Self- Review Threat
Table representing an analysis of specified situations:
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Situation
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(a) Threat
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Justification
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(b) Safeguard
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(c) Assessment of audit independence
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1
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Self- Review Threat
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The specified threat arises when auditor audit his own work of the work done by his Partner of a colleague (Rahman, 2013). As per the views of Preiato, Brown and Tarca, (2015), it can be said that a threat of bias arise in situations with an auditor has to review the work done by him or his Partner. In the present case, as the trial balance is prepared by the firm and the same is being audited by it. Thus these circumstances specify the existence of self-review threat.
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The following safeguards are available:
· It must be assured that the person who has prepared the accounts should not be Part of audit team (Camfferman and Zeff, 2015).
· The independence issue must be discussed with the management as well as audit committee (Blay and Geiger, 2013).
· According to the study of Mo, Rui and Wu (2015), an additional qualified individual should be evolved in the audit team so that review could be done more appropriately or guidance relating to same can be received.
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In the present possibility of achieving audit, independence is very rare as the whole accounts are prepared by the same audit firm and a threat to independence will exist even after adopting safeguards. Thus efforts should be made to review the accounts by the independent and qualified individual so that appropriate opinion could be provided.
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2
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Self- Interest Threat
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This threat arises when auditor acts in his own personal interest rather than organisation interest (Boyle, DeZoort and Hermanson, 2015). The same conditions might occur as a result of the financial or other interest of a professional accountant. In the present scenario as Daniel Jackson who is Part of audit team is offered a job in Jupiter Ltd; the organisation of which he is currently doing an audit. Due to this offer, it is possible that he might take a decision after considering the offer rather than in accordance with accounting principles.
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In the present case, the safeguard for mitigating the risk arising due to specified threat is to remove Daniel Jackson from audit team as now the same is offered a job at Jupiter Ltd. Self Interest threat can also be mitigated through performing an independent review of any significant judgements made by that individual due to which the threat arises while on engagement (McKee, 2014).
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Audit independence can be achieved in the present case if the decisions are taken in accordance with professional judgements. Thus the Part of the audit which has been conducted by Jackson must be reviewed again in detail for assuring the same.
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3
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Self-Interest Threat
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Self-Interest Threat emerges in cases such as when financial or any other interest affects the judgement or inappropriately influences the decision of auditor or his behaviour (Contessotto and Moroney, 2014). In present situation self- interest threat exist as Fruit Juices Ltd. is one of the major clients of the auditor, and same has consulted for his engagement for next year in case he performs audit according to his specifications. Thus it can be observed that self-interest threat exists in above conditions.
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The safeguard which can be applied in the present situation is to discuss the importance of independence with the management; so that they understand that audit is done in accordance with standards only. As per the views of Contessotto and Moroney, (2014) the threat can also be mitigated by applying profession judgement for taking appropriate decision. An additional chartered accounted can also be appointed who did not take Part in the assurance engagement for the work done or advice for changes if any required in present circumstances (Abdullatif, 2013).
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In the present case, audit independence can be achieved if the management understands the importance of auditor’s independence. In the present scenario, the auditor should make understand the management that opinion is made after attaining appropriate adequate evidence the same is procured after assessing appropriate details from staff. The same can be done only by asking them an appropriate question relating to policies and procedure of company.
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4
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Relationship Threat
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A nearby peculiar relationship with a member of an audit team or employee of a company can be the reason for the existence of intimidation or relationship threat (Bhattacharjee, Maletta and Moreno, 2015). The same threat exists as the audit team member might have sympathy towards the employee with whom he is having a relationship; due to this reason, the possibility exists that auditor might not conduct appropriately. As per the facts available in this situation a long time friend of audit manager is going to be appointed as finance director of the organisation of which he is an auditor. Thus, in the present case, the assumption might be taken that the data provided by finance director is correct; and no detail verification of same is done by the auditor. The same might be a reason for the inappropriate opinion of the auditor.
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An individual professional can be appointed in for reviewing the data provided by relative who is employed in the organisation. Another safeguard which might be applied is detailed verification for ascertaining whether any material misstatements exist in provided transactions or not (Ittner and Oyon, 2014).
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Auditor independence can be achieved through reviewing the work done by the financial director to access whether it affect the judgement of auditors or not. In case the audit manager Bruce Li assesses the work of finance director, auditor independence will not be achieved.
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5
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Advocacy Threat
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As per the views of William, Glover and Prawitt, (2016), advocacy Threat arises when the professional accountant has to act as an advocate or has to provide opinion rather than an unbiased attester. In the present case the auditor has to represent Super Trooper Ltd. at Superannuation Complaints Tribunal; thus the decision will be according to facts available in financial statements; thus the same might affect the decision and judgements of auditor while conducting an audit.
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The proposal received by the auditor for representing organisation should be refused so that independent opinion can be formed. The other safeguard which might be applied are:
· Using professional who are not a member of audit team while providing another service (Clinton, Pinello and Skaife, 2014).
· Obtaining appropriate advice from an external tax profession (Thibodeau and Freier, 2014).
· In case the tax professional who was involved in providing other service has done auditing also than his Part should be reviewed again in detail (Choi, Hogan and Lee 2013).
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In the present case, auditor independence cannot be achieved because either he can act an independent auditor or can represent the organisation to the best extent possible. The reason behind the same is that possibility might exist that he has to interpret data for winning the case for the company for the interest of company but the same cannot be done by an independent auditor as he has to see the interest of stakeholders and other investors also before taking such decision.
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ISA 240
International Standard on Auditing (ISA) 240 is related to the auditor’s responsibility of relating to fraud in an audit of financial statements (Knechel, and Salterio, 2016.). As per the study of Nickell and Roberts, (2014) the standard specifies that how ISA 315 and ISA 330 are to be applied for assessment of the risk of material misstatement due to fraud. Misstatement can arise in financial statements from either fraud or error. The decisive factor that whether the misstatement is fraud or errors depends on the conclusion that whether the misstatements available in financial records are intentional or unintentional. It can be said that fraud is a broad concept in legal terms relating to the purpose of ISA’s the auditor is concerned with the reason behind material misstatements of financial statements (Soliman and Ragab, 2014). The two misstatements with which auditor are concerned are material misstatement relating to fraudulent financial reporting and misstatement resulting from misappropriation of assets.
Activities which are Part of Auditor’s responsibilities relating to fraud under ISA are as follows:
- Assuring whether all material fraud occurrences are detected.
- The standard specifies that auditor is responsible for maintaining professional scepticism throughout the audit. For the same, he should consider the potential of management for overriding of control and assess the facts that whether audit procedures are effective for detecting error or detecting fraud or not.
- Respond in an appropriate manner to fraud identified during the audit.
- Discussion with staff relating to susceptible areas in the financial statement where material misstatement might arise due to fraud comprising the reason how fraud might occur.
- Questioning and discussion with management within the entity for ascertaining whether they have details relating to actual, suspected or alleged fraud existing in the entity.
- Procuring sufficient appropriate audit evidence for the purpose of assuring that all potential transactions relating to potential fraud have been provided and their impact on financial statements have also been considered.
- Ascertaining whether management has appropriate skills for detecting and preventing fraud. Same can be done through conducting appropriate industry seminars or considering the transactions which have been found in these areas through past experience with fraud.
- Attaining a copy of client’s code of ethics document and assuring that employees have access to it.
- Ascertaining whether the accounting procedures and policies selected by entity might be indicating of fraud.
Activities which are not Part of Auditor’s responsibilities relating to fraud under ISA are as follows:
- Evaluating the appropriateness of journal entries accounted in general ledger and other adjustments made while organising financial statements of the organisation.
From above analysis, it can be said that only 7th point is not auditor’s responsibility according to IAS 240. The primary responsibility of auditor according to this standard is to prevention and detection of fraud relating to the governance of the entity and management. It is necessary for management to oversight those charged with governance and develop a strong emphasis on fraud assessment. It evolves a commitment to developing a culture of honesty and ethical behaviour which can be reinforced by assessing the management and internal control of the organisation. The same comprises considering the potential available for overriding control and inappropriate influence over the financial reporting procedures. All the specified responsibilities are as per the ISA 240 except the seventh point as it is not related to detection and assessment of fraud and error in the financial statement. However, it is also the responsibility of auditor but not as per provision/ of this standard.
Part C. 1
The two accounts at risk of material misstatement are as follows:
Accounts receivables or trade receivable
The risk of material misstatement in the account of trade receivables is high because managers are able to make adjustment as they are offering stock on sale or return basis. In this offer, debtors are allowed to have credit period of 90 days and can return the products up to 30 days before the payment is due. In this, it will not be certain how much debtors owes to the company even after two months of sales through which figures of sales and account receivables can be easily manipulated. For example, dummy transaction of sales can be recorded to uplift profits at the end of financial year, and same can be shown as sales return after two months.
Self- Interest Threat
Purchase account
Due to increasing fluctuations in international currency, there is the possibility of material misstatement in this accounts. Case facts of the company show that timber for production is obtained from offshore sources due to which there can be variation in actual price or recorded accounting price. This accounting fact can be easily manipulated as there is continuous variation in currency value (Badolato, Donelson and Ege, 2014).
The issue relating to prior year’s figure:
ISA 510 deals in cases where initial audit engagements have been made. It provides assistance relation to attaining sufficient appropriate evidence regarding misstatements that are available in opening balance of current period financial statements (Soliman and Ragab, 2014). In case the audit of the previous year has been conducted by another auditor than predecessor auditor’s working paper must be reviewed appropriately in order to obtain evidence relating to opening balances. The same should be appropriately conducted in the present case. Thus it can be analysed that if an audit of financial statements is conducted by another auditor in predecessor period than additional considerations as provided above are to be made for ascertaining whether any material misstatement exist or not or whether the audit was conducted appropriately or not.
The three factors which might question the going concern assumption of Amistad Furniture are:
AUS 708 ‘Going Concern’ provides assistance to auditors in fulfilling their responsibilities regarding the appropriateness of management in the application of going concern assumption while preparing of financial statements. The major areas which should be audited for same comprise nature of the relationship with key financiers; appropriate regional factors; internal organisational and other factors as marketing and production strategies; financial parameters etc.
In the present case the three factors are:
- The inability of the company to pass on timber and labour prices in order to increase the customers.
- Not able to compile all the required conditions of the bank for the purpose of passing the loan. As $100000 sales are required for obtaining the same but the company has $350000 annual sales; thus the criteria is not completed for availing the loan.
- The decrease in the trend of gross profit and the situation has turned that miserable that net profits margin for the year 2016 have decreased to a level where losses have incurred.
Effect on audit plan due to disregarding the management’s assessment of going concern assumption:
AUS provides guidance to auditors in accomplishing their obligations and attaining their objectives and assistance in the application of going concern basis assumption applied by management while preparing financial statements. The going concern assumption has been specified in AAS6/ AASB 1001”Accounting Policies”. AUS 708 deals with the specification relating to going concern i.e. the consideration that should be considered during the period for assessing the going concern assumption.
The following additional considerations will be applied by the auditor in case it has disregarded the management’s assessment of going concern assumption:
- In case going concern problems have been identified in light of mitigating factors, the auditor has to consider and discuss with management regarding the future plans.
- Analysis of cash flow and other forecast is to be done accordance with AUS 516 “Audit of Accounting Estimates” and AUS 804 “The Audit of Prospective Financial Information”.
- Additional procedures can be employed for the attainment of sufficient appropriate evidence so that fair assumption relating to going concern can be made.
- Additional significance will be provided on additional procedures and possibility is also available that procedures might be extended or modified according to the requirement of available circumstances.
Part C. 2
Internal control issue at Amistad:
Internal control can be said as a procedure of assuring achievement of an organisation’s objective in operational efficiency, effectiveness and compliance with law regulations and policies. In the present case, the marketing manager is provided authority to initiate and approve the invoicing of sales as well as issue credit note for these customers when returns are being made. Thus the overall control of these related activities is on one person, and in these circumstances, it is necessary to verify in detail that whether internal control exist or not.
Self-Interest Threat
Fraud risk factors at Amistad:
- A substantial amount of loss can be incurred in asset due to fraud, in case appropriate measures are not taken timely than the same might also result in the closure of organisation. In present scenario the two fraud risk factors are
- Debtors: It has been observed that levels of debtors were also above budget figures, but the same has returned to the normal level at the end of the year. Thus it is to be assessed that whether the same has been done with the planning of management or any other reason exists behind the same.
- Sales: As no significant change has been observed in gross margin ratio even after a major change in sales. It might be possible that reasonable reason is existing behind the same, but the same must be verified in detail to ascertain whether any misstatement exists on this account or not.
Account balance at risk and its assertions
By considering the present case facts, it can be said that account balance of revenue is at risk. It is because; the managerial person is in a position to control and manipulate accounting facts which will enhance the scope of inherent risk. Due to this fact, two assertion at risk will be completeness and accuracy. It is because; entire control is with the single individual so disclosure made by them might be not completed and manipulated as they can also make modification in the associated source document (Mihret and Grant, 2015).
Audit procedure to address potential misstatement
ISA 330 deals with auditor’s response with assessed risk. The scope of the standard includes auditor’s responsibility to design and application of responses for the risk relating to material misstatement which has been identified and observed by the auditor in accordance with ISA 315 in the audit of the financial statement (Ionescu, 2014).
In the present scenario, as Debtors and Sales are two areas in which possibility relating to misstatement exist; thus for reducing the risk to an acceptable low level, the auditor should emphasise team to maintain professional scepticism in gathering and evaluating evidence relating to these two accounts. Additionally, general changes or extension in existing audit procedure can be applied in these two accounts or application of procedures such as unpredictability in the selection of further audit procedure can also be done (Songini, Gnan and Malmi, 2013). These considerations will provide a significant bearing on auditor’s general approach and he will able to provide appropriate opinion on the financial statement.
References
Abdullatif, M., 2013. Fraud risk factors and audit programme modifications: Evidence from Jordan. Australasian Accounting Business & Finance Journal. 7(1),Pp.59.
Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2), Pp.208-230.
Bhattacharjee, S., Maletta, M.J. and Moreno, K.K., 2015. The Role of Account Subjectivity and Risk of Material Misstatement on Auditors’ Internal Audit Reliance Judgments. Accounting Horizons, 30(2). Pp.225-238.
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.
Boyle, D.M., DeZoort, F.T. and Hermanson, D.R. 2015. The effect of alternative fraud model use on auditors’ fraud risk judgments. Journal of Accounting and Public Policy. 34(6), Pp.578-596.
Camfferman, K. and Zeff, S.A.. 2015. Aiming for global accounting standards. Oxford University Press, USA.
Choi, J.H., Choi, S., Hogan, C.E. and Lee, J. 2013. The effect of human resource investment in internal control on the disclosure of internal control weaknesses. Auditing: A Journal of Practice & Theory. 32(4). Pp.169-199.
Clinton, S.B., Pinello, A.S. and Skaife, H.A. 2014. The implications of ineffective internal control and SOX 404 reporting for financial analysts. Journal of Accounting and Public Policy. 33(4), Pp.303-327.
Contessotto, C. and Moroney, R. 2014. The association between audit committee effectiveness and audit risk. Accounting & Finance,.54(2).Pp.393-418.
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Ittner, C.D. and Oyon, D., 2014. The internal organization of enterprise risk management.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.
McKee, T.E., 2014. Evaluating financial fraud risk during audit planning. The CPA Journal, 84(10), P.28.
Mihret, D.G. and Grant, B., 2015. The role of internal auditing in corporate governance: a Foucauldian analysis.
Mo, P.L., Rui, O.M. and Wu, X., 2015. Auditors’ going Concern Reporting in the pre-and post-bankruptcy Law Eras: Chinese Affiliates of Big 4 Versus Local Auditors. The International Journal of Accounting, 50(1), pp.1-30.
Nickell, E.B. and Roberts, R.W., 2014. Organisational legitimacy, conflict, and hypocrisy: An alternative view of the role of internal auditing. Critical Perspectives on Accounting, 25(3).,Pp.217-221.
Preiato, J., Brown, P. and Tarca, A. 2015. A comparison of between?country measures of legal setting and enforcement of accounting standards. Journal of Business Finance & Accounting, 42(1-2),. Pp.1-50.
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Soliman, M.M. and Ragab, A.A., 2014. Audit committee effectiveness, audit quality and earnings management: an empirical study of the listed companies in Egypt. Research Journal of Finance and Accounting. 5(2).Pp.155-166.
Songini, L., Gnan, L. and Malmi, T., 2013. The role and impact of accounting in family business. Journal of Family Business Strategy, 4(2), Pp.71-83.
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William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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