Analysis of Auditor Independence, Business Risk in Audit Report

This report provides a detailed analysis of an audit assignment, addressing key issues related to auditor independence and business risk. The report begins by identifying and evaluating various threats to auditor independence, including self-interest, self-review, advocacy, familiarity, and intimidation threats, with specific examples from case scenarios. It then outlines potential safeguards to mitigate these threats, emphasizing the importance of legislation, professional regulations, and a strong ethical code. The report also examines business risks faced by MSL, such as litigation and claims, and risks of fraud or theft, and how these risks influence audit planning. Furthermore, it identifies the account balances directly impacted by audit risks, differentiating between control and detection risks. The analysis underscores the interconnectedness of business and audit risks, highlighting the need for effective planning and corrective actions to ensure accurate and reliable audit outcomes. The report concludes by emphasizing the importance of ethical conduct and robust internal controls in maintaining audit integrity and achieving long-term business success.

Audit assignment

TABLE OF CONTENTS
introduction......................................................................................................................................3
ASSIGNMENT QUESTION 1........................................................................................................3
(a) Identifying and evaluating any threats in relation to auditor independence...........................3
(b) Identifying any safeguards to those threats identified............................................................5
ASSIGNMENT QUESTION 2........................................................................................................5
(a) Describing two business risk to MSL for planning the 2015 audit........................................5
(b) Identifying the account balance that have impact directly by the audit risk..........................6
CONCLUSION................................................................................................................................7

INTRODUCTION
Audit refers to process of the completing the activities related to completion of the
internal operation. This enables corporation to find out the common mistakes and necessary
remedies provided for the same for long survival of the business. Present report is based on two
different case studies under which threats related to audit independence have been considered
along with provided safeguards. In addition to this, business risk and its role in planning the audit
process have been presented in the light of provided case scenario. Moreover, the audit risk have
also been explained effectively.
ASSIGNMENT QUESTION 1
(a) Identifying and evaluating any threats in relation to auditor independence
There are different types of threats associated with the auditors independence such as
self-review threat, self-interest and multiple referrals as well as Ex-staff and partners threats are
also considered. It assists corporation to understand the threats and accordingly take the
corrective action for remedy of the people who are suffering. These threats are explained as
follows- The self-interest threat-Such kind of threats occurs when auditors work on the basis of
financial and emotional as well as any other kind of self-interest related work towards the
organization. It affects the work of auditing to a great extent (Abbott and et. al., 2016). The self review threat-It is the another kind of issue under which company may face
issue related to self-review threat under which auditors act in the biased manner. This
affect overall work of the business in a negative manner. It is because auditors will not
find significant mistake in their own work and accordingly they might provide the fake
audit report. The advocacy threat-Under this, auditors work as the advocate for or against an audit
clients rather focusing on taking the unbiased decision. Such kind of practices will have
significant impact on the performance of the business and accordingly profitability of the
business goes down to a great extent (Dogui, Boiral and Heras‐Saizarbitoria, 2014). The familiarity or trust threat-This kind of threat occur to business when the chartered
account in the business affect the financial reporting by accepting the particular gift or

benefits from others. Such kind of situation might mislead the report deprived form audit
activities. This affect overall rate of return of the business to a great extent. Owing to this,
it is important to incorporate suitable activities for right and effective audit report to meet
the expectations of all related parties. Furthermore, the close relationship with the audit
clients have greater impact on the performance of the business by creating issue in the
future (Blay and Geiger, 2013). The intimidation threat-This reflects that threat for fair audit report just because of audit
client is connected with the audit and in the close relationship with the same. Such kind
of situation tends to affect the fair reporting procedure and affect the outcome derived
from the audit report.
Situation 1
According to the given case scenario, it has been found that advocacy threat is presented
under which Chris willing to ensure the personal benefit and was acting like advocate of the CJ.
However, he could have focused on the unbiased practices for the successful operation of the
audit activities.
Situation 2
The situation second or conversation with Chris reflects that trust threat as familiarity
between CJ and Geoff. It is because Chirs talked to offer the 14-days holiday voucher for Geoff
and family. Owing to this, such kind of relationship with the clients does not seem to be good
and affect the outcome of the report.
Situation 3
The third situation reflects that father of Michaeal is already working in the LTH and
they have the close relationship. This against reflects that intimation threat for the business in
term of effective presentation of audit report.
Situation 4
Annette was already handling the temporary assignment of the LTH and accordingly he
will going to review his own work in the organization. It might bring fourth less valid or reliable
information for the business and accordingly has the direct impact on overall rate of return of the
business. Therefore, presence of such kind of threats with the business affect the operation to a
great extent and they cannot go to take the right kind of decision on right time.

(b) Identifying any safeguards to those threats identified
The threats related to independence of audit must be removed effective in order to
determine the success of the business and effectively complete the all audit related affairs. It
proves to be effective to carry out operation activities in the right manner and accordingly
complete the business related activities in an effectual manner. As per the identified threats,
management of audit team can go for necessary safeguards mentioned in the report. For this
purpose, safeguards are available for the business under which safeguards is created by
legislation, profession and regulation (Wilson, 2017). On the other hand, safeguards in the work
environment. For example, work environment must be supervised effectively so as to address
the issues in the right manner. For example, audit committee can select the personnel who do not
have any kind of contracts with the audit clients. This in turn they will be able to review the
performance of the business effectively and provide the right kind of remedy to resolve the
business situation.
Furthermore, strong internal control can be established by the companies like LTH
through which performance will be reviewed in accordance with the set practices. For this
purpose, internal audit will be conducted appropriately so as to reduce the issues to a great
extent. This proves to be effective in contributing the success of the business and accordingly
meet the long as well as short term objectives by deriving the valid outcome in the audit report
(Roy, 2015). Moreover, code of ethics of the entity must be followed in the company so as to
determine effective inspection of all business practices. Moreover, any person in the close
relationship of audit client should not be involved in the audit team .
ASSIGNMENT QUESTION 2
(a) Describing two business risk to MSL for planning the 2015 audit
The business refers to the factors which affect the management of corporation in
achieving the objectives on right time. This leads to cause business failure because of
involvement of varied kind of risk such as cash flow problems, over trading and increase in the
marketplace competition as well as decrease in the profitability. Though, the increased risk of the
business tends to support auditors to change their audit plan accordingly. In case they do not
change the plan of audit as per the risk plan then outcome varies to a great extent. For this
purpose, it is important to take the suitable action to address the business issue. Assessment of

business risk is helpful for auditors to prepare their report in the right manner which is supported
by the strong planning. For example, selection of audit methodology will be different in case of
higher business risk (Ratzinger-Sakel and Schönberger, 2015). On a critical note, auditors plan
for their audit in accordance with business risk which is supervised with the help of structured
procedure. The first step is of evaluation of the risk assessment of clients and then analysis is
done in context of business environment. This aids to provide information related to internal and
external aspect supporting or affecting the control procedure of corporation. According to the
given scenario, MSL is connected with clients across the world such as Australia, Europe, China
and US. Here, MSL is dealing with mining equipment which are sold on the basis of 2 years
warranty period. For this purpose, below mentioned two types of business risk can be faced at
the time of planning the 2015 audit- Litigation and claims-The MSL is operating its business and supplying the equipment
across the world for different parties. Here, customers might have fake claim related to
warranty as they get their equipment repaired through the personal agents. Owing to this,
it might be possible that marked claims might not be relevant with the business. For this
purpose detection risk occurred with the audit planning under which team must make
their detection part quite strong This contributes towards determining the long run
success of the business and accordingly derive higher rate of return for the business
(Audit Risk Model, 2013).
 Risk of fraud or theft-The equipment are sold outside of the countries as per the order
placed by the customers. For this purpose, it might be possible that company have wrong
estimation related to sales or profitability. However, the proper disclosure procedure
might have not been applied. Such kind of situation affect the audit procedure of the
business in an extensive manner. This would enable team of audit to consider the specific
business risk and accordingly take the corrective action for the resolution of ther business
issues. This proves to be effective in completing the operational activities in the right
manner and create the competitive edge of the business in the marketplace.
(b) Identifying the account balance that have impact directly by the audit risk
According to the identified risk business might suffer from two specific kind of risk such
as control and detection. Here, the control risk related the risk of material misstatement which

occur due to less control through business under the financial statement. For this purpose, it is
important to establish the appropriate control procedure applied on the internal business
operation. IN the absence of such kind of internal procedure, corporation might not be able to
detect the failure and take the corrective action for the successful completion of the business
activities. It shows that business risk related to fraud or theft has the involvement of audit risk as
the control one. However, small business organizations like MSL generally have greater level of
control risk under which financial statements are prepared in the right manner due to less
technical knowledge of financial and accounting (Audit Risks & Business Risks, 2013). This
tends to affect the business operation to a great extent and support corporation in deriving the
valid outcome for the purpose of accomplishing the long as well as short term objectives of the
company. In addition to this, risk related to detection also come under the audit risk through
which corporation need to integrate the business related activities and proper detection of fraud is
necessary. However, the operation of the current business is widespread through which risk of
detection increase with the rapid speed. For this purpose.
Moreover, some of the detection risk are always marked as the inherent limited of the
audit because of use of sampling for selecting the particular transaction. In this m manner,
business risk and audit risk come together which might have negative impact on the outcome of
audit report. For this purpose, audit committee must consider the outcome derived from the audit
report and incorporate the findings effectively to reach the end results effectively. Therefore,
varied kind of business risk are considered the audit team and accordingly appropriate planning
is done over the steps covered under the budget planning (Abbott and et. al., 2016). It facilitates
to show the valid results in the light of collected information and presenting the same in the right
manner through which corporation can determine its success in the long run with greater rate of
return. Thus, business risk of MSL have been considered so as to provide the corrective actions
for the issues which are occurring the organization. This leads to take the corrective action on
right time and accordingly opt suitable strategy to deal with such kind of abnormal situation.
CONCLUSION
The aforementioned report concludes that business risk must be considered before
planing the audit plan so as to covered the necessary step in the same manner and bring out valid
outcome for the successful operation of the business. It can also be concluded that association of

several kind of threats in the audit must be considered as per the situation and accordingly
safeguards should be provided for the successful completion of the audit report and deriving the
unbiased outcome for the entire business.

REFERENCES
Journals and books
Abbott, L.J. and et. al., 2016. Internal audit quality and financial reporting quality: The joint
importance of independence and competence. Journal of Accounting Research. 54(1).
pp.3-40.
Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from
going concern reporting decisions. Contemporary Accounting Research. 30(2). pp.579-
606.
Dogui, K., Boiral, O. and Heras‐Saizarbitoria, I., 2014. Audit fees and auditor independence:
The case of ISO 14001 certification. International Journal of Auditing. 18(1). pp.14-26.
Quick, R. and Warming‐Rasmussen, B., 2015. An Experimental Analysis of the Effects of Non‐
audit Services on Auditor Independence in Appearance in the European Union: Evidence
from Germany. Journal of International Financial Management & Accounting. 26(2).
pp.150-187.
Ratzinger-Sakel, N.V. and Schönberger, M.W., 2015. Restricting non-audit services in Europe–
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audit quality. Accounting in Europe. 12(1). pp.61-86.
Roy, M.N., 2015. Statutory Auditors' Independence in the Context of Corporate Accounting
Scandal: A Comparative Study of Enron and Satyam. IUP Journal of Accounting
Research & Audit Practices. 14(2). p.7.
Wilson, R., 2017. The impact of revolving door practice and policy on nonprofessional
investors’ perceptions of auditor independence. Accounting and Business Research, pp.1-
28.
Online
Audit Risk Model. 2013. [Online]. Available through:
<http://accounting-simplified.com/audit/risk-assessment/audit-risk.html>. [Accessed on
26th April 2017].
Audit Risks & Business Risks. 2013. [Online]. Available through: <http://accounting-
simplified.com/audit/risk-assessment/audit-risk-business-risk.html>. [Accessed on 26th
April 2017].