and the authenticity of the documents. The auditor's grasp over the
knowledge subject is the next thing which will help make the audit a success (Raiborn and
et.al.,2017).

b)
i)Auditor's independence means the external auditor's independence indicated through their
integrity and freedom in carrying out their work with a great sort of fairness. When the audit
manager holds shares in their client company then this may leads to compromising of ethical
principle known as self- interest threats (Brenninkmeijer and et.al., 2017). This principle is all
about the interruptions in fairness and integrity on the part of audit manager when they have any
kind of financial interest in the client for whom they act as an auditor. Self- interest threat
emerged from auditors having either personal, financial or personal interest in the company. This
interest may affect the quality of audit either consciously or subconsciously. In this particular
situation where auditor holds share in the auditee company, there exists a financial interest of
auditor. Such interest of auditors leads inappropriate judgement on the part of that auditor.
ii) The ethical code states that the income (fee) from any single source or client should not
exceed 15% of the total income or fee received by the audit firm. The reason for such restrictions
are due to the fact that if they have higher proportion of their income from single client then this
may leads to threat of losing that particular client. Such threat may result in poor quality of
auditing and the firm may compromise in behaving in a fair and just manner (Chaban and
Tirbakh, 2017). Here the audit fee received from Janet co. is 14.28 % of the total fee income of
the firm which is under the limit as recommended under the code. But the important point here is
that there must be no other form of income from this client which leads to impairment of
independence principle. But a slightly exceeding of this limit doesn't mean that there is non-
compliance of the principle of independence.
iii) Here also the auditor is having financial involvement in the affairs of the client, where it is
strictly not allowed to have any loans or guarantee relationship between auditor and client. This
is due to the fact that existence of such relationship may affect the auditor's judgement either due
to client's pressure on auditor or auditor's fear of financial loss (Alaraji, 2020). In the present
case, the senior auditor has obtained loan from its client, that is, Margot bank, but there exist one
exception where in the normal course of business of bank, they grant personal loans and if the
interest rate thereon is the same rate as offered to others, then there will be no impairment of
auditor's independence.