Paper Example on Threats to Auditor Independence

From the conversations that took place among the auditors and the newly introduced staff, we get to see there were various threats in relation the auditor independence. Auditor independence needs to be clean with no issues that concern bias and involvement in malpractices.

From the conversation with Annette, there is a threat inform of self-interest. In this kind of threat, an auditor or anyone in the auditing department tends to act in his or her interests which are displayed emotionally, financially, or psychologically (Gilad 2016, para.5). In this case, we see that Annette is determined to catch up with the friends and people that she used to work within the auditing department. This act shows that she might not deliver the services appropriately having in mind that she wants to satisfy her personal needs.

The other threat about auditor independence is advocacy. This threat comes up at a time when an auditor tends to behave as an advocate. The support is connected with the auditing clients' position rather than a situation where there is an unbiased attester. In the second conversation that involved Chris, we see that he was operating as an advocate and this would have posed a threat to the auditor independence. He did this by offering Geoff a trip to the Greek isles without getting permission from the management on the traveling costs and accommodation.

The threat on familiarity is also seen in the conversation that involved Michael. This kind of threat that comes up when on tends to believe in close relationships that exist among officials working in the audit department (Gilad 2016, para.5). Michael is happy that his father works in the top auditing team. Therefore, he develops a perception that he will do a good job.

The first conversation with Chris shows that there was some form of intimidation which is a threat to audit independence. Chris felt that CJ had done an exemplary auditing job on 30 June 2015 and hence they wanted to reappoint him with Geoff providing a speech on the same. In intimidation, one feels that he or she is overtly or covertly coerced to take part in a given activity by the auditing team (Gilad 2016. Para.10). Geoff was in this kind of state as he was supposed to make a speech for someone else to be reappointed instead of himself.

Safeguards to threats on audit independence.

After identifying the threats to the audit independence, there are safeguards which can be devised to ensure that they do not cause much harm to the parties involved. The organization should introduce a second party or consultant to review it and disclose it to the audit committee to reduce cases that have to with self-interest. The committee or consultant will be able to identify the self-interest threat and hence make Annette restate her roles.

Auditor independence threats from familiarity can be protected or handled by including a restriction on an auditor's relationship with another auditor who is on the audit committee. It entails refraining from assigning roles to auditors who are connected to clients or top accounts in the department. In fact, this can be dealt with by ensuring that the interview process rules out people who have relationships with customers and officials in the organization. The main thing here is to modify the selection process.

The organization should adopt good corporate governance mechanism to reduce cases of inferiority. The agency should ensure that it appoints the right persons to make speeches. It should be persons not connected to the auditing system. Using this style will make the other parties to be loyal and confident as there will be no issue or cases related to being converted concerning another person's appraisal.

The organization should come up with mandatory rotation rules to make people like Annette to maintain the purpose of the job. She has a perception that she will get connected to her old friends. Rotation should be done to reduce the chances of making friends and forgetting to handle the taxing and roles for which she is employed.

Assignment Question (2)

Business Risk

From the case study, we see that there are risks which might arise due to MSL's operations and provision of goods and services. There are two business risks which MSL can face, and this has to be catered for in the auditing done by Crampton and Hasaad. Business refers to the factors which can hinder the attainment of organization objectives. MSL will face a market risk that entails loss of customers and decline in product demand. These are risks which Crampton and Hasaad should consider planning for as they are the primary factors that drive business.

The company might face the loss of customers because they have to raise the cost of their products. The prices have to be increased as they obtain raw materials from Europe at higher prices which have to coincide with the profits that they target to make. Customers tend to choose an alternative product if they find out that MSL has raised their prices. The probability of losing customers, therefore, needs to be incorporated in the auditing.

The decline of product demands is another risk. This risk occurs when there is an alternative product or services invented by a competing organization (William and Arthur, 2002, p.203). It also happens when the price of the goods are increased to a level where the customers cannot afford them. It also takes place when the quality of the property and services goes down and hence customers lose taste. This risk is likely to happen in each financial year and should be included in the auditing.

Business Risk and Audit Risk

When a business risk occurs, there is always an accompanying audit risk. In our case, the first business risk was in the loss of customers. This risk of activity can lead to the rise of inherent risk on the auditing side. This kind of error that arises when there is a misstatement of financial statements from errors or omissions (Shelton, Koehn, and Sinason 2009, p.15). During auditing, the prices of goods and services might be entered wrongly, and this means that the following financial year will have prices either high or low. The will lose customers if the prices go high. The principal account balances that will be impacted in this case include the cost of services provided to customers outside the warranty period.

The decline in product demand will lead to control of risks. Control risks are the auditing risks that occur when one of the management fails to apply the appropriate controls in operations of the company at hand. Having frequent checks and controls reduces errors and misstatement of financial records (Shelton, Koehn, and Sinason 2009, p.15). Lack of proper controls leads to misreporting of prices of goods and services highly and hence their demands will go down. The principal account balances to be affected in this case are the reimbursements for travel and accommodation costs for mechanics.

References

Gilad, L. 2016, Threats to Auditor Independence and Possible Remedies, Auditing Best Practice. [Online]. Available at: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full#s4 21 Apr. 2017

Parker, A. 2016, 6 key threats to auditor independence, In the Black, Leadership Strategy. [Online] Available at: https://www.intheblack.com/articles/2015/01/06/6-key-threats-to-auditor-independence 21 Apr. 2017

Shelton, S.W., Koehn, J. L., and Sinason, D. 2009, Influence of Business Risk Assessment on auditors planned audit procedures, The DreamCatchers, LLC. Vol.13 Issue 2

William T. A., and Arthur S. 2002, Threats and Safeguards in the Determination of Auditor Independence, 80 Wash. U. L. Q. 519. [Online]. Available at: http://openscholarship.wustl.edu/law_lawreview/vol80/iss2/2 21 Apr. 2017