Identification of Threats and Its Evaluation in each Situation

Questions: 1. For each Situation, Identify and Evaluate any threats in relation to Auditor Independence.2.Identify any Safeguards to those threats Identified above Assignment. 3.In relation to the Purchasing of Equipment and Spare Parts, Describe two Business risks to MSL that Crampton and Hasaad will Consider in Planning the 2015 Audit.4.For each Business risk Identified in 1 describe a Specific Audit Risk that Could arise. Answers: 1.Identification of Threats and Its Evaluation in each situation Chris - Situation 1 The situation implies that there is the clear threat of promotion or advocacy. The presence of these threats is followed by the pressure which is imposed on the auditor to promote the company, its goods and its services to the public in lieu of which the auditor will have the financial or non financial interest in an organization. The same has been happened in this situation, the auditors were asked to promote the company in an open seminar otherwise the firm will lose the audit engagement. The evaluation will depend on the degree of the negative effect imposed on the integrity and objectivity coupled with the independence of the auditor. Chris - Situation 2 The situation implies that there is the threat of self interest. The self interest may be financial or non financial. It occurs when the company gives some extra benefits to maintain the healthy relationships and to get the audit done very smoothly. The same has happened in this situation as the auditor has got the complementary fourteen days package of the audit partner and family. The evaluation will depend on the acceptance of the complementary gift by the auditor. If its accepted with full spirit then the risk will be high. Michael Situation 3 The situation implies that the threat of familiarity or threat of intimidation exists. It occurs when the member of the audit team has direct or indirect relationship with the officers or directors of the company and there are chances of having the audit observation resolved due this relation. The same has happened in this situation where Michael father is the Finance Controller of the company. The evaluation will depend on nature of the relationship and trust therein. In this situation, risk is high. Annette Situation 4 The situation implies that there is threat of self review. This type of threat occurs when the same person has been selected and engaged as member of audit team who has done the services other than the audit towards the same company. The same has happened in this situation as Annette has performed the accounting and taxation work of the same company for two months. Therefore, there will be possibility that Annette might leave some mistakes or correct some mistakes during the audit knowing that this is hers fault. The evaluation of threat will depend on the presence of the mistakes and its materiality and its correction by the member of audit team (ICAEW,2015). 2.Safeguards for situation posing threats to independence The safeguards of maintaining the auditor independence has been defined in three parameters: From the acts, laws and rules and regulations thereinCreated within the audit firm andCreated by the audit client (Livine,2015) The safeguards under the said parameters are listed therein:Code of conduct shall be formulated for the auditors of the company detailing the work that shall be done keeping in consideration the maintenance of objectivity, integrity and independence.Requisite experience shall be given to the professionals or member of audit team before entering into the work area.Creating the provision where the non audit service to the client shall be restricted to the extent which will not hurt the independence of auditor.Creating the system where the member needs to disclose if he or she has relationship with any officers or employees of the company or has worked earlier with the company with different work other than audit. Governance system of the company shall be strong enough where the complementary benefits or any other kind of financial or non financial interest to be provided to the auditors of the company shall be prohibited 3.Business Risks In relation to the purchase of equipment made by the company, two business risks have been identified:First business risk is pertaining to the main equipment. The supplier company has not provided any provision for getting the equipment replaced if any manufacturing defect is come to the notice of the company or its customers within the given period of time or not provided any provision for warranty for the equipment. The company has only provided the warranty for spare parts and that too for one year. It shows that in case of purchase made in bulk and if customer returns the same on account of the manufacturing defect or improper working then the company will be in total loss clubbed with affecting the going concern presumption (Becker,2015).Second risk that the company will face is the loss of stock during the transportation from port to factory and from the UK, USA and China port to the Australia port. The risk is mainly due to the insufficient information about whether the loss o f stock if any occurs during the transit from overseas to port will be borne by the company or by the supplier. If it will have to be borne by the company then the company will again be in the situation of loss (EY, 2016 4.Risks in Audit The following risks have been identified for the business risks discussed above: First risk that pertains to the non provision of warranty is Detection risk. Detection risks occur when the auditor is not able to check and verify certain event or transactions due to non availability of relevant information. Further the risks will continue even after the auditor applies the substantive and compliance procedures to know the causes and effects of the event or transaction that has happened he is not able verify the same. The account balances that may be affected by this type of risk are provision made for warranty, provision made for replacement or provision for loss of stock (Becker,2015). Second risk that will be faced in the second situation is the risk of inherent. This risk implies that the company is facing with the inherent limitations which have been originated since its incorporation and the first purchase and have been continued till date. Due to the inherent limitation the company does not have any documents supporting that the loss of stock if any occurs during transit will be borne by the supplier. Thus, these types of limitations have generated inherent risk. The account balances may include the stock, debtors and creditors (Becker,2015) References: Becker E, (2015), Audit Risk vs. Business Risk, available at https://www.osyb.com/blog/small-business/audit-risk-vs-business-risk/ accessed on 25/04/2017. EY, (2016), Top 10 Business Risks, available at https://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf accessed on 26/04/2017. ICAEW, (2015), Reviewing Auditor Independence, available at https://www.icaew.com/-/media/corporate/files/technical/audit-and-assurance/audit/guidance-for-audit-committees/reviewing-auditor-independence.ashx accessed on 26/04/2017 Livine G, (2015), Threats to Auditor Independence and Possible Remedies, available on https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full accessed on 27/04/2017