Auditing and Assurance Services: Threats to Auditor Independence

This report analyzes potential threats to auditor independence in two distinct scenarios. The first situation examines whether an auditor's advice on selecting a waste disposal contractor compromises independence, concluding it only becomes a threat if it creates a self-interest. The second scenario identifies intimidation and self-interest threats arising from a client linking audit fees to favorable results and offering a Europe trip in exchange for overlooking inventory misstatements, referencing APES 110 guidelines on gifts and hospitality. The report emphasizes the importance of maintaining auditor independence to ensure the integrity of financial statement audits.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ASSURANCE SERVICES
Question 2
Situation 1
In the audit profession, five types of threat to the audit independence can be seen. The
Self-interest threat of audit independence occurs when the auditor has financial interest in the
audit client. In case the auditor use the results of previous audit judgment, the Self-review threat
of audit independence occurs. In case the auditors take part in the promotion of client’s business,
Advocacy threat of audit independence occurs. Any long-standing relationship between the
auditors and audit creates Familiarity threat of audit independence. In case the auditors do not
perform their due duty in the presence of the pressure from the client, the occurrence of
Intimidation threat is there (Chambers and Odar 2015).
Inspecting the financial statements of the business organizations in order to find material
misstatements is the prime responsibility of the business organizations. From the application of
the above-discussed rule of the threat of audit independence in the provided situation of Enid
Blyton, it needs to be mentioned that there is not any violation of audit rules and regulations that
can lead to the occurrence of risk of audit independence. However, in case Enid Blyton provides
his view or suggestion to the originations so that they can be able to select the appropriate
contractor for the disposal of waste, there will be chance to occur the threat of audit
independence. Enid Blyton would be charged for providing non-assurance services in case he
provides the suggestion to the company. It would indicate the presence of any interest of the
auditor in the client and thus, it would create the Self-interest threat of audit independence
(Cohen and Simnett 2014).

2AUDITING AND ASSURANCE SERVICES
Situation 2
From the provided scenario, it can be seen that John Dooley has not made the full
payment of the auditors and provides the situation that he would make the payment of the rest
amount after observing the progress of the audit process as he needs to be satisfied with the
result of the audit operations by Jean Douglas. In addition, the CEO has also informed the
auditors about the auditor selection process for the next year. This situation indicates towards the
aspect that the CEO is trying to create pressure on the auditor by making the audit fee dependent
on the results of the audit operation. For this reason, there will be creation Intimidation threat of
audit independence on the auditors (Cohen and Simnett 2014).
It can also be observed from the provided situation that the company has not followed the
required accounting standard for carrying out the accounting operations related to the inventory
and this aspect can lead to the development of material misstatements in the financial statements.
Apart from this, the company has indicated about a free Europe trip for the auditors after the
successful completion of the audit operations by ignoring the material misstatements in the
inventory. As per APES 110, Section 260, Gifts and Hospitality, the auditors are barred from
taking any gifts from the audit client (apesb.org.au 2018). In case the auditor accepts the gift, this
regulation will be violated along the occurrence of self-interest threat of audit independence.

3AUDITING AND ASSURANCE SERVICES
References
Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online] Available
at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 23
May 2018].
Chambers, A.D. and Odar, M., 2015. A new vision for internal audit. Managerial Auditing
Journal, 30(1), pp.34-55.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory, 34(1), pp.59-74.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance
services. McGraw-Hill.