This question is making focus on the independence of the auditor which has been considered as the utmost part while an auditor is performing his/her duty. The audit manager of Clarke & Johnson (CJI) required to check the professional part with respect engagement to audit work of Luxury Travel Holidays LTD (LTH) for the subsequent years based on the draft plan given by the audit partner Mr. Geoff. The company has been offered to take audit for the financial year ending on 30 June 2015. The company was also the auditor of LTH for the previous financial year. For the audit of current financial year, the audit partner M. Geoff has selected two persons namely Michael and Annette.
When the audit manager has made conversation with the CEO of the company Mr. Chris and in reply he got some positive view. Mr. Chris stated that the board of directors of the company is impressed with the audit work of the firm for the previous financial year and they are impressed with the work of Audit partner Mr. Geoff as a consequence they have invited him to give a speech about the operational management of LTH in its next travel agency seminar and also required to help the organization on how to make promotion of the business which attract the more and more investors. He also stated that if Mr. Geoff is not able to accept the condition then the company will no more do the business with the firm. Additionally Mr. Chris has also offered to audit manager that; the company is impressed with the work of audit and as a consequence they would like to present a complimentary 14 days tour holiday package for family members of audit manager and audit partner both which include all types of expenses.
When audit manager had made discussion with Michael; he comes to know that he is son of financial controller of LTH who is the main person responsible for preparation of financial report of LTH. The conversation with Annette revealed that she was earlier engaged with LTH to help the company in calculation of tax and making accounting entries in relation to tax matter, and she had also stated that she is exited for this audit work and she is thinking that there would be less requirement of audit work in the tax part as she had already made enough work in that area.
So, based on the above information; here the audit manager is required to consider the professional code of ethics which requires to maintain the integrity and audit independence in order to maintain the quality of the audit, and in order to qualify for audit work; they needs to make some changes in the audit plan. First, the offer made by the CEO of the company for making promotion of the business with the help of speech of audit partner and 14 days holiday tour package are not acceptable according to the ethical code of independence of the auditor where it is the responsibility of the auditor to maintain such part at stage of audit. Michael cannot be part of the audit team and previous work of Annette with LTH should not make any compromization in audit work.
In order to make the audit without making compromization in audit quality following safeguards can be taken by the audit manager:
Here in the first situation the CEO of the company has asked for help of audit partner Mr. Geoff whose work being appreciated by the management of the company and as a result being invited to give speech in the next travel agency seminar. So; they require the audit partner to give speech on how to make business promotion on new project, which has been considered as management consultancy service and as per ethical code of audit; and auditor cannot engaged in any other business service while he is performing the work of audit; so in that case; it would be advisable for the audit partner to restrict his speech only up to the matter discussion related to audit, and offer of CEO cannot be accepted which compromising the audit independence.
In another situation; the CEO of the company has made offered to provide free 14 days tour packages to the families of audit partner and audit manager which includes all type of expenses. No executive would need to be compelled to select an audit firm that they accept has a material clash with the organization and its interests. What’s more, if there are just two reasonable contenders, you will take some real time to contemplate before cutting off your ties with the occupant firm because of the hazard that the new firm may build up an independence issue or generally not work out, which would bias the whole organization. So; when the audit manager is accepting the free tour package from company the audit integrity and audit independence is going to compromise which is not an ethical task expected from the auditor; so this offer should not be accepted.
In third situation; Michael is son of the financial controller of LTH, so per the qualification norms for an auditor; the audit firm or any partner or any employee of the firm should not be in the employment with the client company whose audit to be conduct. So; Michael cannot become member of audit team which makes disqualify CJ to become the auditor of the company.
In the last situation, Annette who has already perform the work with LTH in helping the working calculation of tax and journal entries part of that working, should not be considered while making planning for the audit of financial year 2015. So; there is full area audit required in tax part and this task cannot be assigned to Annette which makes compromization in the integrity of audit work. So; being as independent auditor the work of audit can be performed with the above mentioned changes in the proposed plan of audit from audit partner.
Here in this question; being as audit senior of Crampton and Hasaad; making planning for audit work of Mining Supplies Limited (MSL) for the financial year ending on 30 June 2015. The company is engaged in the business of selling of equipments and spare parts being imported from different countries. The company is importing such equipments and spare parts based on the order of the customer which mostly customized and special as per demand of the customers. the company is also providing two years of warranty for each equipment and spare part sold for which the company has entered into an agreement with mobile mechanics who travel to all around the place of customers and providing maintenance service; and for the customers who have outdated warranty period being charged as per the contract policy of the company.
Here in this part of the questions two business risks are required to be identified which is part of the equipment purchasing method being set in the organization.
Here the company is making import of the equipments and spare parts mostly from the other countries. Where there are many types of business risks are involved. As worldwide the competition grows, organizations are presented to bunch risks identified with their global exchange exercises. It’s essential for organizations to deal with these exchange risks similarly they oversee different business risks. Acquiring and supply administration experts have an obligation regarding the supply chains from which merchandise, administrations, and works come into their association or specifically to their clients. Great practice in acquiring and supply administration incorporates creating and understanding providers’ operations and offering direction and bolster when change is fundamental or suitable. So; while an organization is importing the goods from other country the purchasing system becomes so complex and requires due compliance with the various rules and regulation; where administration procedure in the business system must be so sufficient that the business risks can be avoided. So; here many types of business risks are involved which the auditor needs to consider before planning of audit, out of which two major risks are described here:
- The business administration system set from making an order to realizing of the payment; is abused or defrauded at any stage which makes harm the interest of the company and puts the company into financial losses.
- The system of purchase may not be so efficient and economical that can provide the sufficient stock for the company to meet the ongoing demand from the existing as well as potential customers. So; account balance of vendor must be verified in the audit process in order to give true and fair view of the financial statements of the company.
So; here it is advisable for the auditor to make complete review of the purchasing function in order to check the system how the company is making purchasing of the equipments and spare parts from different countries.
So; it is possible that the system so set in the company for purchase of equipments and spare parts are defrauded or may be operated with lack of efficiency. MSL ought to have frameworks and techniques which appropriately bolster use as far as conferred consumption, esteem for cash, and presentations of the potential irreconcilable situation with controls set up to shield reserves from misrepresentation and debasement. These frameworks are frequently connected to acquirement, which is outside the extent of this direction. The frameworks for ordering, receipt and installment for products and ventures may speak to probably the most critical frameworks inside an association. Notwithstanding consumption sort, there is a need to guarantee risks are completely recognized, evaluated and alleviated by applying strong controls to guarantee operations run viable.
So for the above mentioned two business risks following auditing risks are existed which needs be evaluated as under:
- In the first stated business risk that the system of purchasing so set may be running with some major breaks which ultimately harm the potential financial and other interest of the company. So here the auditor is running with so many risks like; the internal control system of purchasing management may not be sufficient, the payment of accounts payable also affected with this, and account of bank also required to be check, whether payment going to accounts of vendor or not. These are manual or mechanized systems that regularly work at a business procedure level and apply to the handling of exchanges by individual applications. Application controls can be protection or investigator in nature and are intended to guarantee the trustworthiness of the bookkeeping records. A case of the operation of clump controls utilizing bookkeeping programming would be the checking of a physically created figure for the aggregate gross estimation of procurement solicitations against that delivered on the screen when the bunch preparing alternative is utilized to enter the invoices of the vendor.
- Another business risk with which the organization is running is the efficiency and effectiveness of the purchasing system of the company. At the point when a buy request is raised, it is great practice to raise a promise against a specific spending code empowering the spending holder to see the adjust remaining. It is the duty of the auditor to make verification of the entire system of purchasing and accounting in order to verify how the efficient and economic the system is. So that true and fair view of the financial statements can be identified and opinion provided on the financial statements is justifiable and authenticated at all. The organization ought to guarantee that they are working inside their legally binding limits and inside any prerequisites forced by the controller for instance; where paying on time is the standard and late installment apparently is inadmissible over the business group bringing about late installment intrigue and obligation recuperation costs. This can be observed utilizing information accessible in the records payable capacity. So, before coming to any decision in audit process it is advisable for the auditor to verify the entire system.
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