Threats To Auditors Independence

Question: Discuss about the Threats To Auditors Independence. Answer: Threat of Intimidation and Advocacy In this case, Clarke Johnson (auditor firm) is politely threatened by its client Luxury Travel Holidays (LTH) that if Geoff (audit partner of CJ) does not promote its business at an upcoming seminar, then CJ will not be reappointed as the auditor. This is a clear threat of intimidation because LTH is imposing a forced reappointment cancellation to deprive CJ to undertake subsequent audits and hence hurting its revenues indirectly. If CJ agrees to the terms of LTH, then this poses a serious threat to its independence as the auditor of LTH. Firstly, providing such non-audit services is not justifiable, and if Geoff does promote LTH, then it leads to advocacy threat (Flood, 2017). Consequences Due to this risk the audit firm will be discouraged from acting unbiasedly due to perceived or actual pressures, including efforts to exercise unwarranted influence over CJ and Geoff. Moreover, if Geoff agrees to promote LTHs business as unduly asked by the client, then there will be a threat that CJ and Geoff will expand LTHs business to the extent that their objectivity gets compromised. Shareholders will find it difficult to trust the audit reports, and CJs reputation of an independent auditor will be at stake (Flood, 2017). Safeguards Refuse to accept the offer Refuse to accept reappointment until the condition is not eliminated Refuse to stand for reappointment Threat of Self-Interest LTHs offer of free expensive holiday package to Geoff and another member of the team gives birth to a threat of self-interest to objectivity as the gift might influence the judgment of CJ in favor of LTH. In assessing how significance is this threat, issues like the monetary value and nature of gift, and the hospitality offered to Geoff and another member, plus the motive behind the proposal needs to be considered (Gray and Manson, 2007). Consequences The threat in the current scenario of any financial or another type of interest is likely to sway the professional accountants objectivity, judgment and behaviour inappropriately. LTHs intention behind such expensive gifts is also made explicit by the company. They want the next year audit to be smooth. This is indirect bribery which if accepted by CJ which impair the objectivity of their audit report. This is because receiving the gifts would form a familiarity which will lead to self-interest threat (Gray and Manson, 2007). Safeguards: Refusing to accept the holiday package apparently Ask LTH not to extend such gifts and hospitality treatments in future Creating a policy that will restrict any member of the audit team to receive any kind of unreasonable gifts and will restrict the client to extend any such absurd Threat of Self-Interest, Familiarity and Intimidation Close personal ties among audit team members and an employee or owner of the client firm is likely to result in threats of self-interest, familiarity and intimidation to objectivity as that member of the audit team will not be appropriately skeptical of, and is likely to be sympathetic toward the employee with whom he/she has a relation. In assessing the significance of the threat present in the case, the seniority of the audit team member and of the clients employee must be considered, because the threat becomes more significant with senior people involved as they have greater influence over these things (Livne, 2011). In the present case, Michael, a fresh accountant who is being contemplated to be on the audit team is related to the client company because his father is the financial controller of LTH. Consequences - The threat of self-interest and familiarity will crop up here in the sense that Michael is not likely to objectively review the accounts because his father is employed at a senior position in the company and that too in the finance department. If any inconsistency with the accounts is found, his fathers job may be at stake. There is also a change that LTH may try to influence Michaels judgment by threatening his father about the future of his job. This will give rise of the threat of intimidation, and all these are likely to induce Michael into giving a favourable report for LTH. He may even try to influence other members of the audit team to do the same (Williams, 2016). Safeguards: Michael must not be made part of the audit team He may help with other accounts work but not the core audit of LTH If Michael is involved in the audit team, then his work should be reviewed to identify discrepancy if any Threat of Complacency, Familiarity, Self-Review and Social Bonding When the auditor becomes too trusting or sympathetic of the client due to a close relationship with the management and employees, then social bonding and familiarity threat is likely to creep in. Familiarity leads to complacency wherein the auditor does not practice scepticism and is too sure that everything with the clients account is accurate. Moreover, when an auditor has to re-assess work done by him/her the threat of self-review emerges because he/she again becomes complacent and does not practice objectivity in reviewing own work (Basu, 2010). The present situation also involves the same case as Annette has worked with LTH and has close relationships with people in the client company. Consequences Due to her close relationships with the client firm and its employees, Annette is likely to be sympathetic to LTHs interests and may be very accepting of their work. Moreover, as she was working with the company till a month ago helping in tax calculations and accounting entries, there is a high probability of the existence of self-review and complacency threat. Resultantly, she may overlook rechecking the tax calculations and account entries, thereby impair her objectivity as an auditor (ACCA, 2012). Safeguards: If Annette is involved in the audit team, then re-checking her work because it is bound to have discrepancies Instructing other audit team members to practice extra scepticism and not become complacent. Cross-checking Annettes last transactions with LTH to ensure she does not have any financial interest in the company anymore and not receiving any unreasonable perks. Business Risks Inherent risks and control risks are the two main business risks that Crampton and Hassan would like to consider in planning the 2015 audit. On purchase of equipment, it is possible that the return on such a huge investment may not seem justifiable at the end of the payback period. Moreover, the equipment might lose its utility after a few years and result in impairment due to non-utilization. This constitutes the inherent risk. Control risk relates to the loss arising out of the inadequacies and incompetence of the companys internal system to effectively manage and protect the assets (Longenecker et al., 2013). Audit Risks Relating to the Business Risks The audit risk pertaining to internal risks is the misstatement of the asset in books of account. It is crucial to identify that the assets are recorded on correct cost basis or not. It must be ensured that the company has capitalized all costs pertaining to the acquisition and continuing use of equipment. Moreover, another audit risk relating to inherent risk is recognition of the complexity of book value computations (Saita, 2010). As far as audit risk in relation to control risk is concerned, it must be made sure that the asset management has been allocated to the correct person and there is sufficient infrastructural backup to support the asset and prevent its wear and tear. References ACCA. 2012. A question of ethics. [pdf]. Available through: https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012s/sa_nov12_p7_ethics.pdf. [Accessed on 22nd April 2017]. Basu., 2010. Fundamentals of Auditing. Pearson Education. Flood, M. J., 2017. Wiley Practitioner's Guide to GAAS 2017: Covering All SASs, SSAEs, SSARSs, and Interpretations. John Wiley Sons. Gray, I. and Manson, S., 2007. The Audit Process: Principles, Practice and Cases. Cengage Learning EMEA. Livne, G., 2011. Threats to Auditor Independence and Possible Remedies. [Online]. Available through: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full#s4. [Accessed on 22nd April 2017]. Longenecker, G. J., Petty, W., Palich, E. L. and Hoy, F., 2013. Small Business Management. Cengage Learning. Saita, F., 2010. Value at Risk and Bank Capital Management: Risk Adjusted Performances, Capital Management and Capital Allocation Decision Making. Academic Press. Williams, T. L., 2016. The Impact of Disclosing Auditor Independence and Tenure on Non-professional Investor Judgment and Decision-making.