HI6026 Auditing Theory: Risk Assessment, Independence, and Compliance

This report provides a comprehensive analysis of auditing theory and practice, focusing on risk assessment and auditor independence. It identifies and assesses audit threats related to auditor independence in various scenarios, including non-audit services, acceptance of benefits, and close relationships. Furthermore, it discusses safeguards to mitigate these threats, such as rotating audit partners and forming effective audit committees. The report also examines the risks involved in spare-parts inventory management, distinguishing between operational and strategic risks, and analyzes their impact on accounting balances. The document is contributed by a student and available on Desklib, a platform offering study tools for students.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Authors Note
Course ID

1AUDITING THEORY AND PRACTICE
Answer to question 1:
Part A:
Identification and assessment of audit threats associated to the auditor independence:
While performing the work of audits, the auditors are assigned with the
responsibilities of adhering with the accepted principles concerning audits. Independence of
the auditors need integrity and an objective approach relating to the process of the audit
(Arnold et al., 2013). The independence of auditor in general sense represents the
independence of the internal and external auditor having financial interest in the business that
is not audited.
The independence of auditor generally signifies that internal or the external auditor
performs the work of audit through reasonable means. Additionally, independence is referred
as integrity and objective approach in performing audit (Beil, 2013). The auditor should be
independent from the client company where the opinion of the audit is not influenced by the
association amid them. The auditors are anticipated to provide a bias free and true opinion of
the financial position of the company to the shareholders.
Situation 1:
Non-audit service is referred as services, which is provided to the client by auditors
which is beyond the scope. Non-audit services comprise of tax services, administration
service and simultaneously promotion of the client business (Belloc 2017). Non-audit
services mostly consist of additional income or any kind of non-monetary benefit.
Additionally, it is found that contributions in non-audit services results in impairment of
independence of auditor while providing services to the probable clients. An important

2AUDITING THEORY AND PRACTICE
consideration must be paid in assessing the effect of non-audit services. It is vital to consider
the material fact that quality of the audit of is the centre of issue that faces criticism from the
stakeholders together with the regulators.
Advocacy is another threat of auditor independence that should be considered is this
situation. Advocacy is defined as the state of affairs where the auditor state their opinion
however individual considers the quality of audit is jeopardised (Chuprunov, 2013). Ethics
would be jeopardized when the auditor provides service of advocacy and simultaneously
creates an impact on the auditor’s independence.
Situation 2:
Under this situation, it is noticed that the independence of auditor is facing threat
since the auditor considered taking monetary and non-monetary benefit other than the
prescribed fees for performing the work of audit. The auditor might consider taking the other
benefits, which is not specified in the agreement of audit or engagement, effecting the
auditor’s independence (Freeman, 2013). In the present circumstances, the client was
provided with the holiday package voucher for the member of the audit firm. If the auditor
accepts such kinds of offer, then there might arise a situation where the auditor can consider
taking the non-monetary benefits that ultimately creates an impact on the auditor’s
independence. If it is found that the auditor is constantly receiving additional benefits, then
threats to auditor’s independence is increased.
Situation 3:
Under these circumstances, it is noticed that the spouse of auditor together with parent
and siblings are closely related family members. Financial interest such as debt guarantee,
both short and long-term securities and ownership that is directly owned by the person
together with individuals or through intermediary, the participating and supervising person

3AUDITING THEORY AND PRACTICE
consider the decision controlling investment decision. As understood in the present situation
if Michael considers accepting the present offer for being the part of the audit, then it might
result in threat of auditor’s independence (Gul & Nurmazilah 2013).
Situation 4:
In the present situation, it is found that there is a close association amid the clients,
employees, officers and directors that is influenced with the risk associated with the business
environment of clients. Additionally, it is found that in large number of situation where the
auditors face threat of acting sympathetically with the clients. In the present situation, a close
relationship is found to be present which ultimately creates a greater degree of trust to
provide the client with the accurate data (Liu, 2015). Additionally, it is noticed that the
auditors possess the essential information of the clients since she had been the part of the
LTH prior to the month. The auditor is held accountable for executing the services, which
needs necessary tax computations after recording the accounting entries for the year ended
30th June 2015. Hence, it is not practicable for performing their work of audit.
Answer to part B:
Identification of safeguard for the above stated threats:
A large number of forbidden services that is provided to the clients and the auditor is
required to provide any service that usually jeopardize the auditor’s independence. In
addition to this, numerous measures that is required to be applied would strengthen the
independence of the auditor (Moeller, 2016). These are as follows;
a. An important measure that must be implemented for strengthening of the auditor
independence is rotating the auditing partner. This signifies that the rotating system of
auditing partner removes the hazard of excess knowledge and self-centeredness
because it would encourage the independent nature of the auditor without any form of

4AUDITING THEORY AND PRACTICE
considerable cost (Mohd, 2015). Additionally, institutional and historical knowledge
would be available to the team members, which would assist in maintaining higher
quality of audit.
b. It is vital to form an effective audit committee that would provide greater degree of
transparency. This would form an efficient tool of maintaining the independence of
auditor in an appropriate manner (Montgomery, 2013). It is necessary to have a highly
qualified audit team with necessary resources where they could gain the access of the
objectivity and independence originating from the upcoming result, which is made
accessible to the public.
c. An auditor that is independent must target in regulating and contributing towards the
quality of the audit and independency of audit similarly. The primary feature
surrounds the auditor is the efficiency in considering the independence particularly
from the political interference along with the audit profession (Moscardo, 2013).
Auditor must maintain the transparency, which would offer a true and fair view
involving the share of private data.
d. An auditor is under the obligation of following the ethical standards while performing
the audit by adhering to the Auditing Standards and Code of Ethics (Mustaq, 2013).
Auditor is required to follow the international set of higher quality of independence
together with the ethical standards, which would assist in eliminating the complexities
involved during audit process.

5AUDITING THEORY AND PRACTICE
Answer to question 2:
Answer to Part A:
Risk involved in spare-parts inventory:
In the present situation, the risk involved in management is explained that forms the
vital element that is used in the administration of the spare-parts however in large number of
circumstances; administration of the stock is poorly performed. In addition to this, business
organization should consider the risk of administering the factors where they assess the risk
along with the steps that is necessary for eliminating the risk to greater extent (Pickett, 2013).
There are few risks, which is identified by the business that includes commercial risk and
reputational risk and risk associated to health and safety.
It is noteworthy to denote that there prevails a risk of financial loss where it is noticed
that the business organizations have constantly been unsuccessful in taking into the
consideration of applying the techniques of assessing the risk related to spare parts (Porter et
al., 2015). During the planning of audit namely two audit related risk are related with the
business.
Operational risk and strategic risk forms the vital risk for the business in the present
study that needs to be considered. Risk that are not associated with the trade is known as
strategic risk and it becomes necessary for the business to determine appropriate selections of
products and market (Russell, 2013). Such risk considers the inventory management of the
spare parts where the organization manages the spare parts in an effective manner.
It is noticed that business generally make the use of auditing practices where the
organization can choose to spend on the purchase of products by using a policy that are
definite and possessing the formal characteristics.

6AUDITING THEORY AND PRACTICE
The organizations consider the appointment of the experienced managers that can
provide active ruling particularly on the regular business process. The organization shoulders
the responsibilities of selecting appropriate method of managing spare parts where
organization usually considers the process of standardization for financial management.
Business firms must be placing emphasis on investing more to administer the level of
stock and risk together with the probable loss. They must perform the extended amount of
downtime experience for losses that is related with the handling of risk by using large
quantities of purchase. It becomes vital for the business to apply the ad-hoc strategies in an
appropriate manner (Vallabhaneni, 2013). Additionally, when an organization is unable to
afford the lengthy downtime along with the investment in stock and simultaneously it is
necessary for a company in locating the best alternative strategy for administering the spare
parts in an effective manner. Hence, it is vital to assess the best alternative options of
mitigating or avoiding the probable losses in an effective manner.
Operational risk on the other hand is another risk that is linked with the operational
downtime. Furthermore, the risk is associated with the selected approach in respect of the
implementation level. This becomes vital for the organization in forming the strategic
management approach that fails to perform in an efficient manner. Business organization
must be applying the policy for maintaining stock during the decision making process for
standardization (Wells, 2014). The company manages the operational risk, which assures the
appropriate association of the approaches and administration of the inventory in an effective
manner. Administration of risk is necessary faced by the business, which makes sure in the
identification of the appropriate approaches used for correcting the practices.

7AUDITING THEORY AND PRACTICE
Answer to Part B:
Audit risk and impact on the accounting balance:
As noticed in the present situation it is found that the associate risk comprises of the
inherent risk. Furthermore, inherent risk arises due to the omission or error as noted in the
financial report owing to the factor other than the control failure. Additionally, risk arises
because of the nature of the transaction is multifaceted in nature and the state of affairs
requires higher level of judgement particularly for the financial projections (Russell, 2013).
There is numerous risk in association with the impact over the balance of stock and accounts
receivables. As it has been found currently that the there are some kinds of accounting works
that is to a greater extended associated with the inherent risk. One of the example is in regard
to the current situation is the risk that is related to the management of the stock. An assertion
in this regard can be bought forward by stating that it results an impact on the accounting
balance relating to the class of transactions.
Numerous kinds of associated risk are associated with the identification of the risks.
To be more precise there could be a certain circumstance where the auditor might in no
circumstances would successfully recognize the figure that is misstated in the books of
accounts.
It represents the situation when the commercial firm performs the analysis along with
the procedure of substantive test procedure for the upcoming prospect. In order to identify the
risk the auditor is expected to apply the method of identifying the balance of books of
accounts, which ultimately keeps a check on the work of accountant simultaneously.
In addition to this, it creates an impact on the balance of the account that is reliant on
the transaction along with the amount, which is involved in the transaction (Mustaq, 2013).
Hence, a large number of the accounts are susceptible to the nature, which aligns with the

8AUDITING THEORY AND PRACTICE
type of risk, and the risk associated with the purchase account, revenue account together with
sales account and inventory account.

9AUDITING THEORY AND PRACTICE
Reference List:
Arnold, D., Beauchamp, T., & Bowie, N. (2013). Ethical theory and business. Boston:
Pearson Education.
Beil, F. (2013). Revenue recognition. New York: Business Expert Press.
Belloc, H. (2017). On. Freeport, N.Y.: Books for Libraries Press.
Chuprunov, M. (2013). Auditing and GRC automation in SAP. Berlin: Springer.
Freeman, R. (2013). Governmental and nonprofit accounting. Boston: Pearson.
Gul, F., & Nurmazilah Mahzan. (2013) Auditing.
Liu, J. (2015). Study on the auditing theory of socialism with Chinese characteristics.
Moeller, R. (2016). Executive's guide to COSO internal controls.
Mohd. Faizal bin Jamaludin (2015). Principles of auditing & assurance services in Malaysia.
Montgomery, R. (2013). Auditing theory and practice volume 1. [Place of publication not
identified]: Theclassics Us.
Moscardo, G. (2013). Sustainability in Australian business. Milton, Qld.: John Wiley and
Sons Australia.
Mustaq, A. (2013). Auditing principles, techniques and practices. [Place of publication not
identified]: Regal Publications.
Pickett, K. (2013). The internal auditing handbook. Hoboken, N.J.: Wiley.
Porter, B., Simon, J., & Hatherly, D. (2015). Principles of external auditing. Chichester:
Wiley.

10AUDITING THEORY AND PRACTICE
Russell, J. (2013). The ASQ auditing handbook. Milwaukee, Wis.: ASQ Quality Press.
Vallabhaneni, S. (2013). Wiley CIA Exam Review 2013, Internal Audit Knowledge Elements.
New York: Wiley.
Wells, J. (2014). Principles of fraud examination. Hoboken, NJ: J. Wiley & Sons.